OREANDA-NEWS. 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.