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On December 4, the Executive Board of the International Monetary Fund (IMF) discussed the Financial System Stability Assessment¹ of the Kyrgyz Republic.

There is scope to further develop the Kyrgyz financial system, which would support growth and stability. The economy is largely cash based and financial services are limited, with low financial savings mobilization. With the exception of microcredit institutions, which have grown rapidly, the nonbank sector is not significant. Money markets are shallow, the interbank market is dormant, and weaknesses in the financial infrastructure hamper intermediation.

 

The banking sector has mostly recovered from the 2010 crisis, but significant risks remain. Banks report high capital adequacy and liquidity ratios, and most are profitable, but vulnerabilities stem from lending and funding concentration. High dollarization creates indirect foreign currency-induced credit risks. Systemic risks appear manageable given the modest size of the system.

The framework for early intervention and bank resolution is inadequate, frequently disrupted and delayed by court rulings. Weaknesses remain in bank and nonbank supervision, insurance coverage is very limited, and there are shortcomings in the governance and management of state-owned banks. Furthermore, key components of financial infrastructure are underdeveloped, while the regulatory environment is not keeping pace with innovation.

Nonetheless, important progress has been made in strengthening the regulatory and supervisory environment as well as on financial safety nets, in line with the 2007 Financial Sector Assessment Program recommendations. A deposit protection agency has been set-up, inter-agency coordination has been strengthened, and access to finance is deepening. More recently, implementation of recommendations to bolster bank supervision as well as the bank intervention and resolution framework have accelerated via the drafting of a new Banking Code that was presented to Parliament in September 2013.

Directors noted that while progress has been made in the implementation of the 2007 FSAP recommendations, additional efforts are needed to address the remaining weaknesses. They called for timely approval of the draft Banking Code with all the key features intact, notably a special bank resolution regime. Directors welcomed the 2013 Financial Sector Stability Assessment recommendations. They stressed the importance of strengthening the supervisory and crisis management frameworks, and further enhancing the central bank’s autonomy. Priority should also be given to strengthening risk management, to conducting an actuarial review of the state pension plan, and to reinforcing corporate governance of state-owned banks. Directors urged the authorities to address the deficiencies in the Anty-Money Laundering/Combating Financing of Terrorism legislation and the payment system law.

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¹ The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA), which is discussed by the IMF Executive Board. In cases where the FSSA is discussed separately from the Article IV consultation, at the conclusion of the discussion, the Chairperson of the Board summarizes the views of Executive Directors and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in a summing up can be found here:http://www.imf.org/external/np/sec/misc/qualifiers.htm.

² At the conclusion of the discussion, the Managing Director, as Chairperson of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:http://www.imf.org/external/np/sec/misc/qualifiers.htm.