IFC MOBILE MONEY SCOPING COUNTRY REPORT: UZBEKISTAN SUMMARY

OVERALL READINESS RANKING 3 CURRENT MOBILE MONEY SOLUTION Card-enabled payment service providers (PSPs) exist such as CLICK and UPAY. Very few have mobile banking application for retail customers. However, some PSPs have web portals and mobile banking applications.

POPULATION 29 million (2015) MOBILE PENETRATION 73.79% (2014) ACCOUNT PENETRATION 41% (2014) PERCENT UNDER POVERTY LINE 17% (2011) Market Readiness ECONOMICALLY ACTIVE POPULATION Workforce: 17.28 million (2014) Regulation 2 ADULT LITERACY 99.6% (2015), age 15 and over can read and write Financial Sector 2 MOBILE NETWORK OPERATORS Beeline (VimpelCom) Telecom Sector 3 Perfectum Mobile Distribution 2 Ucell (TeliaSonera) Market Demand 4 UMS (MTS) UzMobile (Uzbektelecom)

Source: CIA World Factbook, Global Findex Database, IMF Access to Finance Survey Macro-economic Overview

Regulations Financial Sector Telecom Sector Digital Financial Services Landscape MOBILE BANKING MARKET POTENTIAL

Key Country Statistics Insights

▪ Population: 29 million ▪ Uzbekistan has a large population of ~30 million ▪ Age distribution: 24.6% (0-14 years), 70.6% which is highly literate. (15-64 years), 4.8% (over 65 years) ▪ The government and the central are pursuing a policy of reducing the cash in the ▪ GDP (PPP): $172.3 billion (2014), Source: CIA system; thus encouraging the payment of salaries ▪ GDP per Capita (PPP): $5,600 (2014), into accounts and cashless payments for utilities, Source: CIA taxes, mobile recharge, and other services. ▪ Urban/Rural split: 36.4% urban (2009), Source ▪ Banking penetration is medium with 41% of the CIA population having access to an account. This study determined that much of penetration is in ▪ Population below poverty line: 17% (2011), the form of salary accounts which are accessible Source: World Bank through ‘online’ cards. ▪ Literacy Rate: 99.6% (2015), age 15 and over ▪ The population as a whole is showing increasing can read and write, Source: CIA interest in technology adoption as evidenced by ▪ Banking Penetration: 41% (2014) have an the increasing smartphone penetration and take account of store, Source: World Bank up of electronic payments. As such, there is potential to work with various players to hasten the ▪ Remittance: $256 (2012), Source IFAD move from cash payments into cashless ▪ Workforce:17.28 million (2014), Source: CIA payments. ▪ Mobile phone penetration: 73.79%, Source: ITU Macro-economic Overview Regulations

Financial Sector Telecom Sector Digital Financial Services Landscape REGULATORY BODIES INVOLVED IN MOBILE BANKING

Roles & Responsibilities

Its main objectives, which are relevant to DFS are: Central Bank of ▪ Organization and provision of effective payment system in the Uzbekistan the Republic of ▪ The licensing and regulation of banking activities as well as payment activities Uzbekistan ▪ Reducing the levels of cash in the economy REGULATORY FRAMEWORK, SLIDE 2 Current Regulations Implications

▪ Account must be opened with a bank staff ▪ Agent based services for cash in, cash out, member present. or for payment services would not be ▪ Deposits require signatures from three possible to implement under the current KYC/AML departments namely cashier, chief regulatory regime. accountant, and the head of the branch. ▪ The central bank has limited issuing ▪ Risk based KYC does not exist. licences for dealer-based payment services and as such, no other dealer-based payment companies are envisaged in the near future. ▪ Regulation tends to promote cashless ▪ Banks are not allowed to conduct business payments at every level, making the through third party agents. removal of cash from the banking sector to ▪ However, there is one institution (Uzpaynet) be an onerous process for depositors. which received a license in 2009 to set up Third party ▪ Uzpaynet collects money to its own account dealers to collect cash payments across the agent services through which it makes payment later country. No further licenses have been (transactions is as follows: customer -> issued. Uzpaynet -> service provider) ▪ Notably, Uzpaynet may not collect cash for deposits into bank accounts. REGULATORY FRAMEWORK, SLIDE 3

Current Regulations Implications

▪ The central bank is actively promoting Payments cashless payments in the economy. ▪ Click/Upay provide only agent services, i.e. they ▪ All institutions facilitating payments in the help to make transactions from a customer to country require a payment service provider service provider (transactions is as follows: license from the Ministry of IT. However, customer -> service provider). As such, it has there is no license from the Central Bank. been deemed that they do not require license from the central bank. ▪ The existing regulation and licensing regime does not allow for agency banking, e-money, or P2P transfers. E-money and ▪ There is no provision for e-money in the ▪ However, the central bank is encouraging all Remittances current regulations. other payments to be made via non cash means. ▪ Currently, person to person transfers are This includes services such as utilities, mobile prohibited by regulation. recharge, taxes, and others. Macro-economic Overview Regulations Financial Sector

Telecom Sector Digital Financial Services Landscape FINANCIAL SYSTEM OVERVIEW 41% of Uzbekistan is banked providing an opportunity for growth. Furthermore, the central bank is keen to pursue a strategy which will lead to a more cash less society. Both these factors provide an opportunity for payment service providers.

BANKS MICROFINANCE INSTITUTIONS PAYMENT INFRASTRUCTURE ▪ The banking sector consists of ▪ There are 24 microfinance ▪ As of January 2014, there were 26 commercial banks: 3 state institutions in the country. 1,733 ATM terminals. owned banks, 10 joint stock However, the microfinance ▪ There are 129,679 POS commercial banks, 8 private sector is not well-developed and terminals as of January 2014. banks, and 5 banks with foreign does not have a large customer ▪ Additionally, there are 11,068,000 capital. base. plastic cards in the system. ▪ The country has about 8,720 ▪ There are two kinds of cards in branches nationally which the system currently: offline translates into 37.49 branches cards and online cards. Offline per 100,000 customers. cards need to be loaded with ▪ The top 5 banks are: Xalq Bank sums at bank ATM terminals. (state-owned), National bank of This is the old system. These Uzbekistan (state-owned). Agro cards being replaced by new Bank (state-owned), Ipoteka online plastic cards which are (state-owned), and Uzbek connected to the cardholders Industrial Construction Bank current account. These cards are (state-owned) interoperable between banks, but are not branded by international payment associations like VISA / MasterCard ▪ Salary accounts are generally current accounts which are linked to plastic cards. These cards are used to make payments,

Source: Central Bank Source: Central Bank withdraw cash, etc.

Source: Central Bank FINANCIAL SYSTEM OVERVIEW – ADDITIONAL PLAYERS

SWITCHING, CLEARING & SETTLEMENT ▪ There are two settlement systems currently in place in Uzbekistan: ▪ The Interbank Payment System is designed for conducting electronic payments in national currency (sum) among banks through their correspondent accounts opened at the Central Bank. ▪ There is also a Unified Republic-wide Processing Center which brings together 26 commercial banks that issue Uzbek sum plastic cards. The Center established the interbank payment clearing system for sum plastic cards called “Uzcard”.

CREDIT BUREAU: CREDIT INFORMATION ANALYSIS CENTER LLC

▪ The bank-owned credit bureau received a license to operate in October 2012. ▪ Its main activities are as follows: ▪ Developing a database and analyzing the information necessary to build the credit histories of both legal entities and individuals in the country. ▪ Analyze the financial performance of legal entities and individuals ▪ Provide the information to users of credit information in order to help them in assessing the solvency, credit and payment discipline subjects of credit information PAYMENT, CLEARING, AND SETTLEMENT

▪ The Interbank Payment System is designed for conducting electronic payments in national currency (sum) among banks through their correspondent accounts opened at the Central Bank of the Republic of Uzbekistan. ▪ The rules of the Interbank Payment System are defined by the Central Bank of the Republic of Uzbekistan. ▪ The Interbank Payment System is a property of the Central Bank of the Republic of Uzbekistan.

Source: Central Bank BANKING SECTOR Amounts are in million UZS

• Total assets: 12,918,010 (~$5.33 bln) • 90 branches NBU (state) • Total liabilities: 11,646,733 (~$4.8 bln) • 55 mini banks 2014

OJSC • Total assets: 7,418,847 (~$3 bln) «Uzbek industrial- • 43 branches • Total liabilities: 6,944,402 (~$2.87 bln) construction bank» • 80 mini banks 2014

• Total assets: ~$2.2 bln «Asaka» Bank • 26 branches • Total liabilities: ~$1.8 bln (state) • 112 mini banks 2014 • Total assets: 3,292,096 (~$1.36 bln) OJSC • Total liabilities: 3,004,776 (~$1.24 bln) • 37 branches “Ipoteka Bank” 2014 • 128 mini banks

• Total assets: 2,529,360 (~$1.25 bln) OJSC • 183 branches • Total liabilities: 2,215,287 (~$1.09 bln) «Agrobank» • 271 mini banks 2013

OJSC «Qishloq Qurilish • Total assets: 2,423,256 (~$1.19 bln) • 42 branches Bank» • Total liabilities: 2,126,319 (~$1.05 bln) • 15 mini banks 2013

• Total assets: 690,719 (~$341.6 mln) JSC • 12 branches • Total liabilities: 570,907 ($282 mln) «Aloqabank» • 27 mini banks 2013

Note: Above are selection of banks, the full list of banks is available in www.cbu.uz (equivalent amounts in US$ converted at historical ex.rate at the end of 2013 and 2014; http://www.freecurrencyrates.com/exchange-rate-history/USD-UZS/2014) CURRENT TRENDS IN THE BANKING SECTOR Central Bank is Driving a Move Towards Cash Less Payments The Central Bank has adopted a strategy to reduce the amounts of cash in the system. Two key aspects of this strategy includes payment of salaries into current accounts and the promotion of electronic payments . These payments include: utility bills, mobile recharge, taxes, amongst others. At the moment, the market is migrating from paying through cash at one of the 30,000 points set up by Paynet a dealer network to paying via two payment service providers CLICK and Upay. These latter two services offer an account linked to the payer’s plastic card which can be accessed via smartphone or the internet. These systems support salary cards as well as conventional bank cards.

Potential Competition from Payment Service Providers Mobile and internet-enabled payment service providers have seen their customer base increase dramatically since the launch of their services. This is for several reasons: increasing mobile and internet penetration, the move towards electronic payments, and the convenience offered by the services. However, this increase compromises the banking sector’s profit margin from payments. While banks recognize this potential competitive threat and only see the reach of PSPs increasing in the future, they are unsure about how to handle the threat.

Lack of Trust in the Banking Sector Due to past failures in the banking sector, public perception of the safety of their deposits in banks is poor with state- owned banks being preferred to private banks. Additionally, withdrawing cash from one’s account is often an onerous procedure requiring signatures from three departments. As such, those who do not receive their salaries via current accounts prefer to keep their savings in cash. This has the effect of disincentivising customers from banking any cash they do receive – leading to a clear separation of the cash economy from the banked economy.

The team was told of rumors that the informal (largely cash) economy is anything up to 4 times the size of the formal (largely electronic money driven) economy. There is also currently a 100% discrepancy between the official and unofficial exchange rate for hard currencies like the USD when dealing in cash of both currencies. CURRENT CHALLENGES TO MDI OR MFI SECTOR

▪ The microfinance sector in Uzbekistan is underdeveloped, fragmented, and unsustainable. There are only 29 Microfinance institutions in the country, and these have a very limited level of penetration and access to funding. Most of the MFIs are also small, having fewer than 1000 customers, and none have branch outlets. Despite of the recent growth in demand for microcredit, which can be explained in part by the closure of credit unions in 2011 and the gap it created in services for small and rural borrowers, microcredit organizations account for only 10% of the overall microcredit portfolio (where 90% is provided by three commercial banks).

▪ Access to funding by MCOs is very limited, volatile and open to market disruptions. MFIs in Uzbekistan are not allowed to raise deposits. Consequently all funding stems from shareholders’ resources. However these have proved to be limited and volatile over time thus hindering the growth and stability of the sector. FINANCIAL FLOWS - INTERNATIONAL REMITTANCES

REMITTANCES SENT BY UZBEK MIGRANTS

▪ A World Bank Study shows that 2 million citizens of Uzbekistan live outside the country as of 2010. This is approximately equivalent to 7% of the population. The mobility rate, although higher than the world average, is lower than that of Europe and Central Asia as a whole (10.7%). ▪ Remittances from Russia have shown strong increases since 2009, increasing at double digit rates. In 2013, they reached USD 6.6 billion or 12% of GDP. However, in 2014, this amount fell due to the ongoing Russian ruble crisis.

UNDP : Remittances from Russia to Uzbekistan, mln USD Macro-economic Overview Regulations Financial Sector Telecom Sector

Digital Financial Services Landscape MOBILE NETWORK OPERATORS

• 10,6 million customers Ownership : • 52% market share JSC VimpelCom (Russia)

Ownership: • 8,5 million customers Subsidiary of the Swedish- • 42% market share Finnish telecommunications group TeliaSonera

• 0,2 million customers Ownership: • 1% market share Rubicon Wireless Communication (US-Uzbek JV)

• 0,5 million customers Ownership: • 2,5% market share Uzbektelekom

Ownership: • 0,5 million customers Joint venture between • 2,5% market share Uzbekistan and Russia's MTS POINTS OF INTEREST IN THE MOBILE MARKET

▪ Although the mobile SIM penetration is at 74%, MNOs believe that this number is much higher as at least 7% of the population is out of the country working in other countries including Russia. ▪ The bigger MNOs have begun discussions with banks about potentially devising projects to include the unbanked. However, opening accounts is problematic for MNOs as regulation requires that bank staff identify the employee. MNOs do not have the license to do this. ▪ Additionally, P2P transfers are expressly prohibited. As such, MNOs may not facilitate this. However, balance transfers of up to $5 are allowed. MNOs observe that this limited balance transfer happens mainly to keep SIMs active in the market as SIMs which have zero balance are deactivated after 3 months. ▪ Similarly, MNOs allow customers to go into overdrafts of up to $3. Repayment rates on this are high with default rates of 2-3%. Although transactions like this give MNOs a wealth of data on customer’s ability to pay, the MNOs are not allowed to sell customer data or currently exploit it for themselves. ▪ At the moment, smartphone penetration in the market is about 20-25%. MNOs believe that the market is growing but that the growth will take time. ▪ MNOs see mobile money as an opportunity for growth and revenue generation. However, from a regulatory perspective, they are unable to provide this service. INTERNET USAGE

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013.

Internet users (per 1.9 2.6 1.1 3.3 6.4 7.5 9.1 17.1 20.0 30.2 36.5 38.2 100 people)

INTERNET PENETRATION VIA MOBILE OR FIXED CONNECTIONS Source: World Bank, World Development Indicators. http://databank.worldbank.org/data/views/reports/tableview.aspx

Definition: “Internet users are individuals who have used the Internet (from any location) in the last 12 months. Internet can be used via a computer, mobile phone, personal digital assistant, games machine, digital TV etc.” Macro-economic Overview Regulations Financial Sector Telecom Sector Digital Financial Services Landscape PAYMENT SERVICE PROVIDERS CLICK http://click.uz/ ▪ CLICK is a payment platform and a tool for managing bank accounts through plastic cardholders in Uzbekistan. ▪ Through the platform, the user may manage multiple bank accounts and make payments without coming to the bank. ▪ This platform is accessible via the internet, smartphone application, or USSD. Possible payments include: mobile recharge, fixed line telephone charges, internet service providers, cable television, & other services. ▪ It has 1 million active subscribers as of November 2015. Currently, of their transactions, 65% are rural and 35% are urban. The most popular payment is for mobile recharge. ▪ CLICK has recently launched an initiative where the platform enables payments in shops and restaurants without the need for terminals or cards. Thus far, the project has been working in Tashkent city. ▪ Currently, it’s the biggest payment platform of its kind in Uzbekistan. In the current context where electronic payments are being promoted and access to internet and smartphones are also increasing, CLICK’s business model shows great promise.

UPAY http://www.u-pay.uz/ ▪ UPAY is also a payment platform as well as a technology service provider (TSP) to banks. Like CLICK, UPAY links plastic cards to payment services. ▪ In addition, UPAY is able to provide a common online banking portal for banks with some level of customization. As banks in the country are in the process of deciding whether to build internet banking portals for their individual retail clients themselves, this could be an option they consider. UPAY also has aspirations to build its services so that ultimately, it can offer a credit reporting interface as well. ▪ UPAY used to be SMS Tolov. In September 2015, it was re-branded and re-launched as UPAY. ▪ In terms of payment services, UPAY also offers payment services which include: mobile recharge, fixed line telephone charges, internet service providers, cable television, & other services. ▪ UPAY is available on internet, USSD, and smartphone platforms. ▪ UPAY is Payment Card Industry Data Security Standard (PCI DSS) certified which is a proprietary information security standard for organizations that handle branded credit cards from the major card schemes PAYMENT SERVICE PROVIDERS PAYNET http://paynet.uz/ ▪ Paynet is the only payment platform in Uzbekistan with a dealer network. It is 67% owned by Xalk Bank, a state- owned institution. ▪ It has a 120 billers available on its platform and 30,000 payment points across the country. Mobile recharge is the most popular payment. ▪ Paynet has been operating since 2006. As of 2009, there were 15 such companies in Uzbekistan. In 2009, licenses to all these companies were rescinded and Paynet is currently the only company in the country which has the right to accept cash payments through its dealers/agents. ▪ It partners with banks as well so that all bank branches function as Paynet agents as well and are able to accept payments. 20% of all Paynet dealers belong to banks.