Tashkent, Uzbekistan (UzDaily.com) — Since its inception in 2020, the banking reform in Uzbekistan has made significant progress, according to the rating agency Fitch Ratings. However, the credit profiles of domestic banks continue to suffer from deep structural weaknesses, and new risks have emerged in recent years.

The reform has already yielded tangible results — notably, in 2023 one of the largest privatization transactions was completed with the sale of Ipoteka Bank (rated BB-/Stable) to the Hungarian OTP Group. The agency notes that other banks slated for privatization have seen significant improvements in management quality and corporate governance. Nevertheless, the privatization of certain banks has been postponed multiple times.

According to a recent presidential decree, the new target date for the sale of three state-owned banks — Uzpromstroybank (also known as SQB), Asakabank, and Aloqabank — is set for the end of 2025. All three carry BB-/Stable ratings, based on expectations of continued state support.

Fitch Ratings believes that completing these sales will face challenges due to a number of inherited issues: a large volume of low-margin targeted loans (some of which are of weak quality), capital constraints limiting credit growth, and intense competition from other domestic banks.

The agency emphasizes that sustained investor interest in Uzbekistan will be a key factor amid increasing uncertainty in global markets. Fitch Ratings does not expect all privatizations to be completed within the planned timelines.

The remaining state-owned banks, which will remain under long-term government control, are continuing to transform their business models. According to Fitch, these banks are increasingly focusing on commercial lending, particularly to the small and medium-sized business (SMB) sector and retail customers, as subsidized social lending programs are phased out.

A recent transfer of large minority stakes in three such banks — Halk Bank, Business Development Bank, and Microcredit Bank — to management by the newly created National Investment Fund is expected by the agency to contribute to strengthening corporate governance, improving risk management systems, and reducing the degree of state intervention.

Fitch Ratings assesses that this will gradually improve asset quality and enhance the resilience of financial indicators. The fund’s management will be handled by the international asset management company Franklin Templeton, with an initial public offering planned for 2026.

Fitch also points out that funding costs for banks may rise amid uncertainties related to U.S. tariff policies. Moreover, lingering legacy issues — such as a still high but declining level of dollarization (down to a historic low), realization of previously accumulated asset quality risks, and high dependence on external financing — continue to pressure the banking sector’s financial stability.

Nevertheless, the agency notes that refinancing risks are mitigated by state support and the long-term nature of external borrowings, which are mainly provided on concessional terms by international financial institutions.

Fitch Ratings forecasts that the average level of non-performing loans among rated Uzbek banks will peak at 9–10% in 2025–2026 (compared to 8% in 2023). The agency also expects that high provisioning charges will continue to weigh on sector profitability, especially for banks executing government policies, despite ongoing state capital support.

Fitch warns that rapid growth in retail lending has created overheating risks, even though it contributed to profitability growth, reduced portfolio concentration, and lowered dollarization levels. The agency considers that restrictive measures taken by the Central Bank of Uzbekistan have been effective in cooling high-risk auto and family business lending. However, unsecured consumer loans have increased by approximately 50% year-on-year, albeit from a low base, reaching 9% of total lending as of the end of the first quarter of 2025 (compared to 5% at the end of 2023). Fitch expects further tightening of macroprudential policies this year.

Fitch also highlights medium-term risks in the small and medium business lending segment. Authorities are encouraging growth in this segment, including by easing capital requirements for banks extending such loans, which has accelerated growth rates. The agency believes that the greatest vulnerabilities lie in SMB exposures within volatile cyclical sectors such as agriculture, construction, and textiles, as well as loans denominated in foreign currency.