The State as a Startup: How to Turn Uzbekistan into a Growing Fintech Hub

The Uzbek market is in a stage of transitioning towards becoming a digital economy. Humans Group founder Vlad Dobrynin discusses what initiatives the region needs, how to replicate the UAE’s and China’s successes in Uzbekistan, and why it’s important to go cashless and view the country as a startup.

The Regulatory Landscape: Slow-Paced Evolution and How to Improve the Economic “Climate”

In 2023, the Uzbek fintech industry gained ground: there are now more than 60 startups in this field. Uzbekistan’s first digital banks and super apps have emerged, and the proportion of people who have bank accounts is now 44% of the entire adult population. The country’s neobanks are gaining momentum, and the popularity of e-wallets is growing year on year. Nonetheless, the local payment instrument market is quite fragmented, and a competitive environment has not yet developed: large banks dominate the industry at present, and it’s fairly hard for startups to grow — sooner or later, most successful companies get bought out by larger market players, including foreign banks. 

The circulation of cash in Uzbekistan is also at a consistently high level, despite the popularity of e-wallets. For example, in just the first quarter of 2023, this figure had grown by 25% in comparison with the same period in 2022. Many Uzbek citizens who claim a pension or benefits do so in cash form, since some regions still suffer from a lack of access to ATMs. 

In light of this, during the last five years, the fintech industry in Uzbekistan has received a great deal of support, including from the government. For instance, in 2019, the government passed a law “regarding payments and payment systems” that granted legal status to the major categories of fintech businesses and also fixed the definitions of concepts such as electronic funds and payment services. Another law was also passed “regarding investments and investment activity”. Banks have begun to integrate more thoroughly with payment companies, and the proportion of cashless payments being made has started to grow. The Central Bank has begun discussing developing the digital soum (Uzbeki currency) and subsequently introduced a regulatory sandbox system for innovative companies. 

Changes in the current geopolitical situation have brought about a change in terms of the development of the market and the activities of its participants. For example, the Central Bank has instructed companies to monitor transactions more carefully, including card-to-card transfers that amount to more than 165 million soums per month. In addition, the regulator has introduced additional restrictions on withdrawing currency.

Despite all the challenges that are associated with the history of market formation and modern development conditions, Uzbekistan is currently the perfect platform for fintech experiments and in this regard can easily be compared to China in the early 2010s. It was at that time that the population began to acquire smartphones en masse and to really embrace digital payments. The process was so rapid that it’s hard to imagine today that at the start of the 2000s, among 1.2 billion people, there were just 140 million mobile devices. Today, there are estimated to be 1.6 billion users of mobile devices, and the volume of mobile payments grew by 28 times just between 2014 and 2018, the peak growth period. 

It is interesting that we can identify a great deal of demographic similarity between China in its early stages of growth and Uzbekistan today. For example, at the start of the 2000s, the average age in China was 29, the same figure as in Uzbekistan in 2022. A young population embraces new technology more quickly and is more willing to experiment, which is why fintech services have huge potential in Uzbekistan. However, in order to speed up this evolution, a number of legislative changes are required. Let’s take a look at what exactly needs to change. 

Step One: A Roadmap for the Future of Fintech

The UAE, and Dubai in particular, is a good example of an effective strategy for supporting fintech. Even back in 2004, the emirate created the Dubai International Financial Centre (DIFC), a free zone with its own legislation and regulatory framework, a basis for the development of fintech hubs and accelerators. Using its oil and gas derived capital, Dubai also launched various programs to provide mentoring and financing for startups. 

Of course, the UAE and Uzbekistan differ in terms of their GDP and the hydrocarbon deposits at their disposal, but nonetheless, they do have something in common. In this kind of cultural environment, initiatives filter downward, so it’s essential that the government creates regulatory sandboxes and special economic zones, as well as designating priority economic sectors. In Uzbekistan, the digital economy is attracting attention from regulators, but it seems that they don’t have such high expectations  as Dubai or China had. For example, there are 21 free economic zones (FEZ) in the republic, 19 of which specialize in the field of industry, one in the sphere of agriculture, and one in tourism. There could be substantially more large-scale programs for supporting the digital economy.

What’s more, the country’s legislation is constantly being added to, which is to be expected for a developing economy. New laws and regulations are passed frequently, but businesses don’t always have a chance to adapt to the changes. The solution might be having a comprehensive support program for fintech in the region at all levels. The program could be spearheaded by a regulator with the involvement of businesses. What’s required isn’t targeted draft legislation, but rather a comprehensive roadmap for 5–7 years that will encompass all aspects of business, from tax exemptions and incentives for startups, right through to working with the general population to increase financial awareness and to facilitate a large-scale transition to cashless payments. Similar frameworks have previously been developed and launched in the UK, Singapore, and Australia. The initiative has to come from the government, but we need to involve both local business people and visionaries in the process because their experience and vision will help to enhance the roadmap and bring it in line with the realities of the market.

It was with this aim that the Fintech Association of Uzbekistan was formed in the republic in 2022. In its first market research the organization observed that one of the main problems facing the fintech industry in the region is a lack of concise strategy and institutional support. For example, no draft legislation has been developed in Uzbekistan to regulate key technologies, such as open APIs and cloud technologies. In addition, there is no state fund for supporting fintech startups. This is one of the key areas for developing this branch of the country’s economy. 

Step Two: A Green Light for Investors

The story of most successful industrial hubs and technology valleys begins with creating the perfect “climate” for doing business. There are so many positive conditions for commerce being created in the region that it is sometimes simpler just to relocate a whole team to a new zone and adapt your business to the specifics of the locale, rather than continuing to operate in your previous location. 

For example, more than 60% of Fortune 500 companies are based in Delaware, one of the smallest states in the USA. Companies that are registered in Delaware but do business elsewhere are exempt from federal taxes. What’s more, all corporate proceedings are dealt with by a special judicial department that has a good understanding of the ins and outs of entrepreneurship. 

Of course, transferring the lessons learned in Delaware to Uzbekistan in their literal entirety is impossible, but it is also worth drawing attention to the experience of other tax havens around the world. Uzbekistan is already moving in the right direction. For example, VAT in the republic had already been reduced from 20% to 15%, but in 2023, the rate has been reduced further, down to 12%. In addition, new exemptions are being introduced in terms of the calculation of corporate tax and sales tax. Incentives related to specific economic branches are also emerging. For example, corporate tax for companies that operate in the field of e-commerce has been reduced from 15% to 7.5%. These are definitely steps in the right direction. It is possible that, if we wish to increase the country’s appeal in this regard even further, we need to further enhance these measures to make it advantageous for foreign companies to enter the Uzbek market rather than turning to other jurisdictions.

Insufficient tax incentives and preferential treatment also limits the influx of capital into the republic. Analysts have already identified a reduction in foreign direct investment (FDI) into Uzbekistan. This can be explained in part by the general economic turbulence in the region in 2022, but that isn’t the only reason. The republic is among a list of countries, as compiled by the OECD, that have codified restrictions on foreign investment. 

According to the OECD’s data, the Uzbek regulatory system is organized in a complex manner, and it is rather difficult for outside investors to get to grips with it. Some branches of the economy are hindered by particularly strict regulation, such as financial and banking services. Thus, it is difficult for fintech startups to compete with market giants. There are a handful of large banks and state institutions that dominate in the region, and the influx of capital from abroad is limited. 

Thanks to our understanding of market conditions, here at Humans, we’ve prioritized our super app model precisely due to the specifics of the business climate. A fintech mono-product doesn’t stand a great chance of surviving in Uzbekistan, since it will quickly reach a growth ceiling and won’t be able to develop further. However, an ecosystem of services that is deeply integrated into the life of every citizen of Uzbekistan has a great chance of succeeding.

Giving the green light to foreign investors and having a more flexible taxation system is likely to attract an influx of capital into the region, especially following the events of 2022. For example, the foreign companies and global foundations that left the Russian market have begun to turn their attention to Central Asia. Thus, at the end of 2022, the gross influx of foreign direct investment into Kazakhstan reached $28 billion dollars for the first time in 10 years, which is 17.7% more than the same point the previous year. The volume of investment into Uzbekistan is increasing too. This mainly affects the energy, metallurgy, chemical, and construction sectors. The field of IT is also a priority. However, when it comes to banks and financial products, the amount of financial injections are very modest.

The republic’s IT Park, which is the base of operations of around 1,330 companies, is helping to attract projects and investment into Uzbekistan’s digital economy. The Park offers substantial incentives and helps startups find investment. In the future, it plans to create a digital bank specially for exporters that are residents of the park. The initiative is primarily geared toward software developers and outsourcing service providers — Uzbekistan based fintech companies are becoming increasingly focused on the internal market or expanding into other regions.

Step Three: Complete Digitalization — More Data, Fewer Restrictions 

Another growth driver for any digital business, and fintech in particular, is the digitization of processes at all levels. On a macro level, we need to transfer all state processes and services onto a digital footing, digitize data as much as possible, and introduce the most cutting-edge analytics tools. On a micro level, the government needs to form new digital habits, such as converting all payments made by the state into a digital format, developing convenient and straightforward apps for managing one’s finances, and, most importantly, making investment and lending tools more accessible. 

Uzbekistan is already taking steps in this direction. For example, thanks to an initiative from the Central Bank, customers can open e-wallets, bank accounts, and bank cards remotely. They can also get micro loans online. 

On the whole, the collection and analysis of big data is currently at an elementary stage; Uzbekistan does not plan on developing open banking right now, and payment organizations cannot freely exchange information, which would allow them to improve the quality of their products more quickly. Companies can only get insights from their own limited sample of users and are thus unable to view the bigger picture. 

The digitalization of the finance industry is a big part of any strategy for developing fintech, and it’s something that the government should be initiating. Unfortunately, the digital infrastructure in Uzbekistan is not particularly well developed at present. However, by 2030, the situation should have improved, thanks to the “Digital Uzbekistan 2030” initiative. Furthermore, on the whole, access to the internet and mobile services is improving in the country, and, accordingly, the critical mass of big data is gradually being accumulated too. In the future, this will help companies fine tune their analytics more quickly and also make all transactions more transparent. 

Step Four: Available Investments and Capital Accumulation for Everyone

The Uzbek economy is currently dependent on cash. For example, in 2022, the proportion of transactions made using cash increased by 38% in comparison with 2021, even though the global tendency is the other way around with the world gradually going cashless. Much of this depends on the region. The urban and rural populations in Uzbekistan each represent roughly 50% of the population. Those who live in the provinces often only have limited access to a mobile connection, the internet and devices, which of course means digital services. However, the republic is already among the top 20 countries in the world in terms of mobile internet availability.

Citizens of Uzbekistan are relatively conservative in their use of digital financial services. Thus, even when they have a bank card, they often prefer to take out cash and keep savings in cash. Residents of the republic do open accounts, transfer money to one another, and pay for purchases using the internet. However, for instance, investment and savings tools are not in high demand. The exception to this is “buy now, pay later” services that offer payments in installments. 

The cashback savings model is also gaining in popularity. However, on the whole, loyalty programs in Uzbekistan are not particularly well developed at present. Banks mainly tend towards providing only modest bonuses, and Uzbeks often don’t recognize the potential advantage of using cashback and don’t see it as a bona fide tool for building up their savings.

What’s more, global practice shows that the best way to develop financial awareness is to present a population with the most straightforward and accessible means possible of saving and growing their capital. Currently, there aren’t that many options for managing one’s money in Uzbekistan. Even access to cryptocurrencies has been partially restricted in the republic; a new law forbids any transactions involving the purchase or sale of cryptoassets on third-party platforms, with the exception of five platforms that have been approved by the government. At a regulatory level, it is important that we distinguish between traders and regular citizens who want to use cryptocurrencies. However, only a handful of countries have so far managed to solve this issue. Germany is a good example. It has equated bitcoin and other cryptocurrencies not so much with market assets but as an accumulative asset. If a physical person holds crypto in their account for more than a year, then it is not subject to capital gains tax.

The State as a Startup: The Future of Uzbek Fintech

Despite the regulatory restrictions and general economic instability, the number of enterprises in Uzbekistan is steadily growing, and the fintech market continues to develop. New services are emerging, business collaborations are being concluded, and new companies are coming to the country, and not just monopolies and market giants from neighboring regions. Regulators are seeking to listen to entrepreneurs and regular citizens. Things won’t happen instantly, but by means of iterations, they’re making legislative proposals more liberal. 

However, for companies that are just starting out, even if they have resources and expertise, things aren’t easy. Often, they grow not because of the circumstances, but in spite of them. In this light, it is clear that an economic miracle isn’t going to happen by itself in the republic. This has been shown by global practice, including the cases of the UAE, China, Singapore, and other countries that have undergone a transformation in a short space of time. This will happen in Uzbekistan too if we view the state as a startup, and one of the most important principles for a startup stage business is continual innovation.