BAKU, Azerbaijan, August 4. Uzbekistan's
banking sector is benefiting from stronger regulation and a gradual
shift toward risk-based lending, although state influence remains a
key constraint on further progress.


This was reflected in a new report by Moody's Ratings on banking systems in
Central Asia and the Caucasus (CAC).


The report says banking regulators across the region are
strengthening supervisory frameworks and prudential regulation in
line with international standards, a trend that is reducing
systemic risks by improving loan quality, increasing banks'
loss-absorption capacity and strengthening liquidity management.
While regulatory progress is evident across the CAC region, Moody's
expects further tightening of prudential standards as governments
continue prioritizing financial stability and transparency.


For Uzbekistan, Moody's highlighted a partial shift away from
directed lending, which has contributed to gradual improvements in
asset quality and more risk-based credit allocation. However, the
agency noted that state influence in the banking system remains
significant, limiting the pace of market-oriented reforms.


According to the report, Uzbekistan is in an intermediate stage
of regulatory development, alongside Azerbaijan, while Kazakhstan,
Georgia and Armenia have reached a more advanced level of
supervisory maturity. Moody's assigns Uzbekistan an institutional
strength assessment of b1, below Kazakhstan (ba2), Georgia (baa3)
and Armenia (baa3), reflecting weaker institutional capacity
despite ongoing reforms.


Moody's noted that Uzbekistan has accelerated banking reforms
under its Financial Sector Assessment Program (FSAP) roadmap. Key
measures include strengthening the institutional capacity of the
Central Bank, implementing Basel III standards, expanding
risk-based and consolidated supervision, reforming bank resolution
and deposit insurance frameworks, introducing independent directors
at banks, and adopting macroprudential measures such as
debt-to-income limits, risk-weight adjustments and credit growth
caps.


At the same time, the agency cautioned that directed lending and
continued state ownership of major banks remain structural
constraints, despite progress with privatization.







The report also found that banks in Uzbekistan have strengthened
their ability to absorb potential losses compared with previous
years. Moody's noted that asset quality and loss-absorption
capacity deteriorated in 2021 but have improved steadily since
then. The country's ratio of problem loans to tangible common
equity and loan-loss reserves has declined since 2019, while the
share of Stage 3 problem loans has remained broadly stable at
around 6%, indicating gradual stabilization in banking-sector
credit quality.


Liquidity conditions also remain supportive. According to
Moody's estimates, Uzbek banks maintain core banking liquidity
equivalent to roughly 12% of tangible banking assets, providing a
buffer against funding shocks despite continued loan growth across
the sector.


Trend's analysis
shows that Uzbekistan's banking reforms are increasingly shifting
the sector toward international supervisory standards rather than
rapid deregulation. The introduction of Basel III requirements,
enhanced risk-based supervision, independent directors and
macroprudential lending limits indicates that regulators are
focusing on strengthening financial resilience as credit growth
remains robust. At the same time, Moody's assessment suggests that
governance reforms have yet to fully offset the structural
influence of the state, particularly through directed lending and
government ownership of major financial institutions.


Trend's
calculations show that Uzbekistan currently occupies a middle
position among CAC banking systems. While the country has
progressed beyond the early-stage regulatory frameworks of the
Kyrgyz Republic and Tajikistan, it still trails Kazakhstan, Georgia
and Armenia, whose supervisory systems Moody's considers more
advanced and more consistently implemented. This suggests that
Uzbekistan's future convergence with regional leaders will depend
less on adopting new regulations and more on improving
implementation, institutional independence and governance.


In Trend's
assessment, Moody's findings reinforce the view that Uzbekistan's
banking sector is entering a more mature phase of reform. Continued
privatization of state-owned banks, stronger supervisory
enforcement and further alignment with international standards
could improve asset quality, reduce systemic risks and strengthen
investor confidence. However, the report indicates that meaningful
reductions in state involvement will remain critical if Uzbekistan
is to close the regulatory gap with the region's most advanced
banking systems.