Konstantin Tserazov: Fintech Growth Prospects in Kyrgyzstan

In 2023, the Kyrgyz financial market showed a remarkable leap forward. In 2023 the rise in payments through POS terminals was about 91% compared to 2022, according to data provided by the National Bank of the Kyrgyz Republic (NBKR). Online purchases by people have skyrocketed 35 times.

This success aligns with the realization of the governmental "E-commerce Development Programme for 2023-2026" and "National Sustainable Development Strategy 2018-2040," aimed at creating a favorable legal framework for online businesses. The staggering growth of the financial sector in just one year coincided with a 31.6% increase in the number of bank cards issued in 2023.

Meanwhile, between 2002 and 2022, Kyrgyzstan's economy expanded at an average rate of 4.0%, lower than the 6.6% average growth in gross domestic product experienced by Central Asian nations during the same period. Moreover, Kyrgyz GDP contracted in 2010, 2012, and 2020.

Bishkek sees the challenge to further raise economic growth rate and set high hopes for fintech in this regard. The remarkable rise in online trade volume, payments via POS terminals, and the number of bank cards issued in 2023 coincided with a significant GDP growth of at least 5%, according to preliminary estimates.

International Cooperation

Kyrgyzstan develops strong investment ties with other Central Asian nations as well as with the U.S.A. and the West in a broader sense. Google Pay arrived in Kyrgyzstan in November 2022 and almost immediately gained high traction among users, which is logical given the country's mobile phone penetration rate of almost 90%.

In 2024, the World Bank allotted an additional $7 million in financing under the ongoing Digital Central Asia South Asia (Digital CASA) project. This project, which started six years ago, has already provided Kyrgyzstan with $50 million from the World Bank. The project aims to support internet adoption in Kyrgyzstan, especially in remote parts of the country, and create incentives for investing in the fintech sphere.

All efforts can bring internet adoption in the country beyond 80% this year. In an impressive feat, Kyrgyzstan clinched the eighth spot globally and emerged as the frontrunner among CIS nations in providing the most affordable mobile internet access to its citizens in 2023. This project is also aimed at stimulating the development of cloud-based financial solutions in the country.

The World Bank is very active in Kyrgyzstan, driving a total of 23 projects worth $1.1 billion. Some financial support is offered as an interest-free loan, repayable over a fifty-year timespan, inclusive of a ten-year grace period before the commencement of repayments.

Kyrgyzstan has been an interesting country for investments and loans from China. Currently, more than 50% of all external loans provided to Bishkek are Chinese, which corresponds to about 15% of Kyrgyzstan's GDP.

One example of cooperation is the appearance of Chinese UnionPay in Kyrgyzstan. It arrived in the country as early as 2012, and UnionPay cards started to be used at some retail points and bank tellers with the UnionPay logo. Currently, UnionPay cards are accepted at 50% of bank tellers and 60% of POS payment terminals in the country.

Meanwhile, Bishkek is actively developing cooperation with other countries as well, preparing a solid foundation for this. In May 2023, the Bank of Mongolia formalized a partnership with Kyrgyzstan's Interbank Processing Center (IPC) through a Memorandum of Cooperation, marking a strategic move towards digitalization in the monetary sphere. This agreement paves the way for mutual sharing of expertise and insights in payment system management, as well as enabling the joint recognition and use of Mongolia's National Brand ₮ Card and Kyrgyzstan's Elcard across both nations.

Furthermore, on February 27, 2024, Mongolia's Financial Regulatory Commission (FRC) established a collaborative framework with the National Bank of the Kyrgyz Republic, as announced by the FRC. The stated objective of this collaboration is to foster support for fintech enterprises and facilitate the exchange of information pertaining to transnational financial transactions.

Digital Som

On the government side, we see rapid movement towards a digital som. On March 2, 2024, the National Bank of the Kyrgyz Republic (NBKR) announced that its Digital Som Project Group received requests from 12 interested companies to join the Group. In 2024, NBKR is going to select a CBDC vendor to work on a test version of the digital som in an experimental mode ("Regulatory Sandbox").

Just to recall: In 2020, the NBKR rolled out this "Sandbox" scheme designed to enable financial technology firms to experiment with their cutting-edge offerings within a regulated, yet flexible, testing space.

Among the 12 interested companies is the famous London-based R3 Corda Ltd. Of these companies, 3 are UK-based, 2 are from the USA, 2 are from Switzerland, and others are from Japan, South Korea, Germany, India, and China.

The digital som is fully compatible with the governmental "Vision 2040" development strategy aimed at increasing the digitization of trade in Kyrgyzstan. By the way, the digital som can boost trust in the national currency, which is very important since Kyrgyzstan is among 39 countries with developing economies in the world where the share of dollar deposits is more than 10% of the total sum of deposits, creating additional currency risks.

The Financial Authorities' Vision

About 90% of the Kyrgyz population identifies as Muslim, so NBKR pays attention to this fact and vows "to expand services rendered on the principles of Islamic finance," as stated in the regulator's Annual 2022 report.

Taking it as a whole, Bishkek is driving the digital transformation of the economy. One of the aims is to enhance the country's export potential, including the development and sale of new fintech solutions in external markets. A special thrust is given to blockchain since it guarantees full traceability of transactions. Under the framework of the EAEU digital agenda 2025, there is a movement to evolve regional digital infrastructure.

Bishkek bets on digitalization as an instrument that can create whole new industries in the economy. It means that even a small fintech startup can give rise to an entire ecosystem with many new companies and employment opportunities.

In 2024, the Kyrgyz legislative body aims to adopt a Digital Code. This Code will be a comprehensive document thoroughly describing the digital rights of people and businesses. It will be a "one-stop" legislative solution for anyone dealing with digital issues in the country. This Digital Code will also embrace the issue of digital rights arising in digital worlds gaining visible hype as key tech giants in the U.S.A. develop technical devices that further drive humanity into mixed reality.

The Kyrgyz government has vowed to develop its own neural networks and streamline supercomputers in the country, aiming to further promote digital services. Currently, more than 80% of the economically active population in the nation have digital documents.

The Kyrgyz government is further driving the Digital Nomad Visa program aimed at attracting foreign specialists in the field of IT and fintech, in particular, to work in the country. Moreover, the status of "Digital Nomad" can reduce the time needed to obtain approval for opening a company in Kyrgyzstan to three days. It is also worth mentioning that in Kyrgyzstan, compared to other Central Asian and some CIS countries, the tax rates are the lowest: the average tax burden is at the level of 32%.

Fintech Success

One prominent player in the digital payment space is Elsom, a mobile payment system launched by the country's largest mobile operator, MegaCom (MEGA), in 2014. Elsom boasts over 1 million registered users and processes more than 100,000 transactions daily.

Elsom collaborates with various financial institutions. For example, Finca Bank provides the Finca Elsom mobile app, which enables customers to conduct immediate transactions, such as domestic and international money transfers, loan repayments, deposit top-ups, and account settlements with Finca Bank.

Pay24 is another major participant in the industry. The company operates under two licenses issued by the NBRK and has been in operation since 2014. Pay24 provides access to 1,500 services for payment, with 17 partner banks processing payments through their platform. The company has 4,300 automated payment terminals and 7,000 payment acceptance points, resulting in approximately 150,000 transactions being processed daily.

Currently, over 50 fintech companies are active in the Kyrgyz market. Key segments include digital payments and remittances, lending, personal finance tools, crowdfunding platforms, and emerging areas like AI financial assistance services, open banking, and cryptocurrency services.

The Coming Fintech Future

Looking ahead, one can definitely say that Kyrgyzstan's fintech sector is poised for significant growth. All necessary components are in place, making it likely that 2024-2025 will see Kyrgyzstan become a birthplace for new fintech unicorns. However, new companies must recognize that they will face a demanding user base for financial services. To succeed, a fintech startup should combine artificial intelligence technology and other innovations, be prepared to address heightened customer expectations, and offer services predominantly through smart devices like smartphones. Customer retention will also be crucial for the success of fintech startups.