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Tajikistan: High Interest Rates Aggravate Business Conditions

Experts note that under the current unfavorable conditions for Tajik entrepreneurs, loan interest rates at commercial banks of the country should be drastically lower.

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The process of obtaining loans at Tajik banks is quick and easy; however, difficulties arise when they need to be repaid. Photo: asiaplustj
The process of obtaining loans at Tajik banks is quick and easy; however, difficulties arise when they need to be repaid. Photo: asiaplustj

Mahmud Nuraliev, young entrepreneur from Dushanbe, needed additional funds to expand his business. He had to request a loan from a commercial bank.

“The process of obtaining loans at Tajik banks is quick and easy. It is only required to present documents certifying the identity, the business, collateralized property and find a couple of guarantors,” says the entrepreneur.

According to him, difficulties arise when the loan has to be repaid with interest.

“Bank interest rates for business are very high: 26%-28% per annum. Moreover, the loan service scheme is designed in such a way that the borrower does not have the opportunity to reduce the amount of payments as the loan principal is returned. That is, during the first months, the borrower pays interest and repays the loan principal only during the last months,” Nuraliev said.

Nuraliev took a one-year, 100,000 somoni (about $10,000) loan in one of the banks with a 26% interest rate per annum. He is dissatisfied with the results of raising the loan.

“Rather, I helped the bank, as I returned more money to it. The loan at such interest rates did not help the development of my business,” Nuraliev emphasized.

Nuraliev added that he would definitely not be requesting the loan from the bank anymore.

According to other entrepreneurs, Mahmud was lucky that he was still able to maintain his business and pay interest to the bank.

Some entrepreneurs had to close down their business due to the high interest of bank loans. Farhod Sadikov was engaged in food retail business on the outskirts of Dushanbe.

“I purchased goods from wholesalers and sold them at retail with a small extra charge. I made small but regular profit. I wanted more; it was necessary to expand the range of goods, and, accordingly, I needed additional money. Therefore, I applied to the bank,” Farhod Sadikov says.

Repaying the loan to the bank, in just a year Sadykov lost not only his business and all his savings, but even had to sell the part of his household assets.

Unprofitable State Support

Back in 2012, the Entrepreneurship Support Fund under the Government of the Republic of Tajikistan was established as part of the State Entrepreneurship Support Program, the purpose of which is to provide favorable financial resources to the private sector.

However, according to entrepreneurs, receiving the loans from the Fund is not simple.

Rustam Saburov. Photo: CABAR.asia
Rustam Saburov. Photo: CABAR.asia

Rustam Saburov, Dushanbe resident, applied to the Entrepreneurship Support Fund for a 10 million somoni loan (about $1 million) for establishment of the electrical equipment production in the country: power outlets, light switches and other similar products. The Fund agreed to issue a loan with a 12% interest rate per annum, but only for three years.

In addition, Saburov was required to provide collateralized property worth 18 million somoni, that is, almost twice as much as the requested loan. At the same time, the entrepreneur had to start repaying the loan from the first month after receiving it.

According to Saburov’s calculations, he planned to receive profits only after two years of work. “In three years and with such interest rates it is almost impossible to repay a loan,” Saburov calculated.

According to his opinion, the government should attract long-term soft loans from international financial institutions to refinance small and medium businesses.

However, experts believe that international financial organizations are unlikely to trust their money to Tajik banks in their current condition.

On February 12, 2020, the International Monetary Fund (IMF) called again on Tajikistan to liquidate two insolvent banks: Agroinvestbank and Tojiksodirotbank, which have not been able to pay off debts to depositors since 2016.

According to Radio Ozodi, in February 2017, the Government of Tajikistan allocated 2 billion 250 million somoni (about $231.3 million) for rehabilitation of the Tojiksodirotbank, and 1 billion 70 million (about $110 million) for recovery of Agroinvestbank.

The management of the International Monetary Fund (IMF) stated that despite the debt reduction to depositors and increased profitability of the banks, even more efforts are required to restore public trust in the banking system.

“In this regard, the liquidation of the two banks, which are now insolvent, as well as the return of depositors’ investment is a priority,” the IMF statement notes.

In Current Situation, the Loan Interest Rates Should Not Be Higher Than Two Percent

Experts believe that now it is impossible to develop a business on the bank loans with such high interest rates. For entrepreneurs involved in the manufacturing sector, this is even more difficult.

According to financial analyst Aziz Jafarov, the profitability of a business should be twice the loan interest rates. He believes that, given the conditions in Tajikistan, an entrepreneur can take loans now with a rate of no higher than 2% per annum.

The NBT claims that they were able to lower loans interest rates. Photo: nbt.tj
The NBT claims that they were able to lower loans interest rates. Photo: nbt.tj

Three years ago, President Emomali Rahmon instructed to determine the real value of bank loans and to reduce gradually their interest rates. To implement the instructions, last year, a working group was created at the National Bank of Tajikistan (NBT) headed by the deputy chairman of the NBT.

On October 15, 2019, the NBT claimed that as a result of this group’s work during those three years, it was possible to lower the average weighted interest rates on loans in national currency from 28.2% to 22.1%.

Meanwhile, a source at the Association of Banks of Tajikistan anonymously told CABAR.asia that under the current situation in the banking sector, significant progress should not be expected.

According to him, people do not trust banks, especially after 2016 crisis, when many depositors actually lost their investments. Now, Tajik citizens do not deposit their savings in banks even at existing interest rates.

Therefore, the banks cannot reduce their interest rates on loans, since this will make their activities unprofitable.

Comprehensive Reforms Are Required

According to financial expert Nur Safarov, the reason for the lack of favorable loans is “the unfavorable business, investment and tax environment in the country”.

“From the investors’ point of view, the country is located in an unstable region. There are no clear and transparent “rules of the game” and the rule of law inside the country,” Nur Safarov believes.

There are no clear and transparent “rules of the game” and the rule of law inside the country.

According to him, reforms in the banking sector alone will not change the situation for the better; comprehensive measures are required that would improve the whole investment climate of the country as a whole. Without this, serious foreign banks would not invest in the country.

“Currently, a monopolization of the banking market by businessmen close to power is observed, and this process limits competition even further. With such a system, interest rates at banks will never be lower than 15% in foreign currency (Dollar, Euro – Ed.),” Nur Safarov believes.

According to experts, under current conditions, the main consumer of bank loans is the trade sector.

“There is a quick turnover, nontransparent accountability system, high markups for goods. So goes on: business earns on people, banks earn on business, the state earns on business and banks,” Safarov concludes.

“This article was prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project”.

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