A growing economic powerhouse optimally placed between the Middle East and East Asia, Central Asia has historically lagged behind some of its oil-rich neighbours but seems poised for a rebirth.

At ‘The Exploring Receivables and Payable Finance conference,’ hosted by FCI, IFC, and the Central Bank of the Republic of Uzbekistan, Trade Finance Global (TFG) spoke to Neil McKain, Country Manager for Uzbekistan at IFC, Davron Ismailov, CEO of Yangi Finance, and Sanjar Nosirov, Director of the Credit Institutions Regulation Methodology Department at the Central Bank of the Republic of Uzbekistan. They discussed the growth of cross-border and domestic trade within Central Asia and what factoring and supply chain finance can do to help.

Chasing the potential of intra-regional trade in Central Asia

Central Asian countries—Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan—were part of the Soviet Union until its dissolution in 1991. While these nations have maintained strong trade ties with Russia and neighbouring countries like Turkey and China, intra-regional trade remains limited, constrained by inadequate infrastructure and a lack of comprehensive regional trade agreements to reduce tariffs.

Crucial to increasing the economic outlook for Central Asia is facilitating intra-regional trade, which could both boost the regional economy as a whole and lift the poorer countries out of poverty. Even where intra-regional trade is happening, it is even more crucial to facilitate and encourage this by removing tariffs and border hurdles: the top 5 destinations for Uzbek industrial goods are outside Uzbekistan, a healthy sign for the future of regional trade but also a sign that the industry is not growing as it should, stifled by tariffs. Uzbekistan’s top exports include gold, natural gas, and cotton, but the country has also been diversifying into industrial goods such as textiles, machinery, and chemicals, which are increasingly finding markets within the region despite existing barriers.

An attractive new market

In many ways, Central Asia is the perfect market for cautious but ambitious trade finance investors. With a healthy 80 million people, little geopolitical instability, and growing construction, energy, and transportation industries, the market has looked promising for years, but the timing has never been quite as right as now.

Uzbekistan, Central Asia’s most populous country and site of the FCI conference, has been liberalising its economy and political system since the death of its authoritarian dictator in 2016. Part of the liberalisation effort has included reestablishing friendly geopolitical and economic relations with its neighbours – a move that could bode well for future regional growth. 

Infrastructure in Central Asia has always been a challenge. The region has a total surface area the size of the EU and a population one-sixth of the size. The low population density is compounded by mountains and harsh terrain that can make moving people and goods difficult. However, flights between Central Asian capitals are increasing each year, encouraging more collaboration between countries and enabling an increase in shuttle trade.

Trade agreements are also crucial for facilitating trade within the region as well as with the outside world, said McKain. Only two countries in Central Asia are members of the European Economic Zone, Kyrgyzstan and Kazakhstan; “trade between those countries is the highest between any two countries in the whole of Central Asia, so there are some lessons to be learned there about what easier border controls and customer controls can really bring.”  More open borders and lower tariffs could be transformative for the region, giving its internal trade the boost it needs.

However, none of these changes will happen on their own. The International Finance Corporation (IFC) has been supporting the region by helping companies trade across borders, giving them the vital working capital they need to develop strong trade ties with neighbouring countries. Plans to build a “trade corridor” through Central Asia connecting China and Turkey, will see large logistics, transportation, and infrastructure projects hoped to bring in foreign direct investment and make trade easy in the region once and for all. 

Factoring in SMEs

Different strategies for financial support are also important. In the Central Asian context, factoring comes in handy. Factoring allows businesses to sell their outstanding invoices to banks or microfinance organisations, enabling them to access funds instantly rather than waiting 60 or 90 days for payment – which, Nosirov said, is “crucial for SME finance since [these organisations] don’t have a good credit score.” They can leverage their partners’ credit score towards attaining, let’s say, lower interest rates. Unlike traditional lending, factoring primarily relies on the value of receivables as collateral, circumventing the significant barriers SMEs often face in securing traditional bank loans.

The mechanism’s benefits were recognised by Uzbekistan’s presidential decree of 12 August 2024 entitled ‘About measures for the accelerated market development of factoring services’. Key provisions include the establishment of a dedicated electronic factoring platform, which will automate financial transactions and provide real-time debtor analysis, and the liberalisation of foreign currency factoring transactions from January 2025.

The Central Bank of Uzbekistan and IFC have drafted comprehensive legislation based on the UNIDROIT Model Law on Factoring to comply more with international standards on factoring. As Nosirov highlighted, the reforms mean factoring organisations can now register as non-bank credit institutions and facilitate innovative financial mechanisms such as cross-border receivables trading and refactoring.

Ismailov emphasised the importance of this decree as the first document formalising separate activity in Uzbekistan. It also resulted in innovation; Ismailov, for one, sought to make Yangi Finance a “marketplace for banks, for factors, where any company can go put their receivables.” 

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The Central Asian market has been stable for some time, but this year has demonstrated its readiness for trade finance solutions, from infrastructure and investment to legislative enablement.

Uzbekistan’s presidential decree of August 2024 marks a transformative moment, establishing an electronic factoring platform and introducing reforms that align with international standards, with focus on enabling SMEs.

As McKain said, the future of Central Asia is focused on “improving the ability of companies to trade across borders, freeing up working capital, and for those companies to develop those trade ties with their neighbouring countries,” to create a more self-sustaining market, receptive to international investment and economic development.