KYRGYZ REPUBLIC: Recovering from Crisis and Strengthening the Financial Sector
The Kyrgyz banking sector has faced significant credit, funding, and liquidity risks since the 2008/2009 global crisis. Moreover, the April 2010 political crisis and the June 2010 violence had resulted in massive deposit outflows in the banking system ($240 million was withdrawn in a month). In response to the crisis, the National Bank of Kyrgyz Republic (NBKR) took measures to preserve financial stability. The NBKR took seven banks (accounting for 45 percent of the system’s assets) under temporary administration, imposed direct supervision on 10 banks, and issued instructions to senior officials of 3 additional banks. There was an urgent need for the NBKR to strengthen its banking supervision and resolution framework.
In the area of Non-Bank Financial Institutions (NBFIs), the October 2006 World Bank/IMF Financial Sector Assessment Program (FSAP) update highlighted the substantial need for reforms in the legal, regulatory, supervisory, and infrastructure framework for NBFIs and securities markets.
In the area of Accounting & Auditing, the assessment of Kyrgyz’s requirements and practices within the enterprise and financial sectors, conducted by the World Bank in November 2008, under the Bank’s Accounting and Auditing Reports on the Observance of Standards and Codes (A&A ROSC) Program, identified weaknesses in national financial reporting infrastructure. The assessment outlined a series of recommendations for improvements in the statutory framework, institutional capacity building, and strengthening accounting education and literacy in the Kyrgyz Republic.
Stabilizing the Banking Sector. Responding to the NBKR’s request, FIRST provided TA (Strengthening Bank Supervision and Resolution) in 2010–2011 worth $119,000 to assist the NBKR in three main areas: (1) assessing banks, and identifying and preparing action plans for those that are or may be vulnerable; (2) strengthening the Prompt Remedial Actions Framework (PRAF); and (3) strengthening the legal and regulatory framework for bank resolution, to remove obstacles to dealing with problem banks.
The action plans, the PRAF, and the legal recommendations were adopted by the NBKR and led directly to the World Bank Financial Sector Development Project. The $8.9 million program had one component worth $1.5 million that focused on strengthening the legal, regulatory, and supervisory framework for banks, and one component worth $5.5 million that focused on modernizing the postal bank network to expand financial services to remote areas, which was also informed by the feasibility study funded by FIRST in 2008
Enhancing Corporate Financial Reporting Standards. The government’s regulatory body, the Service for Regulation and Supervision of Financial Markets, approached FIRST for assistance in translating the ROSC’s high-level recommendations into a detailed Country Strategy and Action Plan (CSAP) in order to have a systematic and phased approach to the proposed reforms. The CSAP was important for mobilizing political commitments for reforms in the country, as well as support from development partners for an effective implementation. The CSAP was finalized and presented to the government in June 2012. It supported the policy recommendations outlined in the A&A ROSC by further developing, prioritizing, and sequencing recommendations into a time-bound action plan agreed to by relevant stakeholders: the regulators, educators, professionals, and private sector. This document was approved by the Kyrgyz government in March 2014 as its official Strategy for Developing Corporate Financial Reporting and Audit in the Kyrgyz Republic for 2014–2020. The strategy document sets out the main objectives for accounting and audit reform in the country, and forms part of the Kyrgyz Government Sustainable Development Strategy 2013–2017.
Developing the Non-Bank Financial Sector. Responding to the request for TA to support the recommended reforms, FIRST approved a project (Strengthening the Legal, Regulatory, Supervisory and Market Infrastructure Framework for Non-Bank Financial Institutions and Securities Markets) worth $323,000. The project assisted the newly established NBFIs’ regulatory and supervisory body, the Financial Market Supervision and Regulation Service, to draft several laws, regulations, amendments, and guidance related to insurance, securities markets, and private pensions.
Stabilization of Banking Sector. With timely support from agencies including the World Bank, the European Bank for Reconstruction and Development, the IMF, the German Agency for International Cooperation, and FIRST, the banking sector was stabilized in early 2011. The country’s efforts in this direction were further supported by FIRST under two TA projects related to a deposit protection system, which resulted in the enactment of the Deposit Protection Law in 2008, and subsequently strengthened institutional capacity. FIRST’s support in strengthening banking supervision continues in a recent TA project approved in June 2015 to be implemented by the IMF.
Adoption of Corporate Financial Reporting Standards Reform. The commitment of the government to enhancing the corporate financial reporting standards, as evidenced by the adoption of the CSAP, has raised interests from development partners to support the implementation of the CSAP. Successful implementation will raise the quality and availability of financial information in the market, thus contributing to the private sector’s accountability and transparency, contributing to access to finance by SMEs.
New NBFIs Legal Framework. The NBFI legal and supervisory framework has been substantially strengthened, as evidenced by the adoption of important laws, regulations, and policies, including the following:
- The Law on Financial Market Supervision and Regulation Service was enacted in July 2009, reflecting recommendations provided by World Bank experts in line with international principles (those of International Organization of Securities Commissions (IOSCO) and the International Organization of Pension Supervisor, as well as International Accounting Standards).
- The Law on Securities Market was enacted in July 2009; it included mainly the World Bank recommendations.
- The Concept of Insurance Market Development for 2013–2017, including an action plan, was adopted by the government in April 2013.
- The Amendments to the Law on Organization of Insurance, adopted in July 2014, help define the types of insurance for the purpose of regulation and licensing.
- The Law on Non-State Pension Funds, adopted in December 2013, incorporates the World Bank’s recommendations
The good progress achieved over the past eight years in the Kyrgyz Republic is an example of the impact of FIRST's technical assistance in supporting the client in developing the financial sector in a challenging political environment. With the ongoing project on strengthening banking supervision (Kyrgyz Republic #B060 Strengthening Banking Supervision, 2015–2016), FIRST will continue to be a reliable partner for the government in strengthening and developing the financial sector to support the country’s economic growth and poverty reduction agenda.