Microfinancing environment in Uzbekistan

THE NATURE OF MICROFINANCING

Within the meaning of Article 5 of the Law “On non-bank credit organizations and microfinance activities” No. 765 adopted on 20 April 2022 [https://lex.uz/uz/docs/5972413] (hereinafter – “the Law”) microfinancing organizations are allowed to provide following serviсes which are considered as microfinancing activities:

• provision of microloans;
• provision of microcredits;
• provision of loans and guarantees, provision of Islamic financing services to individuals up to 50,000,000 UZS;
• provision of leasing and guarantees, provision of factoring services and Islamic financing services to business entities up to 300,000,000 UZS.

Additionally, only banks and microfinance organizations are eligible to provide the aforementioned services in accordance with regulations.

1. MICROFINANCE ORGANIZATIONS

Microfinance organizations are classified as credit organizations, as are banks and other institutions, however, unlike them, they do not need a licence to carry out their activiites. Clause 5 of the Regulation “On the procedure for permission and notification procedures in the field of microfinance organization and pawnshop activities” (Annex to the RCM No. 30/26 dated 30 December 2022) [https://lex.uz/uz/docs/-6401250] states that microfinance organizations may commence their activities after notifying the governing body, the Central Bank of the Republic of Uzbekistan. Therefore, any entity intending to engage in microfinance activities shall notify the Central Bank of Uzbekistan by submitting an application no later than 3 (three) months after state registration. The application documents must include the following documents

• a referral on the founders of the microfinance organizations;
• documents confirming the formation of the authorized capital;
• documents confirming that the senior staff has relevant higher education and sufficient work experience.

The Central Bank will review the documents submitted by the applicant within 15 (fifteen) days of the date of receipt. No fee shall be charged for reviewing the application.

General requirements for applicants:

The name of the organization should contain the acronym “MMT” (Mikromoliyalash Tashkiloti, i.e. Microfinance organization).

Microfinance organizations are required to have authorised capital of a minimum of UZS 2,000,000,000 (two billion) (approximately USD 164,000), to be formed by the date of submission of the application. Moreover, it is prohibited to use loans and pledged funds to form the authorized capital.

The following are the requirements for staff in managerial positions in microfinance organizations:

• for directors – having a higher education or at least two years of work experience in the field of banking and finance;
• for accountants – having a higher education or at least two years of work experience related to accounting or financial reporting or auditing activities.

2. MICROFINANCING ACTIVITIES:

Microloans

Within the meaning of Article 5 of the Law, microloans are loans that do not exceed 50,000,000 (fifty million) UZS (equivalent of about 4,000 USD) provided to an individual (borrower) based on the terms of solvency, maturity and repayment. Microloans are provided in the national currency of the Republic of Uzbekistan (UZS) in cash or by transferring them to bank cards.

When providing microloans to individuals, a particular "scoring" process is used to calculate the average monthly payments and the average monthly earnings of the borrower. The lender calculates the average monthly payments based on information provided by the credit bureau and obtained by other official sources.

The borrower's average monthly income is calculated as the arithmetic average of the amount of income received by the borrower in the last 12 months. The debt burden must not exceed 50% of the monthly income. For example, if the monthly income (salary / allowance / stipend) is estimated at 5,000,000 UZS and the amount of monthly payments of the debt (debt burden) is estimated at 3,000,000 UZS, the rest of the monthly payment will require the involvement of the guarantor.

If a microloan application includes a guarantor, the income of the guarantor is also included in the calculation of the average monthly income.

The lender is entitled to use the following documents and information to calculate the average monthly earnings of the borrower (and joint borrower, if applicable):

• the salary confirmed by the employer;
• information on the amount of allowance;
• the information on the income from bank accounts;
• information on paid taxes;
• information on interest, dividends, income from property rental.

Microfinance organizations shall additionally require borrowers to provide the following documents:

• An application for borrowing a microloan;
• Identification documents (passport / identification card / driving licence);
• documents containing information about income.

Microcredit

According to Article 5 of the Law, microcredit is an amount of debt not exceeding UZS 300,000,000 (three hundred million) for a borrower who is a business entity or a self-employed person, with respect to repayment, maturity and reimbursement, and in cases stipulated in the contract, for specific purposes.

However, there is no specific procedure for granting microloans to business entities. Nonetheless, the general lending procedure applies to microloans provided by microfinance organizations.

Islamic financing activities

According to Article 5 of the Law, microfinance organizations are entitled to provide Islamic finance services to business entities up to the amount of a microcredit (up to UZS 300 million). In this regard, according to Article 4 of the Law, services related to Islamic financing are defined as financial services provided per the procedure developed by the Central Bank of the Republic of Uzbekistan (hereinafter referred to as the Central Bank of Uzbekistan) in accordance with the rules of international organizations that determine the standards for the implementation of Islamic financing. The legislation of the Republic of Uzbekistan does not define the procedure for providing Islamic financial services. However, several financial institutions currently provide Islamic financing services based on the general principles of Islamic financing.

3. RECENT CHANGES IN REGULATION IN THE FIELD OF MICROFINANCING:

On 10 November 2023 the President of the Republic of Uzbekistan signed the decree “On additional measures to increase the role and share of microfinance services in the development of entrepreneurship” (No. PD-364) [https://lex.uz/docs/6658629]. According to the Decree, from 1 January 2024 following changes will be established:

• the maximum size of microloans will be increased from 50,000,000 UZS up to 100,000,000 UZS;
• non-bank credit organizations will only be established in the form of a joint-stock company (JSC) or a limited liability company (LLC);
• microfinance organizations may borrow loans in foreign currency from non-residents and provide financial services in foreign currency for legal entities;
• microfinance organizations will have the right to perform the activities of a payment organization after obtaining a license;
• individuals and legal entities will be required to obtain the preliminary permission of the Central Bank for the ownership of 20% (prev. 10%) or more shares in the authorized capital of a non-bank credit organization.
• when credit resources from commercial banks are attracted to microfinance organizations or when microcredits are obtained from microfinance organizations to business entities JSC “Tadbirkorlikni rivojlantirish kompaniyasi” may act as a guarantor for the borrowers;
• commercial banks will have the right to demand repayment of their loans by microfinance organizations by pledging the right to demand their microfinance services.

Also, the Decree introduces a new category of microfinance organizations – microfinance banks. Herewith, until 4 April 2023, the Central Bank of Uzbekistan was instructed to:

• develop and approve the legal framework for providing Islamic financial services;
• determine the organizational and legal form of microfinance banks;
• determine permitted types and maximum number of financial transactions carried out by microfinance banks;
• develop the procedure for transforming microfinance organizations into microfinance banks and microfinance banks into commercial banks;
• set the minimum amount of authorized capital of microfinance banks, which will be 50 billion UZS.