27.09.2006

Medium-term strategy of development of the banking system of the Republic of Tajikistan for the period up to 2009

Medium-term strategy of development of the banking system of the Republic of Tajikistan for the period up to 2009 are worked out in according to the National Strategy of Development of the Republic of Tajikistan for the period up to 2015 and it defines the major trends of the banking system development in the country for the medium term, with the purpose of provision a stable economic development, poverty reduction and welfare improvement.

1. Appraisal of Current Situation

1. Macroeconomic indicators for 2001-2005 have tended to gradual stabilization with high output growth, moderately low inflation, increase in wages and income of population, strengthening of social sector. Thus, over the last five years GDP growth rate averaged 9,5% annually, and growth of industrial and agricultural product averaged 10,4% and 11,1%, growth of population income for the said period increased for more than twice. Inflation declined from 12,5% in 2001 to 7,1% in 2005.

2. Activity of banking sector of Tajikistan is being conducted on the basis of principles of market economy and its development is directed at more effective use of country’s potential. Considerable part of prudential regulation of banking activity has been brought in conformity with internationally acknowledged approaches. And fundamental principles for development of banking system were: stable and sustainable macroeconomic environment, weighted fiscal and monetary policies, effective regulation of banking activity and banking supervision system.

3. Banking sector is developing in a dynamic way. Competition environment in the market of banking services is being developed, particularly, in such segments as attraction of deposits from population and service of money transfers. Assets and capital of credit institutions is increasing with high pace, its resource base is widening, scale of banking operations and introduction of new banking products is increasing. Thus, ratio of banking sector assets to GDP has increased from 9,1% in 2001 to 22,3 % in 2005, and that of balance capital from 2,0 % to 3,9%.

4. As a proof for strengthened banking system can serve the marked trend of improvement of quality of credit portfolio. Sustainable growth trend of credit investment and deposit base of banking system is also kept while evidencing the increase in trust to banks by depositors being the most important of improvement of banking sector.

5. Over recent years dynamic growth of small lending is observed which allows to address the poverty problems in an accelerated way. Organizational and financial support of, first of all, European Bank for Reconstruction and Development (EBRD) and Asian Development Bank (ADB) has secured quick becoming of multiple networks of small lending institutions.

6. However, scale of banking sector activity is still relatively small. Capability of banking sector is required to be increased and extended if accelerated economic growth is to be achieved. For this purpose, it is necessary to use such available factors as high pace of economic growth, increase of economic sustainability and growth of inflow of money transfers of labor migrants to the country, which establishes the basis for increase of domestic savings. Favorable relations and support of international community and international financial institutions push up chances for successful solution of development tasks marked in the strategy.

7. Despite positive trends, there are still factors which impede the attainment of banking sector development on a sustained basis such as:

Lack of effective and fully acting money market;

inadequate level of corporate governance of financial institutions and their poor technical basis;

low capitalization of banking system;

of indexation of population’s deposits;

unfavorable conditions for long-term crediting of economy and relatively high risks of crediting the real sector;

suspense of a number of key problems of mortgage legislation;

inadequate methodological base and technical conditions inter-bank exchange market operation;

suspense of issue of deflection of resources of commercial banks for inappropriate functions;

low level of monetization.

2. State Policy for banking sector

8. Weighted and consistent policy to be pursued by the state in banking system regulation plays and important role in economic development. The major directions of this policy are:

to secure system stability and creation of needed conditions for development of market for banking services on basis of healthy competition;

to keep and strengthen the market principles in the operation of lending institutions and to make use of indirect (economic) influence methods primarily;

to encourage banking services for small and medium business oriented at providing a wide range of banking products to the final user, first of all, retail consumer lending and mortgage;

to make use exclusively principles of market economy and voluntarism for enhancement of structure of banking sector, rendering services and placement of lending organizations in the regions;

to provide legislative norms with the view to encumber use of banking sector in conducting illegal transactions, including laundering of incomes earned unlawfully and terrorism financing;

to liberalize of transactions with precious metals and stones and bringing norms for such transactions into accord with international standards;

9. Norms of allocation to mandatory reserve fund will be decreased as the alternative instruments of regulation of money liquidity are established.

10. Relations of regulatory body (central and local) and lending institutions will be built on the basis of requirement of legislation, transparency, while prohibiting the possibility of administrative interference from regulatory body into operation of such organization.

3. Objectives of banking sector development

11. The key medium-term objectives of development of banking sector is to increase in sustainability of banking sector, to assist in development of financial intermediation, financial market and to strengthen the market basis of sector operation, which will contribute to attainment of sustainable economic development with the rate exceeding 7 percent annually and decline in inflation up to 6 per cent per annum. To achieve these objectives the following tasks are identified:

12. Monetary policy:

To secure low inflation rate and maintain purchasing power of national currency;

consistent and planned increase of monetization level which provides effective economic functioning and eliminating the basic reasons of demonetization of the economy;

to strengthen and enhancing of implementation of monetary policy and its coordination with fiscal policy;

use of freely floating exchange rate regime in exchange rate policy;

perfection of payment system.

13. Strengthening of banking sector:

Elevation of trust in banking system and strengthening of protection of interests of depositors;

Risk identification, oriented at supervision and supervision on a consolidated basis;

Strengthening of competitiveness of commercial banks and non-bank financial institutions, improvement of competitiveness environment and maintaining of transparency in banks’ and non-bank financial institutions;

development of corporate governance in credit organizations.

4. Expected outcomes of development of banking sector:

14. The basic results of banking sector will fundamental raise of its role in the economy, growth of financial stability and transparency. At that, indicators of banking sector of the country will be gradually approaching to indicators of banking system of countries with modern market economies. Under successful implementation of activities provided for in this document, it is envisaged that the following banking system indicators will be achieved by end of 2009: assets/GDP - 31 %; capital/GDP - 5,5 %; wide money indicator/GDP (level of monetization) – 12 -15 %.

Capital accretion of banks will maintained basically at the expense of capitalization of and gains as well as attraction of funds of domestic ans foreign investors.

The strategic perspective of development of structure of banking sector is in optimal combination of multi-profile banks specialized in separate services (lending in small and medium business, mortgage), non-bank financial institutions, microfinancing organizations.

Banking sector built on the principles of fair competition will be an effective instrument for accumulation of investment resources for maintaining of economic growth, enhancement of living standards of country’s population.

5. Implementation Mechanisms and Tasks For Medium-Term Strategy

15. The most important components of implementation Medium-Term Banking Sector Development are: stable and sustainable macroeconomic environment, availability of relevant monetary, fiscal and legal spheres, attractive investment climate, improvement of regulation of banking operation and banking supervision system.

Monetary Policy

16. To achieve the earmarked goals in monetary and currency policies, implementation of the following tasks are considered:

improvement of development of monetary policy, extending the set of tools for its implementation;

enhancing the mechanisms of mandatory reserve requirement by decreasing norms of mandatory reserves given the macroeconomic performance; cooperation, integration in currency system and security market within member countries of EAEC;

liberalization of account opening in foreign banks, attraction of credits and other forms of foreign investment;

revision of normative regulations in purpose on futher liberalization of foreign economic activities and currency regime;

extension of close and mutual cooperation with international financial institutions and funds, donor countries, private investors, which will contribute to effective attraction of foreign capital for encouraging of economic growth and poverty reduction;

development of inter-bank market for credit resources and introduction of new types of credit products by banks and non-bank organizations, including long-term lending.

Strengthening of banking system

17. Modern conditions of organization of banking system meets the basis needs of economy and secures the favorable conditions for the development of banking sector which conform to the demand of economic growth. The universal status of banks and non-bank financial institutions allows to decrease risks by diversification of services for goal attainment. Given this conditions, the following mechanism of solution of tasks is considered:

continuation of recovery policy of banks having financial problems via their restructuring;

accumulation of capital base of banking system, incl. by issuance of securities;

further improvement of normative and legal acts for effective banking system activity;

increase of control over strict compliance with the banking legislation on the issues of protection of customers’ rights, keeping banking secrecy and compliance with the principles of corporate governance in banks;

support of the process of establishment of microfinance institution system and development of their normative and legal norms of regulations;

assistance in organization of banks’ associations;

creation of conditions for setting-up the normative and legal basis for organization of credit bureaus;

strengthening of individual deposit guarantee Fund by ensuring the real compensation of such deposits;

strengthening of roles of qualification commissions for attestation of banks’ management employees;

capitalization of banks via open sale of stocks;

introduction of international internal audit standards in the bank practices and preparation of opinion in accordance with such standards;

increasing requirements for international audit and publication of their financial statements for banks;

strengthening of technical base of banking supervision bodies; encouragement of creating agencies for credit ratings;

development of market for banking services and enhancing the level of satisfaction, attractiveness and accessibility of banking services;

technical support to independent commission in determination of real debts of cotton sector, development and introduction of transparent schemes of their financing (cotton sector);

setting up monitoring system over use by credit organizations of modern technologies of distance banking services, including internet technology, their protection level given requirement of information security;

Banking supervision

18. Banking supervision provides for development of approaches, which includes evaluation of credit institutions activity and taking measures of supervision reaction based on the risk assessment and their impact on the sustainability of credit institutions. To solve this problem we need to:

work arrangement for setting early react system the basis of which is working out of situation models in lending organizations taking deposits, and introduction of this system in supervision practice;

introduce banking supervision over operation of banks and non-bank financial institutions on a consolidated basis including risk analysis encountered by credit institutions under relations with individuals and legal entities.

develop legislation in banking sector within control over risks aroused in lending of individuals connected with bank, in particular, mandatory approval of these transactions by board of directors of the credit organization, inadmissibility of soft lending of related persons etc.;

continue works related to improvement and optimization of reports to be submitted by banks, including decrease of number of reports forms and simplification of reporting procedures of credit organizations. Moreover, attention will be paid to automation of processes of report submission by banks and non-bank financial institutions to National Bank of Tajikistan by usin internet network which allows exclusion of duplication of incoming information and cut the costs of credit institutions;

improvement of approaches to assessment of operation of credit institutions based on the recommendation of Basel Committee on Banking Supervision and international practice oriented at complex evaluation of banks’ activity which means assessment based on the results of analysis of financial stability of banks and non-bank financial institutions (capital adequacy, asset quality, income level and liquidity) as well as transparency of ownership structure and management quality and internal control;

introduce supervision in counteraction for legalization (laundering) of criminal incomes.

Betterment of Investment Climate

19. Attraction of foreign investment to the economy of Tajikistan, in particular, in its banking sector depends on improvement of corporate governance level in firms and organizations of all economy’s sectors, contraction of non-commercial risks of all investment types introduction of international financial reporting standards in all organizations. System of Capital admittance to the domestic market of banking services, on the other hand, shall be targeted at debarment of capital penetration of non-residents with unstable and volatile financial stance or doubtful reputation. To solve this problem, we need to pursue a policy directed at attraction of investment for development of private sector and other sectors of the economy, namely:

improvement and further development of normative and legal basis for enhancing g the activity of foreign investors, including speed-up of the process of adoption of new Law of the Republic of Tajikistan “On Investment”;

creation of favorable investment climate consistent with the contemporary market demand, implementation of active mechanisms of protection of interests and rights of investors in implementation of investment projects and creation of foreign investment insurance system;

assistance in the process of membership of the Republic of Tajikistan in WTO, to bring legislative base and criteria of economic activity of the country into line with WTO requirements, development of number of actions for protection of domestic market and domestic producers from external factors.

20. Regime of admittance of foreign capital into banking sector is mainly oriented at development of market relations and competition in banking sector.

Deposit market development

21. One of conditions of new development stage of banking operation with the real sector of the economy is to create stable medium- and long-term resource base. The key factor to address this strategic task is growth of population’s deposit. The prerequisites of increase of population deposit with banks are:

Increase in real income of population;

Strengthening of sustainability of credit organizations and banking sector as a whole;

Development of legal base of protection of interests of creditors and depositors;

Increase of trust of customers and depositors in financial institutions;

Ssecuring the institute of banking secrecy, including secrecy of deposit;

Extension of list of banking products to attract population’s income.

Credit market development

22 Rise in demand for bank’s lending by real sector of the economy will secured by positive dynamics of macroeconomic parameters of the economy and development of bank refinancing system on the basis of use of securities and other highly liquid assets as a collateral.

23. With the view to regulate liquidity of banking system the National Bank of Tajikistan will further be developing inter-bank credit resources market which will consider the following aspects:

Particular conditions for inter-bank credits;

Regulating the cost of inter-bank credits in accordance with market;

Capability of banks in obtaining relevant collateral.

24. Works will be continued for improving banks’ credit portfolio quality in terms of repayment of problem debts. In particular, inactive credits extended to state-owned enterprises will be recapitalized and activity for seeking pledge for problem credits by liquid collateral and its implementation will be activated.

Microcredit development.

Betterment of access to resources throughout the country, in particular, in remote and mountainous areas will be the key condition for further microcredit development in the country.

25. In order to develop the system of bank lending for small and medium business it is necessary to develop and implement approaches aimed at adoption of simplified procedures of lending to small business, especially for small loans.

26. An important place in non-bank financing of real sector of the economy has development of microfinance organizations oriented, first of all, at meeting the needs in financial resources of remote areas, small enterprises, micro businesses and dehqan farms, as well participation in the international organizations programs on microfinincing.

27. Given the specifics of activity of microfinance institutions connected with small number of transactions there is a need to develop a simplified accounting and reporting system for them.

Development of mortgage loan market

28. Mortgage lending is the most effective instrument of involving population’s funds in investment sphere and satisfying their needs in housing.

29. To develop the market for mortgage lending adoption of separate State Program which provides for formation of legal and institutional basis of its development and establishment of mortgage bank is required.

30. It is required to implement the measures for the following basic directions such as:

Adoption of legislation directed at creation of conditions for attraction of investment in housing sector. Implementation of this action shall include adoption of basis laws for formation of legal ground of mortgage lending, in particular adoption of laws on: mortgage, registration of rights for realty, transactions therewith and public auctions;

Improvement of normative and legal base that provides for amendment to civil procedure and housing legislation with the view to remove barriers in searching for house acting as a pledge under mortgage lending;

creating conditions and mechanisms of attracting long-term financial resources in mortgage housing financing system.

Security market development

31. Security market in the country is in its early stage of development. Currently there is deposit certificates of the National Bank of Tajikistan and stocks of joint stock companies.

32. To develop organized market for state security the following actions shall be taken: reissuance of state Treasury notes by the Ministry of Finance of the Republic of Tajikistan;

rearranging long-term notes of Ministry of Finance of Tajikistan placed with the National Bank of Tajikistan for secondary security market;

creation of single mechanism of data dissemination for potential market participants;

to continue activity of attraction of international financial institutions for assistance in security market development.

33. Development of corporate security market must gradually involve more number of enterprises and companies which can maintain flexible flow of investments from one segment of the economy to another. Role of Security Agency under the Ministry of Finance will be increased as a regulator of this market operation. This task also provides for accomplishment of the following actions:

improvement of stock exchange operation and inclusion of corporate securities in listing;

establishment of independent audit companies for assessment of economic situation of joint stock companies;

issue of corporate securities by private companies.

Money circulation

34. The major tasks of money circulation in the context of economic development is adequate money supply regulation which provides for:

provision of cash for all sectors of the economy proceeding from their real needs given the availability of funds in the accounts of economic subjects;

improvement of protection level of banknotes to prevent counterfeit and support durability of banknotes in the circulation;

maintaining of money circulation with clean money through withdrawal of torn money via commercial banks and non-bank financial institutions and exchange of torn banknotes with for new ones.

Currency market development

35. The fundamental mechanism of development of currency market of the country are:

further liberalization of exchange regime and order of currency transactions related to capital movement;

maintaining steady functioning of internal currency market, creation of conditions for development of its inter-bank sector and forward transaction market, integration of domestic currency market into world currency markets;

preparation of unified electronic forex trade system;

creation of competition environment in the retail market for sale of cash forex and assistance in development of institute of exchange offices of individuals;

formation of normative base for activity of credit institutions in the market of precious stones and metals.

Staff policy

36. Development of staff policy of banking sector is considered as one of the components of complex action for banking sector reform.

37. The objectives of staff policy are: increasing the staff qualification, creation of professional collectives capable of addressing the strategic development of banking sector. The priorities of staff policy are:

Enhancement of effectiveness of selection system, staff preparation and positioning, and improvement of staff motivation system and development of corporate culture.

38. In the coming years, institutions in the banking sector shall maintain systematic work for staff selection and preparation, maintain and enhancement of professional capacity of available staff. Additional incentives will activated to draw the perspective specialist into the sector. This becomes more actual, as in the environment of high growth rate and increased involvement of Tajikistan in the world economy including the result of foreign investment inflows competition for attraction of specialist will tighten.

39. While bettering works in staff management, bank management shall focus their attention on strengthening of role of staff services and units which should be tasked with enhancement of traditional directions including use of up-to-date evaluation methods which allows to determine the professional and business capacity of staff and to employ them effectively.

40. Base preparation of bankers will be concentrated in universities and institutes of the country capable of qualitative preparation of such staff. Banking sector institutions will systematically support such universities and institutes in formation of syllabuses and up-to-date education methods as well as encourage the participation of their staff in science and pedagogical activity of appropriate profiles.

41. Further development of Inter-bank Training Center will be provide for training and re-training of 100-1000 specialists annually.

42. Both traditional training and measures to increase professional competence of staff in the course of performing their duties will be used for support and betterment of professional level.

Legislation improvement

43. Successful performance of tasks for banking sector development depends on improvement of current and adoption of new laws that meet international norms. The priority laws to be adopted are: on credit history; on joint stock companies (new edition); on mortgage; on state registration of realty and transaction therewith; on fight with money laundering (legalization) obtained illegally and terrorism financing. The following laws of the Republic of Tajikistan need also to be amended: on banks and banking activity (in the section of improvement of corporate governance in banks and increasing the requirement for top bankers); on individual deposits guarantee (in increase of the role of Deposit Guarantee Fund); Land Code (collateral for land use rights); Civil, Tax, Criminal Codes (disclosure of banking secrecy for third persons on the basis of court decision).

Payment system

44. One of the main factors of increasing stability of activity of financial sector and economy as a while is further improvement of payment system including actions for extension of non-cash settlement, introduction of modern technologies and methods for information transfer, perfection of information system protection, maintaining the effective and reliable payment system functioning.

45. To continue improvement of payment system by introduction of new banking services with the use of high technology automation system and complete transfer of inter-bank settlement to electronic payment system throughout the country.

46. Particular attention will be paid measures for improving regulation of available corporate payment system in the country which maintains inter-bank settlement and settlement on the basis of inter-bank correspondent relations. The National Bank of Tajikistan intends to continue cooperation of credit institutions on payment system reform.

47. To increase the proportion of non-cash settlement in the country’s economy works will be continued for activation of Processing Center “Tojkort” and development of infrastructure of use of plastic cards in different economic sectors of the country.

48. It is required to take actions for electronization of payments and settlements, introduction of relevant information technology in trade and financial services, secure reliable legal protection of transactions made in electronic form. These measures will contribute to decriminalization of the economy, crowding-out of shadow component of economic activity, decrease of non-payment and increase of money circulation effectiveness.

49. For improvement of arranging international settlement and maintaining qualitative and reliable settlement and payment process for participants of foreign economic activity of the Republic of Tajikistan, modernization of program and equipment complex will be done with the view to have access to new services and solutions of SWIFT, as well аs connecting new banks to SWIFT system.

50. Specific attention will be paid to issues of maintaining security and protection for information system and integrity of data base on the basis of developed concept of information technology security. To implement the effectiveness of payment system, an international audit in this sector is planned.

Attachment

Dushanbe

September 26, 2006

Medium-term strategy of development of the banking system of the Republic of Tajikistan for the period up to 2009 are worked out in according to the National Strategy of Development of the Republic of Tajikistan for the period up to 2015 and it defines the major trends of the banking system development in the country for the medium term, with the purpose of provision a stable economic development, poverty reduction and welfare improvement.

1. Appraisal of Current Situation

1. Macroeconomic indicators for 2001-2005 have tended to gradual stabilization with high output growth, moderately low inflation, increase in wages and income of population, strengthening of social sector. Thus, over the last five years GDP growth rate averaged 9,5% annually, and growth of industrial and agricultural product averaged 10,4% and 11,1%, growth of population income for the said period increased for more than twice. Inflation declined from 12,5% in 2001 to 7,1% in 2005.

2. Activity of banking sector of Tajikistan is being conducted on the basis of principles of market economy and its development is directed at more effective use of country’s potential. Considerable part of prudential regulation of banking activity has been brought in conformity with internationally acknowledged approaches. And fundamental principles for development of banking system were: stable and sustainable macroeconomic environment, weighted fiscal and monetary policies, effective regulation of banking activity and banking supervision system.

3. Banking sector is developing in a dynamic way. Competition environment in the market of banking services is being developed, particularly, in such segments as attraction of deposits from population and service of money transfers. Assets and capital of credit institutions is increasing with high pace, its resource base is widening, scale of banking operations and introduction of new banking products is increasing. Thus, ratio of banking sector assets to GDP has increased from 9,1% in 2001 to 22,3 % in 2005, and that of balance capital from 2,0 % to 3,9%.

4. As a proof for strengthened banking system can serve the marked trend of improvement of quality of credit portfolio. Sustainable growth trend of credit investment and deposit base of banking system is also kept while evidencing the increase in trust to banks by depositors being the most important of improvement of banking sector.

5. Over recent years dynamic growth of small lending is observed which allows to address the poverty problems in an accelerated way. Organizational and financial support of, first of all, European Bank for Reconstruction and Development (EBRD) and Asian Development Bank (ADB) has secured quick becoming of multiple networks of small lending institutions.

6. However, scale of banking sector activity is still relatively small. Capability of banking sector is required to be increased and extended if accelerated economic growth is to be achieved. For this purpose, it is necessary to use such available factors as high pace of economic growth, increase of economic sustainability and growth of inflow of money transfers of labor migrants to the country, which establishes the basis for increase of domestic savings. Favorable relations and support of international community and international financial institutions push up chances for successful solution of development tasks marked in the strategy.

7. Despite positive trends, there are still factors which impede the attainment of banking sector development on a sustained basis such as:

Lack of effective and fully acting money market;

inadequate level of corporate governance of financial institutions and their poor technical basis;

low capitalization of banking system;

of indexation of population’s deposits;

unfavorable conditions for long-term crediting of economy and relatively high risks of crediting the real sector;

suspense of a number of key problems of mortgage legislation;

inadequate methodological base and technical conditions inter-bank exchange market operation;

suspense of issue of deflection of resources of commercial banks for inappropriate functions;

low level of monetization.

2. State Policy for banking sector

8. Weighted and consistent policy to be pursued by the state in banking system regulation plays and important role in economic development. The major directions of this policy are:

to secure system stability and creation of needed conditions for development of market for banking services on basis of healthy competition;

to keep and strengthen the market principles in the operation of lending institutions and to make use of indirect (economic) influence methods primarily;

to encourage banking services for small and medium business oriented at providing a wide range of banking products to the final user, first of all, retail consumer lending and mortgage;

to make use exclusively principles of market economy and voluntarism for enhancement of structure of banking sector, rendering services and placement of lending organizations in the regions;

to provide legislative norms with the view to encumber use of banking sector in conducting illegal transactions, including laundering of incomes earned unlawfully and terrorism financing;

to liberalize of transactions with precious metals and stones and bringing norms for such transactions into accord with international standards;

9. Norms of allocation to mandatory reserve fund will be decreased as the alternative instruments of regulation of money liquidity are established.

10. Relations of regulatory body (central and local) and lending institutions will be built on the basis of requirement of legislation, transparency, while prohibiting the possibility of administrative interference from regulatory body into operation of such organization.

3. Objectives of banking sector development

11. The key medium-term objectives of development of banking sector is to increase in sustainability of banking sector, to assist in development of financial intermediation, financial market and to strengthen the market basis of sector operation, which will contribute to attainment of sustainable economic development with the rate exceeding 7 percent annually and decline in inflation up to 6 per cent per annum. To achieve these objectives the following tasks are identified:

12. Monetary policy:

To secure low inflation rate and maintain purchasing power of national currency;

consistent and planned increase of monetization level which provides effective economic functioning and eliminating the basic reasons of demonetization of the economy;

to strengthen and enhancing of implementation of monetary policy and its coordination with fiscal policy;

use of freely floating exchange rate regime in exchange rate policy;

perfection of payment system.

13. Strengthening of banking sector:

Elevation of trust in banking system and strengthening of protection of interests of depositors;

Risk identification, oriented at supervision and supervision on a consolidated basis;

Strengthening of competitiveness of commercial banks and non-bank financial institutions, improvement of competitiveness environment and maintaining of transparency in banks’ and non-bank financial institutions;

development of corporate governance in credit organizations.

4. Expected outcomes of development of banking sector:

14. The basic results of banking sector will fundamental raise of its role in the economy, growth of financial stability and transparency. At that, indicators of banking sector of the country will be gradually approaching to indicators of banking system of countries with modern market economies. Under successful implementation of activities provided for in this document, it is envisaged that the following banking system indicators will be achieved by end of 2009: assets/GDP - 31 %; capital/GDP - 5,5 %; wide money indicator/GDP (level of monetization) – 12 -15 %.

Capital accretion of banks will maintained basically at the expense of capitalization of and gains as well as attraction of funds of domestic ans foreign investors.

The strategic perspective of development of structure of banking sector is in optimal combination of multi-profile banks specialized in separate services (lending in small and medium business, mortgage), non-bank financial institutions, microfinancing organizations.

Banking sector built on the principles of fair competition will be an effective instrument for accumulation of investment resources for maintaining of economic growth, enhancement of living standards of country’s population.

5. Implementation Mechanisms and Tasks For Medium-Term Strategy

15. The most important components of implementation Medium-Term Banking Sector Development are: stable and sustainable macroeconomic environment, availability of relevant monetary, fiscal and legal spheres, attractive investment climate, improvement of regulation of banking operation and banking supervision system.

Monetary Policy

16. To achieve the earmarked goals in monetary and currency policies, implementation of the following tasks are considered:

improvement of development of monetary policy, extending the set of tools for its implementation;

enhancing the mechanisms of mandatory reserve requirement by decreasing norms of mandatory reserves given the macroeconomic performance; cooperation, integration in currency system and security market within member countries of EAEC;

liberalization of account opening in foreign banks, attraction of credits and other forms of foreign investment;

revision of normative regulations in purpose on futher liberalization of foreign economic activities and currency regime;

extension of close and mutual cooperation with international financial institutions and funds, donor countries, private investors, which will contribute to effective attraction of foreign capital for encouraging of economic growth and poverty reduction;

development of inter-bank market for credit resources and introduction of new types of credit products by banks and non-bank organizations, including long-term lending.

Strengthening of banking system

17. Modern conditions of organization of banking system meets the basis needs of economy and secures the favorable conditions for the development of banking sector which conform to the demand of economic growth. The universal status of banks and non-bank financial institutions allows to decrease risks by diversification of services for goal attainment. Given this conditions, the following mechanism of solution of tasks is considered:

continuation of recovery policy of banks having financial problems via their restructuring;

accumulation of capital base of banking system, incl. by issuance of securities;

further improvement of normative and legal acts for effective banking system activity;

increase of control over strict compliance with the banking legislation on the issues of protection of customers’ rights, keeping banking secrecy and compliance with the principles of corporate governance in banks;

support of the process of establishment of microfinance institution system and development of their normative and legal norms of regulations;

assistance in organization of banks’ associations;

creation of conditions for setting-up the normative and legal basis for organization of credit bureaus;

strengthening of individual deposit guarantee Fund by ensuring the real compensation of such deposits;

strengthening of roles of qualification commissions for attestation of banks’ management employees;

capitalization of banks via open sale of stocks;

introduction of international internal audit standards in the bank practices and preparation of opinion in accordance with such standards;

increasing requirements for international audit and publication of their financial statements for banks;

strengthening of technical base of banking supervision bodies; encouragement of creating agencies for credit ratings;

development of market for banking services and enhancing the level of satisfaction, attractiveness and accessibility of banking services;

technical support to independent commission in determination of real debts of cotton sector, development and introduction of transparent schemes of their financing (cotton sector);

setting up monitoring system over use by credit organizations of modern technologies of distance banking services, including internet technology, their protection level given requirement of information security;

Banking supervision

18. Banking supervision provides for development of approaches, which includes evaluation of credit institutions activity and taking measures of supervision reaction based on the risk assessment and their impact on the sustainability of credit institutions. To solve this problem we need to:

work arrangement for setting early react system the basis of which is working out of situation models in lending organizations taking deposits, and introduction of this system in supervision practice;

introduce banking supervision over operation of banks and non-bank financial institutions on a consolidated basis including risk analysis encountered by credit institutions under relations with individuals and legal entities.

develop legislation in banking sector within control over risks aroused in lending of individuals connected with bank, in particular, mandatory approval of these transactions by board of directors of the credit organization, inadmissibility of soft lending of related persons etc.;

continue works related to improvement and optimization of reports to be submitted by banks, including decrease of number of reports forms and simplification of reporting procedures of credit organizations. Moreover, attention will be paid to automation of processes of report submission by banks and non-bank financial institutions to National Bank of Tajikistan by usin internet network which allows exclusion of duplication of incoming information and cut the costs of credit institutions;

improvement of approaches to assessment of operation of credit institutions based on the recommendation of Basel Committee on Banking Supervision and international practice oriented at complex evaluation of banks’ activity which means assessment based on the results of analysis of financial stability of banks and non-bank financial institutions (capital adequacy, asset quality, income level and liquidity) as well as transparency of ownership structure and management quality and internal control;

introduce supervision in counteraction for legalization (laundering) of criminal incomes.

Betterment of Investment Climate

19. Attraction of foreign investment to the economy of Tajikistan, in particular, in its banking sector depends on improvement of corporate governance level in firms and organizations of all economy’s sectors, contraction of non-commercial risks of all investment types introduction of international financial reporting standards in all organizations. System of Capital admittance to the domestic market of banking services, on the other hand, shall be targeted at debarment of capital penetration of non-residents with unstable and volatile financial stance or doubtful reputation. To solve this problem, we need to pursue a policy directed at attraction of investment for development of private sector and other sectors of the economy, namely:

improvement and further development of normative and legal basis for enhancing g the activity of foreign investors, including speed-up of the process of adoption of new Law of the Republic of Tajikistan “On Investment”;

creation of favorable investment climate consistent with the contemporary market demand, implementation of active mechanisms of protection of interests and rights of investors in implementation of investment projects and creation of foreign investment insurance system;

assistance in the process of membership of the Republic of Tajikistan in WTO, to bring legislative base and criteria of economic activity of the country into line with WTO requirements, development of number of actions for protection of domestic market and domestic producers from external factors.

20. Regime of admittance of foreign capital into banking sector is mainly oriented at development of market relations and competition in banking sector.

Deposit market development

21. One of conditions of new development stage of banking operation with the real sector of the economy is to create stable medium- and long-term resource base. The key factor to address this strategic task is growth of population’s deposit. The prerequisites of increase of population deposit with banks are:

Increase in real income of population;

Strengthening of sustainability of credit organizations and banking sector as a whole;

Development of legal base of protection of interests of creditors and depositors;

Increase of trust of customers and depositors in financial institutions;

Ssecuring the institute of banking secrecy, including secrecy of deposit;

Extension of list of banking products to attract population’s income.

Credit market development

22 Rise in demand for bank’s lending by real sector of the economy will secured by positive dynamics of macroeconomic parameters of the economy and development of bank refinancing system on the basis of use of securities and other highly liquid assets as a collateral.

23. With the view to regulate liquidity of banking system the National Bank of Tajikistan will further be developing inter-bank credit resources market which will consider the following aspects:

Particular conditions for inter-bank credits;

Regulating the cost of inter-bank credits in accordance with market;

Capability of banks in obtaining relevant collateral.

24. Works will be continued for improving banks’ credit portfolio quality in terms of repayment of problem debts. In particular, inactive credits extended to state-owned enterprises will be recapitalized and activity for seeking pledge for problem credits by liquid collateral and its implementation will be activated.

Microcredit development.

Betterment of access to resources throughout the country, in particular, in remote and mountainous areas will be the key condition for further microcredit development in the country.

25. In order to develop the system of bank lending for small and medium business it is necessary to develop and implement approaches aimed at adoption of simplified procedures of lending to small business, especially for small loans.

26. An important place in non-bank financing of real sector of the economy has development of microfinance organizations oriented, first of all, at meeting the needs in financial resources of remote areas, small enterprises, micro businesses and dehqan farms, as well participation in the international organizations programs on microfinincing.

27. Given the specifics of activity of microfinance institutions connected with small number of transactions there is a need to develop a simplified accounting and reporting system for them.

Development of mortgage loan market

28. Mortgage lending is the most effective instrument of involving population’s funds in investment sphere and satisfying their needs in housing.

29. To develop the market for mortgage lending adoption of separate State Program which provides for formation of legal and institutional basis of its development and establishment of mortgage bank is required.

30. It is required to implement the measures for the following basic directions such as:

Adoption of legislation directed at creation of conditions for attraction of investment in housing sector. Implementation of this action shall include adoption of basis laws for formation of legal ground of mortgage lending, in particular adoption of laws on: mortgage, registration of rights for realty, transactions therewith and public auctions;

Improvement of normative and legal base that provides for amendment to civil procedure and housing legislation with the view to remove barriers in searching for house acting as a pledge under mortgage lending;

creating conditions and mechanisms of attracting long-term financial resources in mortgage housing financing system.

Security market development

31. Security market in the country is in its early stage of development. Currently there is deposit certificates of the National Bank of Tajikistan and stocks of joint stock companies.

32. To develop organized market for state security the following actions shall be taken: reissuance of state Treasury notes by the Ministry of Finance of the Republic of Tajikistan;

rearranging long-term notes of Ministry of Finance of Tajikistan placed with the National Bank of Tajikistan for secondary security market;

creation of single mechanism of data dissemination for potential market participants;

to continue activity of attraction of international financial institutions for assistance in security market development.

33. Development of corporate security market must gradually involve more number of enterprises and companies which can maintain flexible flow of investments from one segment of the economy to another. Role of Security Agency under the Ministry of Finance will be increased as a regulator of this market operation. This task also provides for accomplishment of the following actions:

improvement of stock exchange operation and inclusion of corporate securities in listing;

establishment of independent audit companies for assessment of economic situation of joint stock companies;

issue of corporate securities by private companies.

Money circulation

34. The major tasks of money circulation in the context of economic development is adequate money supply regulation which provides for:

provision of cash for all sectors of the economy proceeding from their real needs given the availability of funds in the accounts of economic subjects;

improvement of protection level of banknotes to prevent counterfeit and support durability of banknotes in the circulation;

maintaining of money circulation with clean money through withdrawal of torn money via commercial banks and non-bank financial institutions and exchange of torn banknotes with for new ones.

Currency market development

35. The fundamental mechanism of development of currency market of the country are:

further liberalization of exchange regime and order of currency transactions related to capital movement;

maintaining steady functioning of internal currency market, creation of conditions for development of its inter-bank sector and forward transaction market, integration of domestic currency market into world currency markets;

preparation of unified electronic forex trade system;

creation of competition environment in the retail market for sale of cash forex and assistance in development of institute of exchange offices of individuals;

formation of normative base for activity of credit institutions in the market of precious stones and metals.

Staff policy

36. Development of staff policy of banking sector is considered as one of the components of complex action for banking sector reform.

37. The objectives of staff policy are: increasing the staff qualification, creation of professional collectives capable of addressing the strategic development of banking sector. The priorities of staff policy are:

Enhancement of effectiveness of selection system, staff preparation and positioning, and improvement of staff motivation system and development of corporate culture.

38. In the coming years, institutions in the banking sector shall maintain systematic work for staff selection and preparation, maintain and enhancement of professional capacity of available staff. Additional incentives will activated to draw the perspective specialist into the sector. This becomes more actual, as in the environment of high growth rate and increased involvement of Tajikistan in the world economy including the result of foreign investment inflows competition for attraction of specialist will tighten.

39. While bettering works in staff management, bank management shall focus their attention on strengthening of role of staff services and units which should be tasked with enhancement of traditional directions including use of up-to-date evaluation methods which allows to determine the professional and business capacity of staff and to employ them effectively.

40. Base preparation of bankers will be concentrated in universities and institutes of the country capable of qualitative preparation of such staff. Banking sector institutions will systematically support such universities and institutes in formation of syllabuses and up-to-date education methods as well as encourage the participation of their staff in science and pedagogical activity of appropriate profiles.

41. Further development of Inter-bank Training Center will be provide for training and re-training of 100-1000 specialists annually.

42. Both traditional training and measures to increase professional competence of staff in the course of performing their duties will be used for support and betterment of professional level.

Legislation improvement

43. Successful performance of tasks for banking sector development depends on improvement of current and adoption of new laws that meet international norms. The priority laws to be adopted are: on credit history; on joint stock companies (new edition); on mortgage; on state registration of realty and transaction therewith; on fight with money laundering (legalization) obtained illegally and terrorism financing. The following laws of the Republic of Tajikistan need also to be amended: on banks and banking activity (in the section of improvement of corporate governance in banks and increasing the requirement for top bankers); on individual deposits guarantee (in increase of the role of Deposit Guarantee Fund); Land Code (collateral for land use rights); Civil, Tax, Criminal Codes (disclosure of banking secrecy for third persons on the basis of court decision).

Payment system

44. One of the main factors of increasing stability of activity of financial sector and economy as a while is further improvement of payment system including actions for extension of non-cash settlement, introduction of modern technologies and methods for information transfer, perfection of information system protection, maintaining the effective and reliable payment system functioning.

45. To continue improvement of payment system by introduction of new banking services with the use of high technology automation system and complete transfer of inter-bank settlement to electronic payment system throughout the country.

46. Particular attention will be paid measures for improving regulation of available corporate payment system in the country which maintains inter-bank settlement and settlement on the basis of inter-bank correspondent relations. The National Bank of Tajikistan intends to continue cooperation of credit institutions on payment system reform.

47. To increase the proportion of non-cash settlement in the country’s economy works will be continued for activation of Processing Center “Tojkort” and development of infrastructure of use of plastic cards in different economic sectors of the country.

48. It is required to take actions for electronization of payments and settlements, introduction of relevant information technology in trade and financial services, secure reliable legal protection of transactions made in electronic form. These measures will contribute to decriminalization of the economy, crowding-out of shadow component of economic activity, decrease of non-payment and increase of money circulation effectiveness.

49. For improvement of arranging international settlement and maintaining qualitative and reliable settlement and payment process for participants of foreign economic activity of the Republic of Tajikistan, modernization of program and equipment complex will be done with the view to have access to new services and solutions of SWIFT, as well аs connecting new banks to SWIFT system.

50. Specific attention will be paid to issues of maintaining security and protection for information system and integrity of data base on the basis of developed concept of information technology security. To implement the effectiveness of payment system, an international audit in this sector is planned.

Attachment

Dushanbe

September 26, 2006