Unlocking opportunities: How Tajikistan can make borrowing affordable

Unlocking opportunities: How Tajikistan can make borrowing affordable Photo by by Claudio Divizia.

Think of a typical entrepreneur in Dushanbe, with dreams of expanding business. Their products might be in high demand, yet when they seek a loan to grow operations, the high borrowing costs make it almost impossible. This is the reality for countless businesses in Tajikistan. But what if borrowing became affordable, unleashing the entrepreneurial spirit across the country?

A new World Bank paper, "Determinants of Bank Interest Spreads in Tajikistan" shows that in Tajikistan, the key lies in reducing “interest rate spreads,” the difference between what banks charge borrowers and what they pay depositors. These spreads are among the highest in the world, choking opportunities for businesses and slowing economic growth. However, this problem is not insurmountable. Change is possible with targeted reforms to reduce the cost of borrowing.

Note: TJK = Tajikistan; KGZ = Kyrgyz Republic; NIC = Nicaragua; SEN = Senegal; UZB = Uzbekistan; HND = Honduras; KHM = Cambodia; CCA = Caucasus and Central Asia.

Improving Bank Efficiency

Banks in Tajikistan operate under challenging conditions. High operating costs, driven by extensive branch networks and outdated systems, are a factor in the wide spreads. For instance, banks maintain branches in sparsely populated areas, such as the Gorno-Badakhshan region, where the costs of operating in remote and mountainous locations are steep. These expenses are passed on to customers, in the form of higher interest rates.

Digital banking could be a game changer. By offering services through online platforms, banks can reach customers more cost-effectively, especially in remote areas where maintaining physical branches is expensive. Digital solutions like mobile banking and automated lending platforms could lower transaction costs, making financial services more affordable and accessible.

Consolidating smaller banks into larger entities could also help. With greater economies of scale, merged institutions can streamline their operations, reducing overhead costs and offering more competitive loan rates. Larger banks are better positioned to invest in technology and infrastructure, enabling them to serve a broader customer base efficiently.
 

Strengthening Legal Protections

Another major obstacle to cheaper loans is the high risk associated with lending, largely due to an outdated legal framework. In Tajikistan, recovering loans from defaulting borrowers is slow and expensive, leaving banks wary of lending. Legal uncertainty means that lenders face higher risks, and these are reflected in the high spreads charged to borrowers.

Modernizing insolvency laws is essential to addressing this issue. An updated legal framework should make it easier for banks to recover bad loans and restructure debt. At the same time, improving contract enforcement through faster judicial processes and better protection for creditors will build confidence in the financial system. For businesses, such reforms mean more fair and predictable borrowing terms, fostering a culture of trust and financial inclusion.
 

Creating a Competitive Financial Sector

Competition among banks plays a pivotal role in determining interest rates. Tajikistan’s banking sector is moderately concentrated, with state-owned banks often enjoying privileges like government guarantees. These guarantees give state banks an edge, allowing them to operate with less competitive pressure and sometimes discouraging innovation.

Ensuring a level playing field is essential. Removing such privileges will encourage state banks to operate on the same terms as their private counterparts, driving efficiencies and improving services. Encouraging foreign banks to enter the market is another way to promote competition. International institutions often bring advanced management practices and financial products that push domestic banks to innovate and lower costs.

Additionally, nurturing innovation through support for fintech startups can create alternative lending options. Digital lenders can bypass traditional banking inefficiencies, offering lower costs and faster access to credit. This pressure could compel traditional banks to improve their services and reduce spreads.
 

Enhancing Financial Literacy

Many borrowers in Tajikistan lack the knowledge to navigate financial options effectively. This leaves them vulnerable to high costs and unfavorable terms. Expanding financial literacy initiatives can empower customers to make informed decisions, demand better rates, and explore alternatives to traditional banking. Educated consumers are better equipped to compare options, negotiate terms, and hold financial institutions accountable.

Enhanced financial literacy also fosters trust in the banking system. When individuals understand how credit works and feel confident about their choices, they are more likely to engage with formal financial services, deepening the financial sector and reducing dependency on informal lending.
 

Ensuring Macroeconomic Stability

Stable economic conditions are fundamental to reducing borrowing costs. Tajikistan struggles with relatively high inflation and dollarization, where a significant portion of deposits and loans are denominated in foreign currency. These factors introduce currency risks that banks account for by charging higher interest rates.

Strengthening monetary policy to stabilize the local currency and build trust in domestic financial markets is critical. A stable macroeconomic environment reduces uncertainties for banks and encourages them to lend at more affordable rates. Additionally, developing local financial markets to offer alternatives for investment and liquidity management can help banks reduce reliance on high-cost measures.
 

The Promise of Change

Imagine a Tajikistan where entrepreneurs can secure loans at fair interest rates, enabling them to expand their businesses, hire more workers, and contribute to economic growth. Lowering interest rate spreads doesn’t just help individual borrowers—it creates a ripple effect, spurring job creation, boosting innovation, and reducing poverty.

The impact of these reforms goes beyond businesses. Affordable credit supports families seeking loans for education, housing, or emergencies. It empowers farmers to invest in equipment and supplies, boosting agricultural productivity. It provides the foundation for a more resilient economy, capable of weathering shocks and creating opportunities for all.
 

A Call to Action

Reducing interest rate spreads is not just a financial reform; it’s a pathway to a more inclusive, thriving economy. Tajikistan’s policymakers, financial institutions, and business leaders must work together to address inefficiencies, modernize legal frameworks, foster competition, and empower consumers.

For entrepreneurs in Tajikistan, the future could be one of opportunity and prosperity. The path to affordable borrowing is challenging, but its rewards are transformative—a thriving economy where dreams become realities. Tajikistan has the tools to make this vision a reality; now, it’s time to act.


Pietro Calice

Senior Financial Sector Specialist

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