Explanatory Note on the Regulation on the Registration of Banks and Licensing of Their Activities

EXPLANATORY NOTE ON THE REGULATION ON THE REGISTRATION OF BANKS AND LICENSING OF THEIR ACTIVITIES

The Board of Directors of the Central Bank of the Republic of Uzbekistan adopted Resolution No. 23/3 dated August 15, 2009, "On Approval of the Regulation on the Registration of Banks and Licensing of Their Activities," which was registered with the Ministry of Justice of the Republic of Uzbekistan on October 8, 2009, under No. 2014.

As is known, as a result of structural reforms carried out after our country gained independence, the foundations of a stable and efficient banking system were formed in the republic.

Specifically, if Uzbekistan's previous banking system was single-tier, consisting of branches of specialized State Banks of the former Union, the Savings Bank, and other banks in the republic, then after independence, a two-tier system was established in the country. At the top tier is the Central Bank of the Republic of Uzbekistan, whose main goal is to ensure the stability of the national currency, the sum. At the lower tier, a wide network of independent commercial banks of various forms of ownership has formed, capable of fully meeting the demand for banking services of economic entities and the population of the country.

In 1991, when our country gained independence, there were 16 commercial banks. Currently, there are 26 commercial banks operating in the country, including 7 private commercial banks and 5 commercial banks with foreign capital participation. The types of banking services and products offered by their branches, mini-banks, and retail service institutions are expanding. This, in turn, has led to the Uzbek banking system occupying leading positions in terms of coverage, and currently, banking institutions exist in all populated areas.

At the same time, deepening the process of reducing the state share in the authorized capital of commercial banks and privatizing banks has been identified as an important task, which is a positive step. Also, taking into account the important role of private commercial banks that provide banking services in accordance with international standards in the development of competition in the banking services market, a number of measures are being implemented to encourage the establishment of new private banks.

Encouraging the inflow of private capital into the banking system became one of the strategic directions of restructuring the banking system. This process became active after the adoption of the Decree of the President of the Republic of Uzbekistan "On Measures to Encourage the Establishment of Private Commercial Banks" in 1997, which provided for a number of privileges and incentive factors for establishing banks with a share of physical persons of not less than 50 percent.

In particular, a set of laws and regulatory documents regulating the activities of commercial banks was developed and implemented, and a modern system for licensing the activities of commercial banks was created.

Among these is the "Regulation on the Registration of Banks and Licensing of Their Activities," developed in accordance with the Laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan," "On Banks and Banking Activities," "On Protection of the Rights of Shareholders of Joint-Stock Companies," and "On the Securities Market," with the aim of establishing the procedure for registering banks and issuing licenses granting the right to carry out banking operations in the territory of the Republic of Uzbekistan.

Also, at the end of 2012, the Law of the Republic of Uzbekistan "On Guarantees of Private Banks and Financial Institutions and Their Activities" was adopted to ensure the protection of the rights and legitimate interests of private banks and financial institutions, create conditions for attracting private capital to the banking and financial sector, expand competition in the market of banking services and other financial services, and improve the quality of service to customers.

Banks, as a rule, are established as joint-stock companies on the basis of any form of ownership in accordance with the Law of the Republic of Uzbekistan "On Banks and Banking Activities."

It should be noted here that on December 21, 2015, the Decree of the President of the Republic of Uzbekistan "On Additional Measures to Attract Foreign Investors to Joint-Stock Companies" was adopted.

In accordance with the requirements of this Decree, it was established that the share of foreign investors in the authorized capital of joint-stock companies must be not less than 15 percent.

Also, based on Law No. URQ-396 dated December 29, 2015, "On Amendments and Additions to Certain Legislative Acts of the Republic of Uzbekistan," amendments and additions were made to a number of laws of the Republic of Uzbekistan, including the Law of the Republic of Uzbekistan "On Licensing Certain Types of Activities."

In accordance with the amendments and additions made to this Law, the electronic address of the license applicant may be indicated in the application for issuing a license, and the indication of the electronic address indicates consent to receive information in electronic form through the information system about the decision made on the application.

As is known, according to Article 9 of the Law of the Republic of Uzbekistan "On Banks and Banking Activities," the use of credits and collateral and other attracted funds to form the bank's authorized capital and to purchase bank shares is prohibited.

In order to ensure the implementation of the tasks set forth in the above-mentioned legislative acts, Resolution No. 8/9 of the Central Bank Board dated March 26, 2016, "On Making Relevant Amendments and Additions to this Regulation of the Central Bank 'On the Registration of Banks and Licensing of Their Activities,'" was adopted.

This Resolution of the Central Bank Board was registered with the Ministry of Justice of the Republic of Uzbekistan on April 18, 2016, under No. 2014-11, in the established procedure.

Now, starting from July 1, 2016, newly established commercial banks in the form of joint-stock companies may be established only if the share of participation of a foreign investor in the authorized capital is not less than 15 percent, except for cases provided for in the resolutions of the President and the Cabinet of Ministers of the Republic of Uzbekistan.

Also, based on the requirement that the share of foreign investors in newly established commercial banks in the form of joint-stock companies must be not less than 15 percent, it is necessary to submit the sources of origin of funds directed by non-resident persons to the bank's authorized capital.

In particular, based on these amendments, in addition to the documents submitted when establishing a bank if non-resident legal or physical persons who are not banks participate in the establishment of the bank, a certificate issued by a first-tier foreign bank confirming the founder's solvency (solvency to pay their share in the authorized capital) and the sources of origin of funds directed to the authorized capital, including confirmation that they were not formed from credits and other attracted funds, as well as a reference from the competent authority of a foreign state regarding the legality of their funds are attached, with the exception of foreign financial institutions.

At the same time, the electronic address of the founders may be indicated in the application for issuing a preliminary permit for opening a bank, as well as in the application for issuing a license. The indication of the founders' electronic addresses in the applications indicates their consent to receive notifications in electronic form through the information system about the decisions made on their applications.

This, in turn, indicates that convenience has been created for license applicants, allowing them to receive information quickly (promptly) about the decisions made on the applications submitted by them for the purpose of establishing a bank.

A bank is a legal entity that carries out a set of activities considered banking activities based on a license issued by the Central Bank of the Republic of Uzbekistan, such as accepting deposits from legal and physical persons, lending at risk or using for investment the funds accepted, and making payments.

In particular, a private bank is a bank in which the share of physical persons who are founders (shareholders) in the authorized capital must constitute at least fifty percent. Legal entities with a state share in the authorized capital, state bodies, as well as political parties, trade unions, public funds, and religious organizations cannot be founders (shareholders) of a private bank.

We can mention Trustbank, Turistonbank, Davr-bank, Universal Bank, Ravnaq-bank, Hi-Tech Bank, and Orient Finance Bank as examples of private banks operating in our republic.

Also, a bank with foreign capital participation is a bank in which the participation of foreign investors constitutes at least thirty percent of the total sum of the authorized capital. In this case, one of the foreign investors is a legal entity.

We can mention Savdogarbank, KDB Bank Uzbekistan, UTbank, and Hamkorbank as examples of banks with foreign capital participation.

In addition, a bank registered in the territory of a foreign state is a non-resident bank, and a bank whose authorized capital is fully formed by a non-resident bank is considered a subsidiary bank of a foreign bank.

The subsidiary bank of Iran's "Sodet" Bank in Tashkent City, Republic of Uzbekistan, is considered a subsidiary bank of a foreign bank, as its authorized capital is fully formed by a non-resident bank.

When the Central Bank makes a decision on issuing a license, the main factors are the feasibility of the business plan for establishing the bank, the sufficiency and formation in accordance with legislative acts of the bank's authorized capital, the prospects for profitability, the qualifications and reputation of the head of the bank being established, and the compliance of the documents submitted for establishing the bank with legislative acts.

It should be emphasized that legal and physical persons, including foreign legal and physical persons, can be bank founders and shareholders. However, except for the establishment of banks with foreign capital participation and subsidiary banks of foreign banks, as well as in other cases provided for by legislative acts, a bank cannot participate in the authorized capital of other banks.

In case of ownership of more than 5 percent of the bank's shares by one shareholder or a group of interdependent shareholders, the Central Bank must be notified, and for ownership of more than 20 percent, prior permission from the Central Bank must be obtained.

However, it is not allowed for the share of one shareholder or a group of interdependent shareholders in the bank's authorized capital (excluding the state share) to exceed 25 percent, but banks with foreign capital participation and private banks have an exemption in this regard, and this requirement does not apply to them.

To conclude agreements on the disposal of thirty-five percent or more of the shares in the bank's authorized capital, prior consent of the anti-monopoly authority is required.

Bank founders do not have the right to withdraw from the composition of bank shareholders for one year from the day of registration.

Bank founders must have impeccable business reputation and personal prestige, and legal entities that are bank founders must be financially stable.

Persons considered incompatible with these requirements, as well as non-resident legal entities registered in offshore zones or foreign citizens residing in offshore zones, as well as state management bodies, local state authority bodies, public associations and religious organizations, public funds, international non-governmental non-profit organizations, and extra-budgetary funds (unless otherwise provided by legislative acts) cannot be bank founders.

The bank's authorized capital is formed from the monetary funds of bank founders and shareholders.

Currently, the minimum amount of the bank's authorized capital is set at the equivalent of 5 million euros for private banks and 10 million euros for other banks.

The specified minimum amount of the bank's authorized capital must be fully formed by the founders before the bank is registered.

The licensing process for banks consists of two stages: the first stage is obtaining the Central Bank's preliminary permission for the establishment of the bank, and the second stage is registering the bank and issuing a license simultaneously.

Within one month after signing the founding agreement, the founders submit an application to the Central Bank for issuing a preliminary permit for opening the bank and the relevant documents in accordance with the requirements of this Regulation.

The Central Bank reviews the set of documents submitted by the founders within one month from the perspective of compliance with the requirements of this Regulation.

If the submitted set of documents is complete and complies with the requirements of this Regulation, the issue of issuing a preliminary permit for opening the bank is submitted for discussion at the meeting of the Central Bank's Commission for Licensing the Activities of Credit Institutions and Credit Bureaus and Registering Banks and Credit Bureaus; otherwise, the set of documents is returned with the reasons for return and the period within which the documents can be resubmitted indicated.

The decision on issuing a preliminary permit is made within a period not exceeding three months from the day the application with all necessary documents attached is submitted.

After obtaining the preliminary permit, the founders carry out organizational, technical, and other measures necessary for registering the bank and obtaining a license. Candidates for the chairman of the bank's board and chief accountant are selected and submitted for approval by the Central Bank. Obtaining a preliminary permit does not guarantee the issuance of a license.

The preliminary permit issued by the Central Bank retains its legal force for a period not exceeding six months from the day it was obtained.

Banks acquire the status of a legal entity from the time of registration in the Register of Commercial Banks at the Central Bank. A license is issued to them simultaneously with registration.

Founders must comply with the requirements for registering a bank and issuing a license set forth in this Regulation within a period of no more than six months from the day the preliminary permit was obtained.

After submitting the application for registering the bank, the Central Bank checks the compliance of the opening bank with the requirements of this Regulation.

The decision on registering the bank and issuing a license to it is made within one month from the day all requirements of the Central Bank are met.

The following are grounds for refusing to register a bank and issuing a license to it:

• non-compliance of the founding agreement and charter with legislative acts;
• unsatisfactory financial condition of one or several founders;
• non-declaration of sources of founders' funds (except for resident physical persons participating in the authorized capital of private banks);
• non-formation of the bank's minimum authorized capital by the time of bank registration;
• lack of protection of bank premises and equipment with engineering-technical security means, and unpreparedness of software products;
• incompatibility of the head and chief accountant of the bank being established with the position.

The decision on refusing to register a bank and issuing a license to it is sent to the applicant with the reasons for refusal and the period within which the applicant can submit an application for reconsideration after eliminating the indicated reasons.

In summary, this Regulation regulates the procedure for registering banks and issuing licenses granting the right to carry out banking operations in the territory of the Republic of Uzbekistan.

It should be noted here that the successes achieved in the activities of our country's banks have been positively evaluated annually by leading international rating agencies with worldwide influence since 2010, which is, of course, a welcome development.

Head of the Department for Licensing and Regulation of Credit Institutions' Activities	Z.Z. Zunnunov