The transformation of state banks in Uzbekistan is a highly relevant and frequently discussed topic at both government and corporate levels. The need for profound changes in state banks has been driven by the policy of President Shavkat Mirziyoyev and the government towards large-scale privatization. To enhance their investment appeal, state banks face complex challenges, such as developing market strategies and reducing dependency on government ties, adopting modern corporate governance, evaluating collateral bases and non-performing loans, and implementing advanced banking technologies.
Years of accumulated issues in state banks underscore the importance of the transformation announced by a Presidential Decree in 2020.
More than four years have passed since the publication of the "Roadmap," allowing preliminary conclusions to be drawn. However, it is extremely difficult for independent analysts as well as strategic investors to make these assessments. Public information resources largely lack data on the status and achievements of the banks' transformations.
The transformation program, as per Presidential Decree No. UP-5992, included nine state banks: “Ipoteka Bank”, “Uzpromstroybank”, “Asaka Bank”, “Aloqabank”, “Qishloq Qurilish Bank”, “Turonbank”, “The National Bank for Foreign Economic Activity”, “Agrobank” and “Microcreditbank”. From this list, only “Ipoteka Bank” was sold to a strategic investor: in June 2023, OTP Bank acquired 73.71% of the bank.
Some of these banks announced the launch of transformational processes back in 2018 and 2019. For instance, in November 2018, "Ipoteka Bank" revealed its collaboration with the International Finance Corporation (IFC) to develop a transformation program focusing on strategy, product lines, and technological platforms. In July 2019, "Agrobank" reported bringing in international consultants to draft a 5-year strategy. In its 2021 annual report, "Uzpromstroybank" mentioned beginning its transformation three years ago.
However, after a wave of announcements, there was an information vacuum. External parties can find only limited and too general information regarding specific transformation goals, diagnostic results, or implementation status. Even when transformation is mentioned in annual reports, as with "Uzpromstroybank" and "Microcreditbank," these tend to describe operational actions like opening branches or launching new apps, which are expected anyway. Some banks merely replicate transformation goals from one annual report to the next, diminishing trust in the process.
Our search for information used public sources and bank websites. Yet, searching for "transformation" yielded little to no information from more than half of the banks. This lack of transparency certainly does not match the project's high-level significance and importance.
Years after the presidential decree UP-5992, state banks continue to publish announcements primarily about beginning collaborations with International Financial Institutions for transformation plans, indicating an elongated preparation and reflection period. In July 2022, "Asaka Bank" signed an agreement with the EBRD, and in August 2022, "Turonbank" reported its collaboration with the IFC.
All this serves for external investors with obvious indicators of hidden problems when transforming state banks. The actions of the country's leadership were also not long in coming.
In an economic system still characterized by strong or even dominant government control, as in Uzbekistan, solutions to problems often involve "personal management by top leadership." On August 18, 2023, Presidential Resolution PP-283 was issued, mandating the engagement of consultants in the bank transformation process and setting specific timelines for reform schedule development. In November 2023, President Mirziyoyev held a meeting discussing banking system transformation and privatization, during which bank leaders presented their transformation plans.
The protracted transformation process has led the Uzbek government to postpone privatization timelines. Both investment analysts and rating agencies have been conservative in their statements about the prospects for swift privatization.
Transforming any company is a complex task and numerous reasons could lead to delays, disruptions, or even negative outcomes.
Based on public sources of information, as well as interviews with representatives of the banking industry, it impresses that the main reasons for the delay in transformational changes in state banks were the following:
- A lack of clear understanding among bank leadership about what "transformation" entails. A recurring pattern involves waiting for international consultants to diagnose issues and guide changes. It is possible that not all bank leaders recognized the urgency and the need for changes.
- Changes in management teams and the appointment of foreign experts require time for new managers to acclimate and engage effectively in the transformation.
- The absence of specific and measurable (financial or non-financial) transformation goals. If goals are abstract, such as "improve" or "enhance," it is impossible to assess the transformation's progress. Management will always be able to find justification, which has become better and what has been improved.
- A lack of focus on priority transformation goals. Almost all state banks identified strategy, organizational structure, operational efficiency, customer focus, IT improvements, risk management, and compliance as transformation areas. Implementing numerous initiatives simultaneously is impractical. Long-term transformation practices show that reforming all these complex areas at once is unfeasible.
- Accumulated staff fatigue from prolonged transformation and insufficient motivation for results. Unlike routine projects, transformation needs a time-constrained, focused, and incentivizing process. If it stretches over years without ambitious goals and motivational programs, it becomes an everyday routine, reducing effective engagement and possibly leading to unspoken opposition to changes.
The transformation process holds significant importance for both successful privatization and Uzbekistan's economic development. Although public information may not fully reflect it, significant transformation achievements have likely been made. A positive example is the National Bank for Foreign Economic Activity, which transparently communicates transformation goals and achievements, outlining four measurable transformation objectives in its 2021-2025 strategy and describing project results in its 2023 report. This transformation project, branded as "Changing Together," fosters team unity and distinguishes it from routine tasks.
Based on our analysis, we recommend the following actions to reset the state banks' transformation process:
- Bank leaders should articulate a "Vision for Change" or “Change Story” — a brief statement on why change is urgent and important, what is expected to change, and what the goals are. These goals should be strategic and motivating.
- Redefine transformation goals to focus on immediate priorities with the greatest impact, postponing others for future stages.
- Set measurable quantitative (financial or non-financial) indicators for transformation goals.
- Implement a motivation system for management and staff to achieve transformation goals.
- Focus on internal marketing of the transformation project with a project name, internal communications, feedback systems, success celebrations, and rewards for outstanding employees.
- Enhance external communications by regularly informing the professional community and press about the transformation's progress, goals, and outcomes.
Despite the challenges of transition, state banks are on the right path to transformation aligned with market economy realities. We hope our recommendations will facilitate more effective transformation processes, thereby increasing the banks' investment attractiveness.
Written by: Michael Tsarev, CPA
Tsarev is the Director of the Research Centre for Business and Management Studies
At the International School of Finance Technology and Science in Tashkent, Uzbekistan.
Comments (0)