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UNCLAS SECTION 01 OF 03 DUSHANBE 000238 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR SCA/CEN; ECA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EIND EAID ETRD PGOV TI
SUBJECT: IMPROVING CONSUMER CONFIDENCE IN THE TAJIK BANKING SECTOR 
 
 
DUSHANBE 00000238  001.2 OF 003 
 
 
¶1.  Summary.  The Tajik banking sector continues to develop 
rapidly, with over 35 percent growth since 2005.  However, 
consumer confidence in the banking system remains weak, 
resulting in an extremely low deposit rate and little money 
available to feed economic investment.  Tajikistan's top bankers 
also fail to recognize the importance consumer confidence plays 
in developing the banking sector and the overall economy, 
preferring to look for outside investment to bolster their 
institutions.   Interest rates for loans in Tajikistan range 
from 18 to 30%, with little long-term financing available, 
presenting a significant barrier to investment.  An 
Embassy-sponsored banking roundtable February 7 gathered the 
"Who's Who" of banking in Tajikistan to explore potential 
improvements the government and banks can make, such as 
improving banking products and developing deposit guarantees. 
Local officials and businessmen seemed reluctant to engage in 
active problem solving, spewing self-serving statements in lieu 
of forward-thinking ideas.  End Summary. 
 
PEOPLE SAVE MONEY EVEN IN A POOR COUNTRY 
 
¶2.  Several roundtable participants offered the excuse that 
because Tajikistan is poor, people immediately use whatever 
money they have for consumer purchases.  In fact, consumer 
spending shot up dramatically, increasing more than 16 percent 
in the last three years.  Many Tajiks continue to live 
hand-to-mouth, as job creation and domestic wages remain low, 
while prices for energy and basic foodstuffs have increased. 
However, research conducted by the European Bank for 
Reconstruction and Development has shown that many individuals 
do in fact have savings but choose to keep their funds in cash, 
gold, property, or cattle -- anywhere but in  the banks. 
Official remittances flowing through the banks exceeded $1.2 
billion in 2006, but little of this money remained in the 
banking sector as deposits. 
 
I'D RATHER USE A PIGGY BANK 
 
¶3.  Public use of the banking sector greatly increased in 2006, 
as total deposits increased 45% to USD 230 million, according to 
Tajik National Bank Deputy Chariman Juma Eshov.  As Jim Egan, 
Chief Executive Officer of The First MicroFinanceBank revealed, 
however, the growth in total deposits is driven mostly by 
businesses rather than individuals.  Tajikistan still has a very 
low overall deposit rate as a percentage of official gross 
domestic product, climbing to 14 percent in 2006. 
 
¶4.  Individuals have several good reasons to keep their money 
out of the Tajik banking system: 
 
-- Tajik banks have governance and transparency issues; 
-- Banks are exposed to undue political and regulatory influence; 
-- Businesses do not work entirely within the law, bypassing tax 
and customs regulations -- depositing funds in banks, therefore, 
puts them at risk of discovery by authorities; 
-- The public retains a negative historical perception of banks, 
with concern about their future stability; 
-- Cotton sector debts mean farmers owe futures companies up to 
$300 million. 
 
¶5.  Clients have limited access to banks: 200 total bank 
branches serve seven million clients, with banks concentrated in 
urban areas.  Rural districts generally lack bank branches 
outside central cities, and just getting to the banks is 
difficult for village residents.  With huge remittance flows 
going to rural areas, banks must figure out how to channel these 
funds into the banking sector as deposits.  Valsa Shah of the 
British Department for International Development presented case 
studies of programs in other countries where they provide grant 
facilities to banks to stimulate rural outreach, in order to 
encourage a more productive use of remittances.  Her proposal 
found some support among the roundtable participants, which may 
lead to the program's start-up in Tajikistan. 
 
DUSHANBE 00000238  002.2 OF 003 
 
 
 
¶6.  According to Egan, Tajik banks and the government can take 
several steps to improve confidence by creating new products and 
better marketing existing structures: 
 
-- Tajik banks need to create a banking association that can 
lobby the government at the industry level, support the 
education and training of a future cadre of bankers, and market 
the benefits of banking to the population. 
 
-- The government's current deposit guarantee scheme provides 
only limited coverage in case of bank default.  Only deposits by 
individuals receive coverage; businesses are not covered.  Also, 
while the scheme exists, the public is not aware of the 
guarantee and how it works, as government and banks have not 
publicized the process. 
 
-- Banks need to create a secondary level of banking outlets to 
reach into rural areas.  Villagers travel to central locations 
to collect remittances sent by family members, or send couriers 
to collect the remittances for the village.  Banks should set up 
a mechanism that would encourage villagers to leave some of 
these funds in the banks as small savings. 
 
-- The government should develop a securities market that would 
allow stock trading and printing of government bonds in which 
banks could invest. 
 
WHEN THE ECONOMY GROWS, THE BANKING SECTOR WILL GROW 
 
¶7.  Several leading Tajik bankers, including one traveling to 
the United States on an upcoming International Visitor Program 
for Tajik bankers, denied that banks need to do anything to make 
the sector more attractive to consumers.  They asserted that 
when the economy grows and people have more money they will put 
it into the banks, seemingly missing the point that a strong 
banking sector drives economic growth.  Tajik bankers also do 
not fully understand that only a transparent bank in a healthy 
banking system can attract business investments.  The head of 
Tajiksodirot Bank went so far as to ask the Embassy to pass a 
letter in Russian addressed to Bill and Melinda Gates  asking 
for investment in his institution. 
 
¶8.  The introduction of new foreign banks in the country would 
have a positive impact on consumer confidence and the stability 
of the sector.  At present a branch of Iran's Tejerat Bank and 
representative offices of Kazakhstan's TuranAlemBank and 
Kazkommertzbank function in Tajikistan.  In all, Tajikistan's 
banking system includes nine commercial banks, one bank with 
foreign investments, nine credit societies, one non-bank 
financial organizations and some 55 other credit organizations, 
according to the National Bank. 
 
¶9.  Private banks are actually innovating in several ways to 
strengthen the banking sector.  In 2006, the number of debit 
card holders grew by 14,000, while the number of ATM machines 
increased to 65.  Credit card penetration exceeded 0.1% of the 
population, topping 11,700 users.  Several stores have begun 
installing point-of-sale credit/debit card machines for consumer 
purchases, which work when the Tajikistan's aging phone lines 
work.  Banks offer 18%-20% interest rates on one-year deposits, 
and up to 14% for shorter-term deposits.  The microcredit market 
is booming, as international donors combine to provide $18 
million in funds for loans to over 63,000 people, according to 
the Asian Development Bank. 
 
¶10.  The National Bank has taken the lead on development by 
creating a Medium-Term Strategy for the Banking Sector which 
outlines in broad strokes all aspects of policy reforms needed. 
They have proposed increasing the minimum capital requirement 
for banks from $5 million to $15 million. 
 
¶11.  U.S. technical assistance provides key support to the Tajik 
 
DUSHANBE 00000238  003.2 OF 003 
 
 
banking sector.  A U.S. Agency for International Development- 
funded project provides vital technical assistance and training 
to the National Bank and commercial banks, promoting policy 
reforms and transparent implementation of regulations.  The U.S. 
Agency for International Development implementer, BearingPoint, 
has agreed to host a continued series of working-level meetings 
to continue the dialogue on banking sector reforms.  An 
International Visitors Program will take five leading Tajik 
bankers to the U.S. in February to look at governance and 
banking systems. 
 
¶12.  Comment: Tajikistan has seen remarkable progress in banking 
sector reform in recent years, but a certain naivete about 
investment and the role of banks still pervades the conventional 
wisdom.  If Tajik banks fail to realize that consumer confidence 
can help boost economic growth, and not just vice versa, they 
will miss out on an important opportunity to bring their sector 
in line with international banking standards -- and make 
Tajikistan more attractive to foreign investors, who need a 
reliable local financial institution for local business 
operations.  Many decision makers in Tajikistan implement 
changes very slowly and reluctantly -- there exists no culture 
of innovation or entrepreneurship.  Post hopes the upcoming 
International Visitors Program will infuse Tajikistan's top 
bankers with enthusiasm for more free market and 
consumer-oriented ideas, and plans to engage in a series of 
follow-up events after their return.  End Comment. 
JACOBSON