By Valeriya Goffe and Sergio Jose De Mesquita Gomes
Uzbekistan, a country in Central Asia with a population of more than 36 million, is undergoing a significant transformation in its financial sector, moving toward a more modern, private-sector-driven system with stronger regulatory oversight. The country’s financial sector is heavily dominated by state-owned commercial banks, which control over 70 percent of total assets.
Meanwhile, private banks have consistently outperformed state banks in terms of profitability, which is two to three times higher; reduced exposure to large borrowers; and stronger corporate governance (more independent, foreign, and female board members). Financial inclusion, targeting various groups of private and business customers across the country, has long been neglected, but the authorities have started taking steps to improve the situation.
By enhancing financial capability of the population and increasing access to financial services for private enterprises, authorities can support the establishment and growth of businesses, leading to creation of more jobs in the country.
In recent years, digital financial services have increasingly expanded, bringing risks of fraud and data protection issues. The population widely uses the mobile applications of commercial banks to perform card-to-card transfer operations in real-time (P2P), budget and make utility payments, obtain and repay microloans, make online deposits, open remote deposit and loan accounts, make payments with an international bank card account, perform online conversion operations, and use other services.
Businesses have opportunities to manage funds from their bank accounts in real-time and make payments, send electronic applications for the purchase (conversion) of foreign currency to the servicing bank, provide an electronic statement to the bank for the transfer of monthly wages and payments, and use other services. The expansion of access and usage of financial services comes with the need to mitigate risks to consumers, especially the most vulnerable ones.
The financial consumer protection challenges that consumers and the Central Bank of Uzbekistan (CBU) face in the banking, credit, and payment sectors resonate with market developments. The following are the main challenges that need to be addressed urgently:
- Irresponsible lending and over-indebtedness. Some regulations are aimed at mitigating the risk of over-indebtedness and supporting the offering of suitable products and fair business conduct by credit organizations. However, there are still many consumer complaints related to high interest rates, poor disclosure of terms, and aggressive credit sales. Broader requirements for undertaking creditworthiness assessments need to be considered.
- Transparency and information disclosure by financial service providers (FSPs). Information disclosure by FSPs, including banks, fintechs, insurance companies, and microfinance companies, could be significantly improved. The terms and conditions of products are difficult to understand, and FSPs do not provide explanations unless consumers ask, even where a lack of understanding is apparent. Consumers often sign contracts without reading them. Consumers frequently complain that they were not informed about the terms and conditions of products or they were not explained.
- Risks related to increased digitalization and lack of data protection. Digital financial services and mobile wallets are expanding, yet data protection is lacking. There are issues with visible data from P2P transactions, poor data protection provisions, and cultural and literacy challenges in understanding the importance of preserving personal data undisclosed. The most prevalent types of fraud include personal data theft, taking out credit fraudulently in someone else’s name, and fraudulent cash withdrawals using cloned payment cards.
The World Bank team has been collaborating with the CBU to enhance the country’s financial consumer protection regime. The initial phase involves assessing the alignment of the CBU’s consumer protection and market conduct supervisory framework with international best practices and providing tailored recommendations for improvement of oversight. Currently, the focus is on CBU-mandated sectors, including banking, nonbank credit, and payment services.
However, a comprehensive financial consumer protection initiative will require coordination with other relevant authorities, such as the National Agency of Perspective Projects for insurance and securities, the Committee for the Development of Competition and Protection of Consumer Rights for advertising and general consumer protection, and the State Personalization Center for data protection.
The World Bank’s assessment has identified challenges such as the need for clear mandates and holistic financial consumer protection regulation, adoption of formal market conduct supervision techniques and tools, and implementation of an effective dispute resolution mechanism that will provide consumers accessible and fair channels to file complaints. To address these challenges, multi-pronged reforms are recommended.
These include expanding the CBU’s mandate to cover all financial service providers, implementing organizational improvements to streamline processes and ensure adequate resources, developing a structured and forward-looking supervision approach, and enhancing laws and regulations in line with international standards. It is also recommended to introduce a financial ombudsperson for alternative dispute resolution and ensure ongoing capacity building for financial consumer protection staff.
