Microsoft Word Microfinance development in Uzbekistan Eng doc

Rate setting of prudential provisions: minimum capital amount. There is a direct link 
between the number of licensed new enterprises and the effectiveness of supervision over 
them. As the resources of a supervisory body are limited, requirements regarding minimum 
capital are used as a criterion for selection. 
Taking into account the lack of significant domestic experience in licensing and running 
the practical aspects of supervisory practice in microfinance, it is necessary to take a 
conservative approach from the very beginning. In time, the requirements can be adjusted in 
favor of by-laws mitigation. 
As the microfinance market develops MFOs which accept deposits will undoubtedly 
emerge. That is why the question of minimum capital requirements
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for such MFOs 
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A group of analysts believe that buyers of these securities should independently oversee the financial 
reliability of MFO-issuer. In this case regular provisions regulating the securities exchange should be applied.
Another group (they do not distinguish between corporate deposits and individual deposits, and are skeptical 
towards local legislation on securities and their practical application) insists on the application of prudential 
provisions to MFOs – the issuer of these securities. 
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In accordance with the law “On joint stock companies” the minimal charter capital of an open JSC must equal 
500 minimum monthly wages at the moment of registration. But resolution # 189 of the Cabinet of Ministers 
adopted April 19, 2003 has set new minimum requirements to the charter capital of an open JSC equivalent to 
USD 50,000. The minimum amount for a closed JSC (no fewer than 3 but no more than 50 shareholders; if 
more, it should transform into an open JSC within 6 months) must equal 200 minimal monthly wages. 

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necessitates legislative confirmation. In this context it will become increasingly important to 
adopts a law which describes mechanisms for the transfer of noncommercial MFOs into 
commercial MFOs and also into MFOs with the right to accept individual deposits. 
Liquidity Requirements. As a whole, there is no need to raise the liquidity requirements 
of MFOs in comparison with the available analogous requirements for commercial banks.
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There are two strong arguments in favor of this statement. 
First, the liquidity indicator established for domestic commercial banks has already 
surpassed the prudential norms of the Basel Committee.
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It means that this norm in 
Uzbekistan is reinforced at 2 %. Second, analysis of the activities of existing MFOs shows a 
high (95-98%) loan repayment rate. The level of overdue and bad loans is much lower than 
in banks. 
At the same time, opinions regarding the lack of liquidity requirements are not accurate. 
The high rate of return on MFO loan portfolios is less stable in comparison with bank 
portfolios and most importantly, it can worsen quickly since the microfinance portfolio lacks 
insurance. In addition, MFOs have high transaction costs and they have to charge high 
interest rates. Given the higher transaction costs and the same level of unpaid loans, MFOs 
will lose their capital much faster than the commercial banks.
Another argument for available liquidity requirements is the fact that microfinancing in 
Uzbekistan is a type of activity and MFOs as organizations have only recently emerged. 
MFO management and staff are relatively inexperienced, and the Central Bank as a 
supervisory body also does not have experience in analyzing and managing the risks in this 
sphere. Moreover, existing MFOs are growing rapidly, thus increasing the burden for 
management and regulation systems.
For the abovementioned reasons, liquidity requirements for MFOs authorized to accept 
individual deposits should be identical to requirements for commercial banks. These 
requirements must be upheld for a certain period until MFOs demonstrate their capacity to 
manage risks successfully and the Central Bank shows that it cam promptly respond to 
emerging problems.
Domestic MFOs can object that liquidity requirements cause lower rates of return of 
capital or higher interest rates. However, analysis shows that the demand for microloans is 
not susceptible to interest rates: even under the current almost loan shark interest rates the 
demand for microloans has been consistently high. As the state has not introduced an interest 
rate ceiling, our domestic MFOs enjoy broad opportunities in the interest rate game.
The development of reserve funds in case of non-repayment of loans. National MFOs 
use group solidarity guarantees as collateral for their microloans. In principle, it enables the 
use of such a scheme as a requirement in microfinance. But it may become a convenient 
option only if all MFO use such guarantees. 
Most loans were provided based on the principle of solidarity in the initial period of MFO 
operations. Analysis now shows that MFOs more frequently use individual loans with 
collateral. Furthermore, there is no evidence supporting higher rates of repayment of group 
solidarity guarantees than individually guaranteed loans. 
Taking into account these circumstances the need to development appropriate regulatory 
framework
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seems justified. It is particularly true for local MFOs which provide microloans 
The minimum charter capital of JSC (number of participants no more than 50) must be the equivalent of 50 
monthly minimum wages at any given moment. 
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Current requirements for capital of commercial banks is set at 10 percent. 
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According to the norms of the Basel Committee, the coefficient of capital sufficiency is set at 8 percent. 
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Regulatory framework should address a number of issues: division/indivisibility of reserve fund, cases for its 
use, its sources, indexation, limitations, and force majeure circumstances, etc. 

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mostly for a short term (in average up to 6 months). It is believed that the delay in repaying 
short-term loans is more than 60 days. The probability of non-repayment of microloans 
without collateral issued for three months with weekly schedule of payments is higher than 
loans ensured by collateral issued for two years with a monthly repayment schedule. 
Requirements for the security and operational procedures of MFOs. Requirements for 
security and the operational procedures of MFOs with financial resources are stipulated in 
Statute #565 for cash transactions of legal entities. From an executive point of view, the 
requirement on the use of police security services is particularly complicated because of the 
pricing monopoly. 
Indeed the observance of the Statute entails additional costs for MFOs and it should be 
reviewed but not terminated. The issue is that the Rules are mandatory for all domestic legal 
entities regardless of ownership form. It means that their review must be enshrined in the 
legislative act which directly concerns microfinancing. 
Mechanisms for legal transformation. There is a whole range of issues related to the 
transformation from one type of organization into another. This issue is of secondary 
importance for national MFOs since there are no potential nominees for transformation yet. 
However, with the expansion of microfinance, the solution for these issues may encounter 
serious regulatory barriers. These may include for example, limitations on foreign 
participation, inequality in taxation for the transfer of loan portfolios, labor legislation issues 
with regard to staff transfers, etc.
Since all of these issues are features of microfinance, the usual development of separate 
regulatory instructions and their incorporation into the available legislative framework is 
inexpedient. All of these issues must be reflected in a separate law.