A closer look: Are Central Asian countries ready to deal with higher non-performing loans?

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The new silk road Dordoi bazaar in Bishkek Kyrgyzstan
The new silk road Dordoi bazaar in Bishkek Kyrgyzstan

With the last global financial crisis still fresh in our minds, banks and supervisors need to be prepared for potentially new pressures. As inflation has sharply increased, central banks around the world are quickly increasing interest rates raising the possibility of financial turbulence. The events involving mid-sized banks in the US and Credit Suisse in Switzerland have illustrated the potential for sudden re-adjustments in market conditions. Historically, higher interest rates make it harder for households, corporates, and sovereigns to shoulder debt. The strain is even greater today, after carrying the burden of the COVID-19 pandemic and other crises. The economic outlook is ailing, with rising threats of yet another recession. Indeed, EU bankruptcy filings in the fourth quarter of 2022 rose to their highest level in eight years, indicating that more of the struggling companies kept afloat by government aid during the pandemic are starting to default.

Countries in Central Asia are not new to the spillover effects derived from global and regional crises. The global financial crisis of 2007-2008 triggered a large increase in Non-Performing Loans (NPLs), after years of rapid economic expansion facilitated by the easing of financial conditions and inflows of foreign direct investment. Large bank failures followed, and Kazakhstan even created an Asset Management Company to resolve the bad investments. A few years later, the Russian Financial Crisis in 2014-2015, caused by the sharp devaluation of the Russian Ruble, renewed downward pressure on asset quality. As a result of these consecutive shocks, the NPL ratio doubled in the Kyrgyz Republic and Tajikistan.

Figure 1. Evolution of NPL Ratios in Central Asian Countries
Evolution of NPL Ratios in Central Asian Countries
Source: International Monetary Fund data. For Kazakhstan, the 2021 data are from the second quarter.

The region learned from these experiences. Countries in Central Asia have been upgrading their credit-risk regulatory and supervisory frameworks, as they have rolled out far-reaching reforms to ensure prudent NPL reporting, provisioning, and resolution , as well as sounder risk-management practices. The reforms, coupled with economic growth and more prudent policies, have resulted in a significant reduction of NPL ratios. Despite these gains, NPL levels remain high, due to ongoing overlapping crises, including the lingering effect of the COVID-19 pandemic, the risks arising from the spillover of the war in Ukraine caused by Russian invasion, rising inflation and increasingly tightened monetary policy. When considered together, these risks pose a significant threat that could lead to a new wave of defaults on bank loans and other debt. The significant dollarization of these countries may make them particularly vulnerable to tightening global monetary conditions.

Against this background, banking supervisors in Central Asia need to be prepared for a potentially sharp rise in NPLs. A recent World Bank policy paper on Readiness for Resolving Nonperforming Loans in Central Asia assesses the NPL resolution framework in four Central Asian countries (Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan) and provides recommendations for improving it.

First, banking supervisors need to closely monitor asset quality—especially the forward-looking considerations of the borrowers’ likelihood to repay. Enhanced measures for banks dealing with high NPLs should be introduced, including strategic and operational plans targeting the reduction of NPLs. There is room to improve credit risk classification and coverage in Central Asian financial systems, including by improving supervisor capabilities for assessing expected credit losses. 

Second, the range of NPL workout mechanisms need to be expanded. The efficiency of NPL workouts and the readiness of systems that address insolvency co-determine the resilience of the financial system and its ability to cope with NPLs. However, banks in Central Asia have limited options for reducing their NPLs. The practices—common in other places—of  court-based settlements, alternative out-of-court workout mechanisms, and NPL portfolio sales are not readily available  in Central Asia. Instead, banks in this region primarily work out their NPL portfolios by actively seeking to maximize loan repayments through collateral enforcement.

Third, insolvency systems in Central Asia need to be more than just liquidation of companies. Central Asian countries offer a wide array of procedures for debtors and creditors to resolve insolvency, ranging from restructurings, rehabilitations, amicable settlements, liquidations, and sanations (a type of reorganization procedure to restore the debtor’s solvency). Despite the availability of multiple procedures, liquidations remain the norm and restructuring procedures are rarely used. Some corporate insolvency laws have been updated recently to facilitate a broader range of workouts (Kazakhstan, Uzbekistan), but these reforms have fallen short of drastically improving current practices. Other countries,  such as the Kyrgyz Republic and Tajikistan, have not substantially amended their laws since their enactment after independence.  Countries in Central Asia could benefit from revisiting international standards and introducing a new approach to business restructuring.  Accounting for the current context, policy makers should consider reforms that allow, when appropriate, the debtor to obtain new financing during insolvency, and also to continue those contracts deemed essential for the debtor's restructuring. An enhanced focus on micro, small, and medium enterprises (MSMEs) would also be welcome, as reorganization through the judicial system is not always a fast or economically reasonable solution. In these cases, out-of-court workouts present multiple advantages, allowing for flexible and confidential alternatives to formally addressing insolvency. Furthermore, while corporate insolvency has drawn significant attention in Central Asia—especially after the Global Financial Crisis—consumer insolvency remains an underdeveloped area where only Kazakhstan and Uzbekistan have recently taken initial steps to adopt a legal framework.

Table 1. Insolvency Data



Kyrgyz Republic


Bankruptcy cases

Rehabilitation cases

Liquidations of legal entities




Total bankruptcy cases

Sanation cases





























96.2% liquidation casesa



Sources: Kazakhstan: Ministry of Justice of the Republic of Kazakhstan; Kyrgyz Republic: Ministry of Economy and Commerce of the Kyrgyz Republic and the Council on Development of Business and Investments under the Government of the Kyrgyz Republic, presented in European Bank for Reconstruction and Development, EBRD Insolvency Assessment on Reorganisation Procedures—Kyrgyz Republic (Economy Profile) (London: EBRD, 2022); Uzbekistan: the Supreme Court of Uzbekistan and the State Asset Management Agency of Uzbekistan.
Note: — = no reported cases; n.a. = not available.
a. Data for 2017–19 come from the Council on Development of Business and Investments under the government of the Kyrgyz Republic as presented in the EBRD report. Data for 2020 are available from the Ministry of Economy and Commerce of the Kyrgyz Republic, but the information is not disaggregated (http://mineconom.gov.kg/ru/direct/8/83).


Addressing the challenges posed by NPLs in Central Asia requires a comprehensive and forward-looking approach. Policymakers and banking supervisors must continue to closely monitor asset quality, request that banks prepare and implement NPL reduction plans, expand the range of NPL workout mechanisms, and develop more effective insolvency systems that prioritize business restructuring over liquidation. Furthermore, attention should be given to supporting MSMEs and developing legal frameworks for consumer insolvency. By implementing these recommendations, Central Asian countries can not only be better prepared for the threats of yet another recession but also lay the groundwork for a more resilient and robust financial sector in the longer term. As the world grapples with ongoing economic challenges, it is crucial for Central Asia to proactively adapt and strengthen its financial infrastructure to ensure sustainable growth and stability in the region.


Emiko Todoroki

Senior Financial Sector Specialist

Ismael Ahmad Fontan

Senior Financial Sector Specialist

Fernando Dancausa

Senior Financial Sector Specialist

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