How do Banks Evaluate Financial Projects and Offer Loans in Uzbekistan

Banks play critical roles in every economy, and perform an important role in terms of maturity transformation. They operate the payments system, and are the major source of credit for large swathes of the economy, and act as a safe haven for deposits' funds. They collect demandable deposits and raise funds in the short-term capital markets and invest them in long-tem assets. It means resources from those in surplus (depositors) are allocated to those in deficit (borrowers) through the banking system. This activity can help match deposit and loan supply and provides liquidity to an economy. Banks also provide loan commitments, letters of credits, and other guarantees that help counterparties plan for future investments (Allen et al 2010). Largest banks in many countries have a tendency to transform themselves via merger and acquisition into multi-product or service offers to customers comprising retail banking, asset management, brokerage, insurance, investment banking, and wealth management (Allen et al 2010).

RESEARCH QUESTION, RESEARCH AIMS AND OBJECTIVES

The aim of this research is to find out and understand 'How do banks evaluate financial projects and offer loans in Uzbekistan', what do they require from their customers for evaluation, and how do they analyze and evaluate before offering credit limit and loans to customers. The following questions will also be features that I try to identify answers through for my research task chosen: How are the projects evaluated before making a decision to undertake by Uzbekistan banks? How do banks evaluate a company's performance and capital structure using both qualitative and quantitative frameworks and tools? How do banks apply the analytic techniques across different industries? What are the advantages and disadvantages of evaluation tools in use? How do the banks in Uzbekistan face the global economic crisis? What would be a solution if they meet any challenge in evaluating projects?

LITERATURE REVIEW

Banking industry in Uzbekistan

The total loans granted that commercial banks in Uzbekistan have offered to their customers have been significantly increased in these years, from $898 million in 2008 to $1.2 billion in 2009 for micro and small enterprises (MSEs). This number is forecasted to increase by $275 million in 2010 (Asian Development Bank, 2010). However, the demand of MSEs is still unmet although the credit has grown significantly. Therefore, banks in this country become stricter in evaluating, and offering the loans to enterprises. In short-tem, the main risk for banks is higher inflation because of the very restrictive policy towards imports. In medium-term, the risk will be related to financial sector adversely affected by a rise in non-performing loans while the enterprises expect for soft budget constraints and various protectionist measures that results to the competitiveness of enterprises (European Bank for reconstruction and development, 2010). Uzbekistan, showing soundness to global recession, is anticipated as one of the most favorable in the region with the real GDP expected to grow by 7 percent in 2009. The strong fiscal position of this country can allow it to get further fiscal expansion in 2010 (European Bank for Reconstruction and Development, 2010). The Anti crisis program and other social programs allow this country to overcome the impact of the world crisis, resulting stable economical growth, stable socioeconomic development and improving the living standards of Uzbeks. Uzbekistan has more than 30 commercial banks with 3 state-owned banks, 13 joint stock banks, 9 foreign capital banks and some other private banks with 46,000 branches and retail stores. Total assets of banks in Uzbekistan are 2 times higher than the total balance of the population and legal entities deposits, insuring complete protection and guarantee of timely payments. Its bank capital adequacy ratio is higher than the international standards. Total current liquidity is 10 times higher than external payments due (see figure 1 and figure 2). (European Bank for Reconstruction and Development, 2010)

Figure 1

Fourteen of those 30 banks were rated as "stable" by leading international rating companies such as National Bank of Uzbekistan (NBU), Asaka bank, Agrobank, UzPSB bank, and some others (see figure 3 for more statistics about assets and capital of the banking system in Uzbekistan). If considering about the following criteria: financial soundness, a significant rural retail network, the ability and willingness to manage the exchange risk prudently, etc, there are three suitable commercial banks chosen: Hamkorbank, Ipak Yuli and Asaka. Hamkorbank, listed on the Uzbek Stock Exchange, was established in Andijan, Uzbekistan's fourth largest city, in 1991. This is a leading privately owned commercial bank in Uzbekistan. Its primary business is offering the entire range of retail banking products and services to micro, small, and medium-sized enterprises (SME). It holds about 1.9% market share of banking section assets and 1.3% of capital stock (Asian Development Bank, 2010). In Hamkorbank, the head office and branch-level committees of each regional branch have the authority to approve loans within a particular lending limits annually set by the head office and executive board. This bank has rich experience in dealing with microcredit. Its loans were up to $29.3 million at the end of 2009. Moreover, Hamkorbank has been successful in attracting funding and receiving technical assistance for microfinance from external sources. Another 'stable' bank in Uzbekistan is AIpak Yuli Bank. This is an open joint stock commercial bank establish in 1990. During 2007, the total assets have increased in 1.9 times and have reached 186.8 billion soum (equivalent to 116 million US dollars). This growth rate is kept last three years. Crediting is considered as the as a major part of mutual relations of the bank. The main task of bank in credit activity is to increase a qualitative and highly remunerative loan portfolio based on minimization and diversification of credit risks. AIpak Yuli Bank offers many types of loans such as credit lines, commercial lending in national currency and foreign currency, leasing, factoring, micro-crediting, consumer and mortgage lending. Before accepting and offering a loan, the bank usually gives a special place to issued credit security for guaranteed equipments which is estimated conservatively and sometimes need independent appraisers (AIpak Yuli Bank, 2007)

Figure 3

(Source is available from: https://www.jp-ca.org/navoiforum/materials/zantais/4bafaev.pdf)

Finance

Finance is 'the science of the management of money and other assets including money, banking, investments, and credit (https://www.thefreedictionary.com/finance). Financing of banks means banks providing funds or capital, supplying fund or credit to lenders borrowers such as enterprises, corporations, government projects, etc.

Projects financed by banks

There are many banks in Uzbekistan providing project financing, loans, or credit lines such as Asian Development Bank, World Bank, Japan international cooperation agency, Islamic Development Bank, etc. Projects specially paid attention and received loans, credit lines, etc from the banks are investment projects with major contribution to Uzbekistan economic development and structural reforms, projects aiming at infrastructure development, projects of modernizing industrial enterprises, or procurement of new modern technologies, equipments and other strategic goods. Most of enterprises have concentrated on investing new technologies as they think that technology is one of the most important key factors for success. Most industries, such as steel and/or automobile industries, require rebuilding in order to get rid of old technology and reduce labor intensities and increase capital intensities (English J. M., 1984)

Project financial evaluation

Any project to be undertaken by financial institutions requires a very careful consideration/evaluation. Project financial evaluation is 'an in-depth investigation of cash flow and risk with the object of determining a project's eventual return on investment' (Annettle, 2010). It means all of the fiscal factors such as cash flow, insurances, capital outlay, payback period, and the ROI (return on investment) involved in the project are checked and evaluated carefully. (English J. M., 1984)

RESEARCH METHODOLOGY

There are various definitions for the term 'research'. Lee and Lings (2008) describes it like "Research is about generating knowledge about what you believe the world is". Saunders et al (2003) defines 'research' as something that people increase their knowledge through by finding out things in a systematic way and they highlights two phrases together: 'systematic research' and ' to find out things'. These may contain describing, explaining, understanding, criticizing, and analyzing (Ghauri and Gronhaug, 2002).They show a multiplicity of possible purposes in research. Lee and Lings (2008) believes that research is a human process that's done by people. People may have alternative opinions on understanding things from each other; they conflict, dispute and sometimes make mistakes.

Research paradigm

To define clear research philosophy reduces mistakes and simplifies the research task. According to Saunders et al (2003), there are three views of business research that leads the way in which knowledge is enlarged and concluded as being acceptable. They are positivism, interpretivism, and realism. Positivist researcher performs the role of the objective analyst, collects data and explains analysis in an apparently value-free manner. They put more emphasis on well-prepared methodology to make easy duplication (Gill and Johnson, 1997) and on scientific study that leads to create a statistical analysis. Interpretive researcher argues that the business situations are getting more and more complex in ever-changing world of business organizations. Such a complexity requires definite 'laws' as the physical sciences refer to. They consider circumstances are reduced wholly to a law-like generalization series. On the other hand, realism pushes the idea that a reality exists in independence of human thoughts and beliefs. 'In the study of business and social sciences this can be seen as indicating that there are large-scale social forces and processes that affect people without their necessarily being aware of the existence of such influences on their interpretations and behaviours'( Saunders et al, 2003). It would be a wrong assumption if I say that one of those philosophies has an absolute advantage or is better than another. However, positivism will be my research methodology.

Research strategies

Lee and Lings (2008) illustrates two approaches to the research. Deduction is an approach in which researcher concludes from rational and logical principles. In an example given by them, ancient Greeks say 'writing a book always makes the author(s) rich', but this is valid and the premises are true, only if it were so. Being essentially opposite of deduction, induction applies to a process showing movement from specific surveillance to a more common theory. In the theory of Saunders et al (2003), deduction tests theory where induction builds theory. There are two main types of research: quantitative research and qualitative research. For my dissertation, I will use qualitative research. This type is generally exploratory in nature, consisting investigative research approaches that result in descriptive textual information. The reason why I choose this approach for my research is because of its features. Qualitative research approach can helps to examine processes, patterns, opinion, values, and case studies including critical incidents. However, the important concern when I conduct qualitative research is that I need to consider the most appropriate methods for gathering and interpreting the information. I will try to 'look through the eyes of someone else' and make a systematic attempt to understand them.

Data collection methods

The key resource for my research project is the library including both physical libraries and online libraries. In these places, there are not only books, journals, archived materials, but also information centers that co-ordinate an electronic gateway to a massive amount of online information. Using new primary sources: my research will focus on collecting data from primary sources such as recently produced reports from banks and enterprises who requested for financing, or face-to-face research through in-depth interviewing and focus group interviewing. Secondary sources: observation

ANTICIPATED RESEARCH ANALYSIS AND FINDINGS

The important task when doing a research is critically analyzing and evaluating information, ideas, and data collected. The key aim of qualitative research is to represent the material in a balanced and rational way. I will not only select examples, answers or quotes to analyze but also consider and note the opposing evidence, then arrive at a conclusion based on a careful analysis of the arguments and literature sources related to my topic.

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