Kyrgyz President Kurmanbek Bakiyev signed the law into this effect on 14 May. All Kyrgyz banks need to participate in the deposit protection system. The law ensures compensation worth KGS20,000 ($500) per deposit in case of the insolvency of a bank. This also includes interest on deposit.

The National Bank of Kyrgyzstan, a central bank, earlier said that this would be enough to cover over 80% of current deposits held by individuals. However, this would not be enough to attract deposits with larger sums and the new system may fail to raise the population’s confidence in commercial banks.

According to the Kyrgyz presidential administration, people are still holding KGS23.5bn ($645.6m) out of the country’s banking system and this is about 3.8 times more than the total volume of deposits opened by individuals.

Deposits decreased from KGS6.16bn ($168.9m) to KGS4.44bn ($122m) between September 2007 and February 2008, according to National Bank figures. Deposits in banks accounted for only 13.8% of GDP in 2007.

The Kyrgyz population’s low trust in commercial banks is explained by frequent insolvencies Kyrgyz banks face. Another factor is that interest rates on deposits are lower than inflation and, therefore, not attractive at all.

However, first compensations for deposits lost in case of a bank’s insolvency will be paid off only in two years – this is the time required for commercial banks and the government to stock up the fund for the protection of deposits. This fund will be only 15% of the total amount of secured deposits. Taking into account the level of economic development, poverty and the state of the banking system in Kyrgyzstan, we believe that the law will not boost the deposit base of the country’s commercial banks.