Uzbekistan's banking sector reform has seen notable progress since its launch in 2020, but significant risks remain, according to Fitch Ratings at a recent conference held in Tashkent. Despite advancements, domestic banks are still grappling with long-standing structural weaknesses, and new challenges have emerged in recent years.
The banking reform has produced tangible results, most prominently the 2023 sale of Ipoteka-Bank (BB-/Stable) to OTP Group, based in Hungary. Additionally, the management quality and corporate governance of other banks slated for privatisation have improved significantly. However, several privatisations have faced multiple delays.
A recent presidential decree has set an end-of-2025 deadline for the sale of three state-owned banks—Uzbek Industrial and Construction Bank (SQB), Asakabank, and Aloqabank—each rated 'BB-'/Stable with government support.
The sale of these banks will be challenging due to legacy issues such as low-margin directed loans, capital constraints, and strong competition from other domestic banks. The ongoing global market uncertainty will also play a key role in investor interest, and Fitch Ratings does not expect all privatisations to be completed within the set timeframe.
Despite these challenges, state policy banks that will remain under long-term government control have made progress in transforming their business models. Their focus on commercial lending, particularly in the SME and retail segments, has increased, as subsidised social lending is gradually reduced.
The transfer of significant minority stakes in three policy banks—Xalq Bank, Business Development Bank, and Microcreditbank—to the newly established National Investment Fund is expected to enhance their governance, risk management, and asset quality. The fund will be managed by Franklin Templeton, and an initial public offering (IPO) is planned for 2026.
However, the sector continues to face challenges such as high funding costs linked to US tariff uncertainties, persistent dollarisation (although it has recently decreased to record lows), and risks related to past asset-quality issues. The continued dependence on external funding, mostly from international financial institutions on concessional terms, helps mitigate refinancing risks.
Nevertheless, Fitch expects the impaired loans ratio for rated Uzbek banks to peak at 9%-10% in 2025-2026, up from 8% in 2023. High impairment charges will put pressure on sector profitability, especially for policy banks, though they will continue to benefit from state capital support.
Retail lending has surged, creating potential overheating risks, although it has improved bank profitability and reduced loan concentrations and dollarisation. The Central Bank of Uzbekistan's recent restrictive measures, particularly targeting high-risk car and family business lending, have been effective.
However, unsecured consumer loans have grown by about 50% year-on-year, reaching 9% of total sector loans by the end of 1Q25, up from 5% at the close of 2023. Further macroprudential tightening is expected in the near term.
Additionally, risks related to SME lending are anticipated in the medium term. The government has incentivised lending to SMEs by easing capital requirements for banks, leading to accelerated loan growth. However, exposures to volatile cyclical sectors like agriculture, construction, and textiles, as well as foreign-currency loans, remain high-risk areas.
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