Clare Nuttall in Almaty -

Tajikistan saw bank deposits grow by 20.5% in the first five months of 2012, reflecting the expanding economy and rising public confidence in the banking sector. This trend is expected to continue, but given the Tajik economy's vulnerability to external shocks, the speed with which the banking sector develops will depend on the international economy, especially events in Russia.

According to data from the National Bank of Tajikistan, corporate deposits reached TJS1.7bn ($366m) and individual deposits TJS2.6bn. This followed an increase in deposit levels of around 28% in 2011, and deposits have continued to build despite relatively low interest rates; on July 10, the central bank reduced its main refinancing rate to the five-year low of 6.8%.

According to Anton Ponosov, marketing director at Tajikistan's fifth largest bank Eskhata Bank, the main reason for the increase of deposits is higher confidence in the banks. "Many people were afraid to invest their money in banks because they were afraid of a repeat of the situation in the 1990s. Now it has been long enough for banks to prove themselves. Clients realise that by opening deposit accounts, they will receive income without the risk of losing their deposits," he tells bne.

Tajikistan's economy has also being growing steadily. GDP expanded by 7.4% in 2011, and the International Monetary Fund expects it to grow 6% in 2012. "Another important reason for the increase in deposits is the flow of remittances," says Ponosov. "Many migrants save for major ceremonies or purchases that require a lot of money, of course they are saving for months, if not years. Thus, migrant workers realise that they can safely stash their savings and additional revenue in deposit accounts with the banks."

However, Tajikistan still has a low level of banking penetration, with much of the 6.8m population keeping their savings "under the mattress", especially in rural areas. And even given the recent upward trend in the banking sector, according to the European Bank for Reconstruction and Development's "Transition Report 2011", Tajikistan's banking sector remains very fragile and financial intermediation very shallow. "This reflects continued directed lending practices and other forms of excessive state interference, which have negatively affected capitalisation and the ability of banks to lend to the real sector," the report says.

The low level of banking penetration means there is room for the country's banks to expand, but how quickly will depend largely on external factors. Moody's Investors Service says that, "Despite the challenging economic environment, opportunities are being created for local banks aided by the low level of financial intermediation in Tajikistan and low competitive pressures in the domestic banking sector."

Tajikistan is still at risk from outside shocks, especially due to its dependence on the Russian economy, Moody's warns. "Given the country's heavy dependence on remittances from Russia... the local economy and the banking sector are highly vulnerable to external shocks," Moody's analyst Lev Dorf says.