New beginnings: Resolving consumer insolvencies in Central Asia

Consumer debt has surged in Kazakhstan and Uzbekistan following the COVID-19 crisis, with over-indebtedness and consumer defaults reaching remarkable levels. In 2023, the two countries—with support from the World Bank —introduced Central Asia’s first consumer insolvency mechanisms as a key policy measure to enhance financial stability and social welfare.  A preliminary assessment now suggests that while Uzbekistan’s system could deliver promising results, Kazakhstan’s system may fall short in relieving consumers from over-indebtedness, unless the authorities double down on critical additional reforms.

Kazakhstan’s banks—mainly due to poor lending practices in the past—experienced high loan losses from corporate loans, which, together with other factors, prompted them to shift business models from corporate to consumer lending. Consequently, loans to individuals rose dramatically; by 41 percent in 2021 and 31 percent in 2022.  This rapid credit expansion is now followed by increasing consumer defaults: consumer non-performing loans (NPLs) increased by 40 percent in 2022 and 15 percent in 2023, according to NBK data. Of a population of 20 million, an estimated 1.5 million Kazakhstanis are late with repayments of consumer loans by 90 days or more (IMF Article IV, 2022).

In Uzbekistan, loans to individuals rose by 64 percent in 2019 alone, followed by a 37-percent annual growth between 2020 and 2022 as the economy opened up and banks focused on new loan segments. In 2023, the Central Bank of Uzbekistan (CBU) imposed lending restrictions to cool down this spurt. However, like in Kazakhstan, defaults have increased, with the consumer NPL ratio tripling since 2020 and reaching 6.8 percent by 2021. Although the ratio has since decreased, CBU’s recent Financial Stability Report informs that by 2022, people with mortgage and consumer loans had to use 60 to 70 percent of their disposable income to repay debt.
 

Resolving consumer over-indebtedness

If consumer defaults continue to rise, they could pose a threat to financial stability of the two economies in the future. From a social standpoint, excessive debt can decrease households’ disposable income and markedly worsen their well-being, causing social exclusion and poverty. 

A sound consumer insolvency framework—through debt relief or discharge, that is, canceling the debt which good-faith consumers cannot reasonably repay—can help achieve several socially beneficial objectives, including: debtors and their families are relieved of overwhelming debts and their suffering is eased; economic vitality is restored by reintegrating debtors into active employment and responsible consumption; and creditors can optimize returns on their claims, either through a repayment plan or an agreed sale of the debtors’ non-exempted property. Furthermore, predictable resolution of consumer insolvency improves access to credit because it allows financial institutions to price credit more accurately.

To be truly effective in helping achieve consumers’ financial well-being, insolvency systems need to be complemented by financial education, financial consumer protection, credit-information infrastructure, as well as proper underwriting and management of credit risks at banks and other creditors.

Kazakhstan’s new insolvency system for consumers features debt discharge following modern principles.  However, the system is conditional on the debtor complying with several requirements—mainly prohibition from borrowing again from financial institutions. Furthermore, discharge is limited to debt borrowed from banks and microfinance lenders and does not include tax arrears or other debts. Finally, access to the insolvency system is dependent on several factors: first, the debtor is required to be ‘irremediably’ insolvent and not have made any payments to creditors for 12 months. Next, to access out-of-court settlements, the debtor must also not own any property at all. To complicate things further, the debtor must have been the subject of either execution proceedings (or pursuit by a collection agency) or settlement negotiations. All these restrictions limit most overindebted consumers from getting financial relief.

In Uzbekistan, debtors are offered two main options. They can propose, based on their disposable income, a three-year repayment plan that creditors must approve. If creditors reject the plan, the debtor can request the court to impose a plan. If a repayment plan cannot be agreed on, the default option is a liquidation-and-discharge procedure, which must conclude within nine months. It involves the sale of non-exempted assets and seizing the income of the debtor (up to 50 percent). Access criteria only require the inability to fully and timely repay debts, which must be overdue for at least three months. If creditors refuse to approve a repayment plan, the debtor must manage to live on 50 percent of income for six months to be rewarded with a discharge of unpaid debt (although a long list of exceptions applies).
 

Charting the road ahead

Uzbekistan’s personal insolvency system is well designed and has embraced good practices related to debt discharge that will help consumers achieve the relief they desperately need. However, the authorities could further improve the current system, mainly by introducing a simplified out-of-court procedure or introducing a minimum amount of protected income, rather than a percentage.

By contrast, Kazakhstan’s system requires a more in-depth revision, notably relaxing the approach of reserving relief to hopelessly insolvent consumers that own no property whatsoever. Additional entry requirements, like having attempted a settlement with creditors, should also be eliminated. Only by dropping these unnecessary restrictions and embracing the ‘open access’ policy, followed by modern systems, will Kazakhstan’s consumer insolvency system achieve its intended results. Fortunately, efforts are already underway to address these restrictions.