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163
THEORETICAL FOUNDATIONS FOR INCREASING THE CAPITALIZATION
LEVEL OF COMMERCIAL BANKS
Rufat Bakhtiyorovich Qurbonov
, PhD
Professor of the Department of "Bank Accounting and Audit",
Tashkent State University of Economics
Annotation:
This article presents safe methods for increasing the capitalization level of
commercial banks. In addition, it analyzes the amount and dynamics of the capital of commercial
banks in our republic, as well as the share of authorized capital in their own funds, and provides
relevant conclusions.
Keywords:
commercial banks, capitalization level, resource base, capital, authorized capital.
Introduction
In the
Action Strategy for the Further Development of the Republic of Uzbekistan
, increasing the
capitalization level and deposit base of banks, as well as strengthening their financial stability
and reliability, has been identified as one of the top priorities [1]. In order to timely and
effectively implement these objectives, the Presidential Decree of the Republic of Uzbekistan No.
PF-5992 dated May 12, 2020, “On the Strategy for Reforming the Banking System of the
Republic of Uzbekistan for 2020–2025,” outlines a phased increase in the minimum authorized
capital of banks to 500 billion soums by 2025 [2].
At present, in order to raise the capitalization level of commercial banks in our republic, several
issues still need to be resolved. In particular, the low capitalization level of commercial banks,
the allocation of significant state budget funds in recent years, the weak activity of commercial
banks in the stock market both as issuers and investors, their inability to provide high-quality
services to clients, the weakness of the resource base, the low share of bank capital in GDP, and
similar problems remain pressing challenges.
Literature Review
In the existing economic literature, the concept of “capitalization level” and issues related to its
increase have been studied by foreign scholars and experts, and corresponding definitions have
been provided. For instance, in A.B. Borisov’s
Comprehensive Economic Dictionary
,
capitalization is defined as “the part of a bank’s capital that has grown due to the issuance and
sale of securities, and the allocation of a portion of income to form specific reserves” [3].
In the research of A.S. Klimov, the term “capitalization” is described as “the market value of a
credit institution’s capital, calculated by multiplying the number of shares by their market
price” [4].
Professor A. Omonov, in his doctoral dissertation in economics titled
“Issues of Effective
Management of Commercial Bank Resources”
, provided a detailed classification of the factors
influencing the capitalization level of commercial banks [5].
Similarly, I.B. Tursunov, in his research work, substantiated that the capitalization of a particular
bank largely depends on the absolute volume of its equity capital [6].
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Research Methodology
In preparing this article, practical data related to increasing the capitalization level of commercial
banks were analyzed. All utilized information was studied by the author based on current legal
regulations and statistical indicators provided by the Central Bank. The research employed
methods such as grouping, comparison, systematic approach, and structural analysis.
Analysis and Results
In global theory and practice, there are two main approaches to interpreting the term
“capitalization” [4].
The first approach is closely linked to the stock market, within which market capitalization is
considered the value of a company’s securities based on their quotations on the stock exchange.
The second approach defines capitalization as the process of increasing capital through profits.
This perspective associates capitalization with the amount of a financial institution’s own equity,
as well as with the capital adequacy level in accordance with the internationally recognized Basel
and Basel I agreements.
Taking into account the consequences of the global financial crisis, the Basel Committee on
Banking Supervision approved the new
Basel III
standard in September 2010, which
significantly tightened the capital requirements for financial institutions.
In order to comply with the new regulations, banks increased the minimum capital adequacy
ratio of Tier 1 capital from 2% to 4.5% by 2019.
Each bank is required to establish a special capital buffer amounting to 2.5% of its assets.
According to the new requirements, the total minimum requirement for core (Tier 1) capital is set
at 7%. The capital adequacy ratio for Tier 1 capital has been increased from 4% to 6%.
It is worth noting that, under the new regulations, the capital of commercial banks must consist
of no less than 50% of common equity and retained earnings. In addition, the Basel Committee
recommends that the level of debt capital should not exceed 25 times the amount of capital.
Although the committee’s decisions are advisory in nature for regulatory authorities, most
developed countries have adopted these recommendations almost entirely in forming their
banking requirements frameworks.
The issue of determining bank capital adequacy has long been the subject of academic research
and remains a matter of debate between banks and regulatory authorities. While banks prefer to
use minimal capital in order to maximize profits and ensure asset growth, regulatory bodies
demand higher capital levels to reduce the risk of bankruptcy.
At the same time, it is argued that bankruptcy often results from poor management, and that
well-managed banks may perform effectively even with lower levels of capital adequacy.
In international practice, the amount of authorized capital is not strictly limited by law. However,
in order to ensure the stability of the banking system, regulatory authorities set a minimum
threshold for the authorized capital of commercial banks.
There is no unified approach to determining the minimum level of bank capital. Historical, legal,
and economic factors play a role in this variation, and the practice of licensing banking activities
differs from country to country.
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165
Countries that impose minimum capital requirements for banks mostly include those in the Asian
region (see Table 1).
Table 1
Countries with the Highest Requirements for Bank Equity Capital
(
as of January 1, 2010, in million euros
)
Country
National Banks
Foreign Banks
Branches of Foreign Banks
Singapore
722,8
722,8
96,4
Malaysia
392.6
58,9
-
Indonesia
211,8
211,8
211,8
Taiwan
204,9
204.9
3.1
Bahrain
175,4
66,0
-
Kuwait
173,5
173,5
34,7
Nigeria
111,7
111,7
111,7
Thailand
99,6
79,2
Israel
99,2
99,2
China
96,8
29,0
The European Union countries have taken the lead in standardizing the minimum level of bank
capital, where a unified norm for private capital has been adopted, requiring it to be no less than
5million #euros.
The spread of the European standard has led to the fact that most countries around the world now
set the minimum capital requirement within the range of 1 to 5 million euros.
In recent years, special attention has been paid to increasing the capitalization of banks in
Uzbekistan. In this regard, a number of Presidential Decrees and Resolutions have been adopted
by the President of the Republic of Uzbekistan.
Table 2
Minimum Authorized Capital Requirements for Commercial Banks Operating in the Republic of
Uzbekistan
Years
For Joint-Stock
Commercial Banks
For Banks Established
with Foreign Capital
Participation
For Private Banks
January 1,
1998
1.5 million USD
equivalent in Uzbek
soums
5.0 million USD
equivalent in Uzbek
soums
0.3 million USD
equivalent in Uzbek
soums
January 1,
2.0 million USD
5.0 million USD
0.3 million USD
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166
1999
equivalent in Uzbek
soums
equivalent in Uzbek
soums
equivalent in Uzbek
soums
January 1,
2000
2.5 million USD
equivalent in Uzbek
soums
5.0 million USD
equivalent in Uzbek
soums
0.3 million USD
equivalent in Uzbek
soums
January 1,
2002
2.5 million USD
equivalent in Uzbek
soums
5.0 million USD
equivalent in Uzbek
soums
1.25 million USD
equivalent in Uzbek
soums
January 1,
2005
5 million USD equivalent
in Uzbek soums
5.0 million USD
equivalent in Uzbek
soums
2.5 million USD
equivalent in Uzbek
soums
January 1,
2008
5.0 million EUR
equivalent in Uzbek
soums
5.0 million EUR
equivalent in Uzbek
soums
5.0 million EUR
equivalent in Uzbek
soums
January 1,
2011
10.0 million EUR
equivalent in Uzbek
soums
10.0 million EUR
equivalent in Uzbek
soums
5.0 million EUR
equivalent in Uzbek
soums
October 1,
2017
100 billion UZS
September 1,
2023
200 billion UZS
April 1, 2024
350 billion UZS
January 1,
2025
350 billion UZS
As is known, starting from
September 1, 2023
, the minimum amount of the
authorized capital
of banks
is required to be
200 billion UZS
[12]. This provision was established by a draft law
adopted in
October 2022
and enacted in
April 2023
. In accordance with the amendments
introduced to
Article 13
of the Law of the Republic of Uzbekistan “On Banks and Banking
Activities”, the Central Bank has officially announced that the minimum authorized capital of
banks must amount to
200 billion UZS from September 1, 2023
, and
500 billion UZS from
January 1, 2025
, to be implemented gradually.
However, at present,
not all commercial banks
have been able to fully meet the newly
established minimum capital requirements. This can be seen in the following table.
Conclusion and Recommendations
In conclusion,
commercial banks must seek and identify effective opportunities to increase
their authorized capital
. Otherwise, failure to comply fully with Presidential Decree No. PQ-
5992 dated May 12, 2020, may hinder the implementation of strategic reforms. This, in turn,
could
jeopardize the continuity of commercial banks’ operations
.
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167
It is evident that
commercial banks in Uzbekistan need to significantly increase the amount
of their authorized capital within a short period of time
. In addition, there are
issues related
to the placement of shares issued by these banks
.
The
average annual dividend rates
offered by the banks are almost equivalent to the
interest
rates on deposits
, and they tend to be
volatile
, as the amount of dividends may decline due to
operational or financial challenges faced by the banks.
Moreover,
share premiums (emission income)
within the capital structure of commercial banks
are
negligible
. As a result, the
shares of domestic banks are traded at nearly their nominal
value
on the securities market, with
no effective mechanisms or factors influencing their real
market price
.
The analysis carried out has led to the following conclusions:
A
regulatory and legal framework
has been developed and adopted in Uzbekistan that
provides significant opportunities for increasing the
capitalization level of banks
.
The
ratio of total bank capital to the country’s GDP
is slightly above
6%
, and in recent
years, this figure has shown a
declining trend
.
The
market capitalization
of domestic banks is
almost five times lower
than their total
capital.
References
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2. O’zbekiston Respublikasi Prezidentining 5992-sonli “2020 — 2025 yillarga mo’ljallangan
O’zbekiston Respublikasining bank tizimini isloh qilish strategiyasi to’g’risida”gi PF-
Farmoni, 2020 yil 12 may
3. Большой экономический словарь. А.Б.Борисов. Издание второе М. «Книжный мир»
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