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Strengthening Financial Stability and Supervision Frameworks in Tajikistan

Project Development Objective (PDO)

This project aims to improve financial stability in Tajikistan through the modernization of the legal and institutional framework applicable to financial stability, risk management and stress testing, nonperforming loans (NPLs), and bank resolution.

Background

The 2015 Financial Sector Assessment Program found Tajikistan’s financial system to be highly vulnerable. The level of NPLs is a key concern. It poses serious threats to bank solvency and banking stability. The lack of proper classification and inadequate reporting by banks has kept the National Bank of Tajikistan unaware of the size, quality, constitution, and distribution of NPLs. Official numbers mask major asset quality weaknesses in some banks. NPLs have grown rapidly, especially in large banks. For the six largest banks, the NPLs account for 28.3 percent of loans against the industry average of 25.1 percent as of December 2014. As the Financial Sector Assessment Program notes, banks are underprovisioned, with specific provisions accounting for only 42.7 percent of NPLs, thus resulting in an overstatement of banks’ capital positions. 

Because Tajikistan’s banking sector is under serious stress, the authorities need to be prepared for a rapid and effective response to a bank in distress or a systemwide crisis. For this reason, new forms of cooperation are needed as well as a more effective use of existing powers and tools. Accordingly, Tajikistan needs to revise its crisis prevention and management, including bank resolution.

This technical assistance project encompasses four critical areas: financial stability, risk management and stress testing, NPLs, and bank resolution.

 

Activities

The envisaged activities for this project are as follows:

1.  Improving financial stability by developing a revised emergency liquidity assistance framework, a
     financial stability report, and procedures for an Interagency Financial Stability Committee

2.  Conducting risk management and stress testing to develop a technical note, instructions and
     regulations on credit risk management, instructions and regulations on liquidity risk, stress test
     user guide, and set of off-site supervision reports

3.  Reviewing NPLs to develop a technical note on tax treatment of NPLs and draft regulations for
     assessing bank action plans

4.  Drafting a bank resolution to develop internal regulations on bank resolution and a model
     contingency plan

Expected Outcomes

The expected outcomes of the project are the following:

1.  Strengthening institutional mechanism and capacity to oversee and respond to banks’ distress

2.  Establishing strengthened microprudential policies and supervisory tools to improve banks’ risk
     management practices

3.  Improving tax treatment in NPL provisioning and enhancing supervisory capacity to oversee
     banks’ NPL management