Clare Nuttall in Almaty -

Kyrgyzstan's banking sector has largely avoided the international crisis, due to a combination of sensible business practices, good regulation and - perhaps most importantly - a lack of foreign borrowing.

This cautious approach benefited the country's banks immensely, but things are due to change. Growth of the banking sector has been faster than the rest of Kyrgyzstan's economy, but it is under-leveraged and to grow further more funds are needed. When international capital markets reopen, at least some of the banks will be looking to raise funds to enable the sector to grow and fulfil its potential, according to Mikhail Nadel, chairman of the board of the country's largest bank, AsiaUniversalBank (AUB), which is likely to be the first in line. "Kyrgyzstan's economy is under-capitalised," he tells bne. "I don't expect any dramatic changes in the next six months to a year, but we are the largest banking institution in the country, so when the markets open we should be able to raise money."

Comparisons with Kyrgyzstan's much larger neighbour are, perhaps, inevitable. While international lenders flocked to lend money to Kazakh banks, Kyrgyzstan was off the radar screen, which turned out to be a blessing. The banking sector also benefited from strict legislation. "In my opinion, we have the best banking legislation of any former USSR country. It's very strict, and this is a big advantage for the development of the banking sector," says Nadal.

If AUB and other Kyrgyz banks manage to raise funds, Nadel is adamant that they will avoid making the same mistakes as the banks in Kazakhstan. "In Kazakhstan, there was a bubble because they borrowed so much money. This created problems, because they raised very short-term money and invested it into long-term projects, which created a liquidity gap," he says. "For sure, we won't make the same mistakes. The size of our two economies is incomparable - we are very under-capitalised here. There will be more than enough opportunities to invest in projects here and to develop the economy."

Another important trend for the Kyrgyz banking sector is the transition from a cash-based economy. "There is a state programme to support the move from a cash-oriented to a non-cash economy. This a great opportunity for us and for other banks," says Nadel.

Consolidation

Last year, AUB, which traditionally focused on the corporate sector, staked its claim in the retail banking sector through its merger with Kyrgyzpromstroibank, which is expected to achieve strong growth as the penetration of the banking industry increases. Already the largest player in the corporate banking sector, the merged entity is now Kyrgyzstan's largest retail banker as well. It currently has market share of 25%, and is aiming to increase this to between 35% and 45%.

The process of integrating the two banks is still ongoing, due to the need not just to harmonise physical infrastructure such as IT systems, but also to bring together two banks with "absolutely different cultures," explains Nadel. The process is due to be finished by the end of November. However, AUB has already started new projects in the areas of credit and debit cards, and has several new retail products in the pipeline.

The bank's main task is to address the general lack of understanding of even the most basic banking services among much of Kyrgyzstan's population. Persuading people to deposit their money with a bank for the first time is a difficult task. "We try to explain to individuals the advantages of using a bank. Changing this mentality is very slow, but it is still going ahead, and I hope penetration will grow very fast in the next couple of years," says Nadel.

In the future, he is convinced that other banks will follow in the footsteps of AUB and Kyrgyzpromstroibank in pooling their resources. There are currently 22 banks in Kyrgyzstan. "Many of these banks are too small to compete effectively with the larger banks. I also expect some of the big international players - either from the west or the east - to come to this country one day," he predicts. "When that happens, the competitive environment will be very intense. The smaller banks may have to merge to avoid being acquired by the bigger banks."

AUB has already prepared for this eventuality; other local banks still have to work out their strategies.

Send comments to The Editor