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Initial steps to institution building



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UzbekBankingRG2009 (1)

Initial steps to institution building
In contrast to the transition experience of its European counterparts, 
most of which had at least some experience with banking under 
capitalism, Uzbekistan did not have a proper banking system prior 
to the adoption of central planning in the country. Uzbekistan’s 
experience with market-type banking had a very short-lived his-
tory. According to Ozerova (2003), the first bank, the branch of 
the State Bank of Russia, was established in the country as late 
as 1874 by the imperial government of Russia. Arguably, strong 
religious opposition against banking business on moral grounds 
(Islam denounces usury) and the backwardness of the economic 
structure (a feudalistic mode of production) prevented any natural 
evolution of commercial banking in this region. Although the first 
private bank was not set up until 1890, by 1913, about forty banks 
were functioning on the territory of today’s Uzbekistan. However, 
this brief experience was interrupted abruptly by the spread of 
communist ideology and implementation of central planning in 
Russia, and subsequently in its colonies, after the accession of the 
Bolsheviks
 
to power in 1917.
Uzbekistan experienced central planning for more than seventy 
years as an integral part of the FSU. The Soviet monobank system 
under central planning combined the functions of a central bank 
with those of commercial banks. The monobank system’s role 
was limited to the organization of the payments system for the 


jUNE 2009 7
enterprise sector, and to pumping short-term credits to this sector 
to facilitate interenterprise trade. Banks controlled the financial 
flows of enterprises, monitored their performance, and supplied all 
necessary information to the authorities. Although the enterprise 
sector depended heavily upon bank credit to finance its working 
capital, the start-up capital of new enterprises, or new investment 
in existing ones, was financed from the state budget in the form of 
nonrepayable grants and subsidies. Corporate banking was sepa-
rated from retail (or household) banking. As a rule, big specialized 
banks provided only corporate banking services. Provision of retail 
banking services to households was the
 
primary function of the state 
savings bank (Sberbank). The general public’s confidence in the 
savings bank was high, because it was the only financial institution 
that offered depositors a financial return and readily exchanged 
deposits for cash money at a one-to-one ratio on demand. In short, 
under central planning, the banking sector was used as an effective 
but neutral conduit in the government’s resource allocation policy. 
Notions such as market-determined interest rates, cost of funds, 
collateral, and creditworthiness were irrelevant to Soviet banking 
practice.
As in all TEs, the transformation of the banking sector in 
Uzbekistan was inspired by policy recommendations associated 
predominantly with the International Monetary Fund (IMF) and 
the World Bank, which called for price liberalization, abolition 
of the distinction between cash money and noncash money, the 
establishment of a two-tiered banking sector (i.e., the separa-
tion of commercial banking from central banking), liberalization 
of interest rates, restructuring and privatization of commercial 
banks, entry of new private banks regulated by minimum capital 
and licensing requirements, and provision of effective prudential 
regulation (see, among others, Calvo and Frenkel, 1991a, 1991b; 
Fischer and Gelb, 1991).
In fact, restructuring of the monobank system had already 
commenced during the years of perestroika in the late 1980s. 
The reforms introduced under perestroika formally replaced the 
monobank

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