The World Bank’s website features a comparative analysis of the banking systems of Kazakhstan and Uzbekistan in terms of the population’s indebtedness. The comparison is not in favor of Kazakh banks.
After the crisis caused by Covid-19, consumer debt in Kazakhstan and Uzbekistan sharply increased, with excessive indebtedness and consumer defaults reaching alarming levels. In 2023, both countries — with the support of the World Bank — introduced the first insolvency mechanisms for consumers in Central Asia as a key policy measure to enhance financial stability and social welfare. Preliminary assessment now shows that Uzbekistan’s system may yield promising results, while Kazakhstan’s system may fail to rid consumers of excessive debt unless authorities double their efforts to implement critically important additional reforms.
Kazakhstan’s banks — mainly due to poor lending practices in the past — have faced high losses on corporate loans, prompting them, along with other factors, to switch business models from corporate lending to consumer lending. Consequently, loans to individuals have surged; by 41 percent in 2021 and by 31 percent in 2022. This rapid credit growth is now followed by an increase in consumer defaults: according to NBK data, non-performing consumer loans (NPLs) rose by 40 percent in 2022 and by 15 percent in 2023. With a population of 20 million people, an estimated 1.5 million Kazakhs are late in repaying consumer loans by 90 days or more.
In Uzbekistan, loans to individuals grew by 64 percent in 2019 alone, and from 2020 to 2022, there was an annual growth of 37 percent as the economy opened up and banks focused on new lending segments. In 2023, the Central Bank of Uzbekistan (CBU) introduced lending restrictions to cool down this surge. However, similar to Kazakhstan, the number of defaults increased: from 2020, the share of non-performing consumer loans tripled, reaching 6.8 percent by 2021, forcing people to use 60 to 70 percent of their income to repay debt.
Solving the Problem of Consumer Overindebtedness
If consumer defaults continue to rise, they could pose a threat to the financial stability of both economies in the future.
From a social perspective, excessive indebtedness can reduce households’ disposable income and significantly worsen their well-being, leading to social isolation and poverty.
A reasonable consumer insolvency system — through debt relief or repayment, i.e., canceling debt that responsible consumers cannot reasonably repay — can help achieve several socially beneficial goals, including: debtors and their families are relieved of huge debts, reducing their suffering.
Economic viability is restored through the reintegration of debtors into active employment and responsible consumption; and creditors can optimize income on their claims either through a repayment plan or through the agreed sale of the debtor’s non-exempt property. Additionally, predictable resolution of consumer insolvency improves access to credit by allowing financial institutions to more accurately assess creditworthiness.
To be truly effective in achieving consumer financial well-being, insolvency systems must be complemented by financial education, consumer protection in financial services, credit information infrastructure, as well as proper insurance and credit risk management in banks and other creditors.
The new Kazakhstani consumer insolvency system provides for debt repayment based on modern principles. However, this system operates on the condition that the debtor complies with a number of requirements, primarily a prohibition on obtaining loans from financial institutions.
Furthermore, repayment is limited to debts owed to banks and microfinance creditors and does not include tax debts or other debts. Finally, access to the insolvency system depends on several factors: firstly, the debtor must be «incurably» insolvent and not make any payments to creditors for 12 months.
Furthermore, to access extrajudicial settlement, the debtor must also not own any property. The situation is further complicated by the fact that the debtor must have become the subject of either enforcement proceedings (or pursued by a collection agency) or negotiations for settlement. All these restrictions prevent most consumers with excessive debt from receiving financial assistance.
In Uzbekistan, debtors are offered two main options. They can propose a three-year repayment plan based on their disposable income, which must be approved by creditors. If creditors reject the plan, the debtor can apply to the court to impose the plan. If a repayment plan cannot be agreed upon, the default option is a liquidation and debt repayment procedure, which must be completed within nine months. It involves selling non-exempt assets and confiscating the debtor’s income (up to 50 percent). The access criteria require only an inability to fully and timely repay debts, with arrears of at least three months. If creditors refuse to approve the debt repayment plan, the debtor must live on 50 percent of their income for six months to receive compensation in the form of debt repayment (although a long list of exceptions applies).
Charting a Way Forward
Uzbekistan’s individual insolvency system is well-developed and includes advanced debt repayment practices that will help consumers get the relief they so desperately need. However, authorities could further improve the existing system, mainly by introducing a simplified extrajudicial procedure or introducing a minimum protected income threshold, rather than a percentage.
In contrast, the Kazakhstani system requires a more thorough review, particularly in softening the approach to providing assistance to hopelessly insolvent consumers who do not own any property. Additional entry requirements, such as attempting to settle disputes with creditors, should also be waived. Only by discarding these unnecessary restrictions and adopting an «open access» policy, accompanied by modern systems, will the Kazakhstani consumer insolvency system achieve its intended results. Fortunately, efforts are already underway to eliminate these restrictions.
