Abdullaev Farkhod Ozodovich1,  Khajiev Umrbek Saburyazovich 2

1Urgench State University – UrSU, Uzbekistan,  2The University of Huddersfield – United Kingdom,

Apex funds - stimulus for further development of the banking system of Uzbekistan

 

 

             At this stage of development of the banking system of Uzbekistan an important task is to attract resources of foreign investors. In terms of continuing growth in the number of international private investors and donors interested in providing loans to microfinance institutions in Uzbekistan, great importance is the creation of Apex institutions (AI) - a sort of wholesale lending institutions that redirect funds (grants, loans, guarantees) to the microfinance institutions (Donor … 2002).

             Aspect Organizations are large wholesale lenders which grant wholesale funding, as well as provide services to microfinance institutions, contributing to the development of microfinance as an incentive to grow small entrepreneurship and comprehensive social and economic strengthening the regions.

             The need for Apexes at the macroeconomic level primarily occurs in the following situations: low level of financial penetration, preservation of the big demand for financial services amid high economic growth, potential to mobilize donor funds and investment in the sector, regional disparities.

             In addition, financing gap due to the high level of interest rates in the sector, a low level of resilience of nonbank institutions, as well as opacity of the sector necessitates the creation of apex institutions at the macroeconomic level.

             The advantage of AI is that they provide wholesale loans by the implementation of the following measures, which guarantee repayment of loans, which is important for investors and for the state, as well as for microcredit organizations:

1.                                                                  Diagnosis, selection and certification of participating financial institutions.

2.                                                                  Management of credit, of liquidity, of credit and foreign exchange risks. As well as monitoring, reporting and evaluation.

3.                                                                  Provision of technical assistance in the following form, for example:

             - granting training for microcredit organizations, including banks;

             - introduction of advanced technologies, such as in the area of ​​branchless banking;

             - lobbying on the creation of favourable conditions for the development of microfinance (on development of specific legislation in the field of microfinance);

             - regulation and supervision (in the case of the existence of delegated supervision).

             Such a method of accumulation and distribution of financial resources provides the following benefits:

             - creation of a catalyst which links microcredit organizations with cheap capital markets;

             - granting foreign investors and government confidence in the support of microfinance activity;

             - funding and technical assistance for a large number of microcredit organizations;

             - improving the coordination of work of foreign investors and donors and promoting the selection and development of viable microcredit organizations;

             - the rational allocation of credit resources in the regional and branch cut.

             Thus, apex fund primarily serves as a catalyst that links microfinance institutions and capital markets, thereby expanding their access to financial resources. Also its benefits can be considered attracting funding and technical assistance to a large number of micro financial institutions, improving coordination work of donors and assistance in the selection and development of viable micro financial institutions.

             Currently, AI allocates on the development of microfinance more than U.S. $ 2 billion a year worldwide (CGAP … 2010). AI is widespread in developing countries such as India, Colombia, Mexico, Bangladesh, Pakistan, Bolivia and Kazakhstan. The average amount of funding provided by each of the top 15 AI in the world, was U.S. $ 151 million in 2007 (Tadjibayeva … 2013).

             Apex funds exist in all regions of the world. The largest volumes of lending through apex funds are made in Latin America and Southeast Asia, while Africa is the region with the largest number (20) of apex funds, many of which were created in the last five years. Most of the funds is available in national currency. This means that micro financial institutions that borrow from the apex funds less exposed to currency risk, than if they received loans in foreign (world) currency. While three-quarters of the loan portfolio of sixteen leading international financial institutions are provided in foreign currency, apex funds provide most of its funding for microfinance institutions in local currency.

             "As a result of the financial crisis, we are witnessing a transition from private funding to public funding, from international development institutions to apex funds," said a leading specialist of microfinance Hiver Reilly (CGAP … 2010).

             Apex funds, established in developing countries are either financed by public funds from the government or by donors from developed countries either funding of apex funds most often is a combination of donor and government funding at the initial stage for the development of the microfinance sector and for coordination of their funding in the future.

              For example, after the war in Afghanistan, when the government decided to actively support the development of microfinance, international donor organizations pooled their money to create an apex fund.

             To date, the funding sources apexes are leading financial institutions such as the World Bank, Asian Development Bank, Inter-American Development Bank, International Fund for Agriculture Development (IFAD) and the European Union.

             Create apex Fund in Uzbekistan will ensure effective execution of the tasks set forth in the Decree of the President ¹ 1438 "On priorities for further reform and improve the stability of the financial and banking system of the republic in 2011-2015" and  achievement of high ratings.

             In addition, the fund will provide expanding coverage of financial services for business entities and the public by improving the accessibility and responsiveness of microfinance services, ensuring efficient allocation of financial resources between microcredit organisations on a competitive basis to increase employment in the regional and sectorial context, promoting public awareness about the opportunities of microfinance services and creating linkages between microcredit organisations and capital markets as a catalyst of inward investment.

             Proposed mechanism of movement of financial resources through apex funds is given here (Figure 1).

 

 

 

 

 

 

 


                                                           

                                                           

 

 

 

 

 

 

 


Source: Tadjibayeva D. Apex funds in microfinance. Journal “Economics and Finance”. ¹1, Uzbekistan, 2013.

Figure 1. The scheme of movement of resources with support of microfinance apex funds

The Fund's performance will improve the financial and non-financial support to the microfinance sector through instruments such as the coordination of fundraising donors and investors; lending to microcredit organizations in compliance with the regional and sectorial distribution and limitation of interest rates; data collection and analysis, with partial implementation of regulatory and oversight functions; provision of guarantees in favour of microcredit organizations; providing technical assistance for microcredit organization in order to enhance transparency sector.

Today, before Uzbekistan is put the task of creating an efficient banking sector with modern banking infrastructure. Implemented program of reform of the banking system determines the main directions of its liberalization by enhancing the process of privatization of banks, attracting additional foreign and domestic investments to banks' capital , further commercialization of their activities, access of business structures to bank financing and increase confidence of depositors to banks.

Two major strategic challenges are defined in the medium term which will determine the development of the banking sector in Uzbekistan. First, the improved financial stability of banks and expanding the range of financial services in the domestic market. Second, intensification of Uzbek banks in international capital markets. All these measures certainly testify the willingness and commitment of the country to integrate into the globalizing world economy.

From the standpoint of the internal aspect major focus will be paid on strengthening the financial condition of viable banks and removing from the market of troubled banks, increase the level of bank capitalization and quality of capital, diversification of banking services, as well as strengthening interaction of banks with real economy, raise of the indicators of the banking sector of Uzbekistan up to international standards.

From the point of view of the international dimension in the long term it is actually necessary to join the global banking system, ie act not only as its borrowers, but become full participants in international monetary relations.

         Good prerequisite for this is the fact that on the main quality parameters the banking system of Uzbekistan (share of capital and assets of the banking system in the gross domestic product (GDP)) refers to the leading countries in the group of transition economies.

 

 

REFERENCES

 

1.     CGAP, Apexes: An important source of internal financing. "March, 2010. www.cgap.org

2.     Donor Brief ¹5, 2002. www.cgap.org

3.            Report by the President of the Republic of Uzbekistan Islam Karimov at the meeting of the Cabinet of Ministers dedicated to the socio-economic development in 2012 and the most important priorities of economic program for 2013 / http://www.press-service.uz/ru/news/show/dokladi/doklad_prezidenta_ respubliki_uzbekist_1/#.

4.     Study Guide for the Study of the report of the President of the Republic of Uzbekistan Islam Karimov at the meeting of the Cabinet of Ministers dedicated to the socio-economic development in 2011 and the most important priorities of economic program for 2012. – Tashkent: Economics. - 2012. - 282 p.

5.             Tadjibayeva D. Apex funds in microfinance. Journal “Economics and Finance”. ¹1, Uzbekistan, 2013.