Microsoft Word Microfinance development in Uzbekistan Eng doc

 What must be regulated: organizations or types of activities? 
In response to this question the opinions of specialists tend towards supporting prevailing 
microfinance regulations which encompass whole sets of activities regardless of the type of 
organizations implementing them. Solid arguments may be brought in favor of both 
approaches yet in the case of Uzbekistan it seems expedient to develop a Law “On 
Microfinance” or “On Microfinancing Organizations” where both approaches would be 
considered.
This is necessary due to the lack of legal framework for MFO operations (regulation by 
the type of organization) and uneven regulatory framework of the types of microfinance 
services offered by various financial institutions. 
The planned development of the Law “On Microcrediting” with the direct involvement of 
the Central Bank meets with some complications as this very sphere has already been nearly 
completely. The development of regulations for the remaining types of the microfinance 
activities requires an expert’s team outside the Central Bank. 
 
4.2. Taxation of MFOs 
Issues related to the taxation of MFO transactions are not uniform in different 
countries. The basic approach to the solution of these issues is based on the differentiation of 
taxes by financial transactions. These include for example, value added taxes for providing 
loans, taxes on interest income, and taxes on net profit. Also an approach is suggested when 
same conditions are created for organizations of different types. For example, in conducting 
the same financial transactions, the tax rate should be the same regardless of the parties 
involved. 

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The pressing nature of the matter is clearly felt in Uzbekistan. Tax breaks provided 
within the framework of the Resolution #309 expire at the end of 2005 and both practicing 
MFOs and as new potential institutions will naturally ask the question - what will be next?
Acknowledging the start-up period for the development of local MFOs and given the 
particular social significance of their activities, it seems expedient to prolong the income tax 
exclusion for the next three years (from January 1, 2006 till December 31, 2008). This 
practicality is determined by the following factors: 
• Necessity to encourage microfinancing as a type of activity regardless of the type of 
MFO. It allows avoiding ungrounded privileges for one type of MFO above others. 
• Encourage establishment of financially sustainable MFOs. As it is known, existing 
MFOs in Uzbekistan are not financially sustainable today. The current state of taxable 
revenues of MFOs is such that levying taxes on their activity does not significantly 
impact state budget revenues yet it will definitely slowdown and terminate MFO 
operations. 
• Accumulation of loan resources. Currently the loan resources of the current MFO are too 
limited. If the tax privileges are abolished (or not re-adopted) these resources will be 
further reduced, thereby discrediting the whole concept of microfinance.
• Focusing on the social mission of MFOs. MFOs provide a public good and their profits 
are reinvested to reduce poverty. Along with this, a particular social role of MFOs in 
Uzbekistan is strengthened in the light of problems such as unemployment and the 
current demographic situation. 
Conditions for tax benefits may include the targeted use of deductible funds for further 
provision of microfinance services, covering of the operational costs of an MFI, and the 
development of their infrastructure and logistics. 
It is noteworthy that previously income taxation privileges were also provided to banks, 
and this tax break played an important role in the development of banking sector.
Although in accordance with the abovementioned it is necessary to exempt for the 
services on granting of microloans and microleasing from a value added tax.