Former Soviet republics have seen the strongest rise in the number of citizens with bank accounts among all countries in Europe and Central Asia in recent years, driven by financial sector reforms and the development of microfinance.
According to World Bank data, all five countries that recorded a 20%-plus rise in the share of adults able to access the financial system between 2014 and 2017 were formerly part of the Soviet Union: Tajikistan, Armenia, Moldova, Georgia and Kyrgyzstan.
The banking markets in these countries remain underdeveloped as they are still dealing with the legacy of a less transparent and accessible financial system. But reforms they have undertaken to strengthen financial regulation are starting to bear fruit.
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Market reforms
Two other ex-Soviet countries, Azerbaijan and Uzbekistan, are ranked near the bottom of the list and have seen a decline in financial inclusion.
The diverging trends can be explained by the fact that changes were made more quickly in some countries. Improved financial inclusion in Tajikistan and Kyrgyzstan is down to recent reforms and the structure of the countries' financial sectors, Arthur Poghosyan, head of financial sector projects in Central Asia at the European Bank for Reconstruction and Development, said in an interview.
The National Bank of Tajikistan has been under new management since 2015, and putting in place a number of reforms in cooperation with the World Bank, the IMF and the EBRD.
The International Finance Corporation, a World Bank sister company and the largest global development institution focused on the private sector in developing countries, has made the development of inclusive financial services a key part of its strategy in Tajikistan, Cassandra Colbert, IFC regional manager for Central Asia, told S&P Global Market Intelligence.
"We support cashless payments and innovative digital financial products that foster the inclusion of underbanked segments and smaller businesses through increased access to financial products and services," she said.

Thriving microfinance
An important driver of financial inclusion in Tajikistan and Kyrgyzstan has been the robust development of microfinance and small business lending, Poghosyan said.
In Tajikistan, there are three large microfinance lenders which together hold nearly $170 million in loans, the majority of which are below $10,000. The largest among these microfinance providers, Imon International, has close to 117,000 borrowers, some 39% of whom are women, Poghosyan said.
Other leading providers in Tajik microfinance are LLC MDO Arvand, Humo and Partners, LLC, FINCA, Oxus Microfinance Tajikistan and Matin, according to sector association AMFOT.
Tajikistan has one of the most advanced private credit bureaus in Central Asia — a result of the IFC's role in developing microfinance in the country, Colbert said. IFC's advisory services have enabled several microfinance institutions to grow into micro deposit organizations, and helped build credit‐reporting and secured transactions systems to reduce financial constraints, she said.
The buoyant growth of microfinance institutions has improved people's access to the financial system in Kyrgyzstan as well, Poghosyan noted. The microfinance sector here is among the most advanced in the wider region and three of the largest Kyrgyz microfinance lenders have transformed into banks since 2012, he said.
Bank Bai-Tushum OJSC received a banking license in 2013, followed by Kompanion Bank CJSC in 2016 and FINCA Kyrgyzstan in 2018. The ultimate parent companies of Kompanion and FINCA are U.S. not-for-profit organizations Mercy Corps and FINCA International Inc., respectively.
The growth of microfinance in Kyrgyzstan and Tajikistan can also be attributed to early legislative reforms. Both countries adopted new rules for microfinance institutions as early as 2002 and 2003, Rainer Schliwa, a regional coordinator at the German Corporation for International Cooperation, GIZ, said in an interview. The new regulations led to a rise in the number of microfinance firms.
In its work on strengthening the microfinance sector in Kyrgyzstan GIZ, which is a governmental agency, helped the National Bank of Kyrgyzstan set up a credit cooperative system, Schliwa said.
In the early years of GIZ's work in the country, there were hardly any financial institutions able to reach rural areas and provide services there, especially to small-scale borrowers, he said. In the years after 2009, GIZ advised Central Asian central banks in on- and offsite supervision of microfinance institutions and credit cooperatives.
GIZ's project to support microfinance in Central Asia ran between 2008 and 2013.
Belgian impact investment fund Incofin Investment Management, a backer of Kyrgyzstan's Kompanion Bank and active investor in Central Asian microfinance, has flagged the quality of local regulations for microfinance institutions as key criteria when assessing market risks in countries it is looking to invest.
Late bloomer
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In contrast to Tajikistan and Kyrgyzstan, the financial system of Uzbekistan has only recently started to open up, Poghosyan said.
Despite it being the most populous country in the region, with almost 33 million people, Uzbek citizens have historically avoided the state-dominated banking system due to worries that opening a bank account or obtaining a loan would expose them to increased scrutiny by the authorities, he said.
Because of this, there has been a lot of informal lending in the sector and people have essentially been keeping money under their mattresses or getting small loans to finance their microbusinesses from informal sources, Poghosyan added.
But more recently the country has embarked on "an ambitious reform path" under new President Shavkat Mirziyoyev and has made steps to open up the banking market and reform the microfinance sector, Poghosyan said.
Previously prime minister, Mirziyoyev took the office of president in September 2016, following the death of Islam Karimov, who had led the country since the dissolution of the Soviet Union in 1991.
"We expect that over time Uzbekistan will catch up to other countries in the region in terms of financial inclusion levels. This is a country with huge potential," Poghosyan said.


