USD/KZT 352.54 
EUR/KZT 415.15 
ARCHIVE
Development Banks. Projects and Problems
 
Alexander Annaev

The experience of many countries has demonstrated that market relations according to the principle of ‘laissez faire, laissez passer’ may lead to economical disproportions. So, in the conditions of increased risks, especially in the post-crisis period, business may not be interested in investments in projects that are long-term, but important for the society. These disproportions are to be eliminated by more than 750 development banks operating throughout the world.

These banks are not banks in a traditional meaning. They are rather non-for-profit financial institutions with a special status established under governments’ decisions. They may provide loans, bank guarantees or special grants for large socially important projects, as well as be engaged in analytical, advisory and educational activities.

There is a full variety of development banks represented in Kazakhstan (Table 1), as the society faces challenges that require actions from the government and international community. They include diversification and modernization of the economy highly dependent of fossil fuels exploration, economic integration with neighboring countries, overcoming the consequences of the global crisis, finding solutions to the social and environmental problems.

Development banks’ competitive environment

At first sight the presence of a relatively big amount of development banks in Kazakhstan is likely to lead to competition among them for one or another project. However, it does not happen, as each bank has defined its own role and leverages on its own approach to enhancing sustainable development. The republic’s government can largely influence decisions of Development Bank of Kazakhstan (DBK) and Eurasian Development Bank (EADB), as it possesses significant shares in their capital (100% and 23.8% accordingly). These banks were established quite recently, but have proved to be leading development financial institutions in the post-Soviet area.

DBK is owned by Samruk-Kazyna National Welfare Fund and considered the best case of a national development bank in the CIS. Having a special status in Kazakhstan’s banking system, it has approved more that 180 investment and export projects with financing for about $3.50 billion. The bank’s investment portfolio is rather diversified. The biggest shares of investments fall on electric power (21%), transport infrastructure (18%) and mining (12%). Although these industries are important for Kazakhstan’s economic development, the bank does not pay enough attention to projects that would directly contribute increasing standards of living and improving the environmental situation in the country. 

EADB was established under the initiative of Kazakhstan and Russia’s leaders in 2006 in Almaty. Its portfolio is dominated by investments in production industry (54%), transport infrastructure (17.5%) and energy (12.7%). Declared in the banks’ strategy as a priority, high technology and innovations have an insignificant share yet. EADB is an integration project in the post-Soviet area that allows the member states not only to enjoy benefits from increasing turnover of goods, but also to develop mutual approaches to such issues as water resources management, nuclear energy, and climate change. Since the bank’s current strategy is due in 2010, one could expect changes in the bank’s strategic goals taking into consideration the consequences of the global economic crisis, establishment of the Customs Union, and accession of new member states to the bank.

Asian Development Bank (ADB) is another regional development institution operating in Kazakhstan. The total amount of loans provided to the country has reached $1.07 billion since Kazakhstan joined the bank in 1994. About 41% of the investments were allocated to transport and communications, 30% - to the financial sector, 13% - to natural resources management and agriculture. The former is important for the bank in relation to poverty reduction and increasing living standards, as the majority of Kazakhstan’s low-income population reside in rural areas. The government received a loan of $34.6 million within Drinking Waters State Program (2002-2010) for the purpose of improving living conditions and public health in selected rural settlements.

Although Kazakhstan geographically belongs to Asia, the country finds itself in European economic, political and cultural environment. Therefore, there is no surprise that European Bank for Reconstruction and Development (EBRD) is actively working here. It was established in 1989 in London to provide economic support to former Socialist countries facing unprecedented challenges. Despite its noble mission, the bank’s approach is quite pragmatic – it works as an equity fund, buying shares of companies with a decent level of corporate governance and a high potential for development in strategically important industries. EBRD’s portfolio in Kazakhstan is the largest one among portfolios of the other development banks and makes up $2.97 billion. The biggest share (41%) falls on investments in financial institutions. Many of them are obliged to use received capital for providing loans to small and medium enterprises (SMEs).

A development bank can unite countries not only geographically, but also based on a religious criterion. An example of this is Islamic Development Bank (IsDB) founded in 1973 in Saudi Arabia and also represented in Kazakhstan. Although ethnic Kazakhs are formally Muslim Sunnis, the majority of the population follows secular traditions and does not obey to norms of Islamic law. Nevertheless, activities of this financial institution should be welcomed provided that the received funds are used in the country’s interests and do not assume commitments to islamification of the society. The bank has financed over 30 projects in such areas as transport infrastructure, public health and rural water supply. Like in the case of EBRD, the biggest share in the bank’s investment portfolio (31%) falls on support to SMEs though financing commercial banks.

The group of various development banks with activities in Kazakhstan is supplemented with International Bank for Reconstruction and Development (IBRD), an institution of the World Bank Group. Since 1995 the bank has provided over $2 billion to Kazakhstan for realization of 32 projects largely aimed at transport infrastructure development (85%). For the recent year the government’s demand in external financing from the West has decreased, so IBRD is more involved in analytical, advisory and educational activities. So, the bank cooperates with the Kazakhstan’s government within Joint Economic Research Program. The bank’s employees organized training for rural citizens aimed at development of entrepreneurial skills for working in non-traditional areas.

On the whole, development banks working in Kazakhstan reflect the geopolitical situation in the country. They represent interest of the global players (Russia, EU, USA, Japan, Islamic world) that finance their activities. However, their presence is useful for Kazakhstan’s economy, as, in the long run, the donors pursue the goal of minimizing risks and finding benefits of mutual cooperation with Kazakhstan. It means improvement of infrastructure, adopting good practices in state and corporate governance, development of alternative industries, and integration to the international economic environment. DBK and EABR play special roles, as the government can influence their agendas and contribute to sustainable development not only in Kazakhstan, but in Eurasia as a region.

DBK and EADB’s financial positions

Since DKB and EADB are significant elements of Kazakhstan’s banking system, the stability of the national economy depends on their financial performance. They do not pursue the goals of profit maximization (provided that they go on being financially effective) and do not form they deposit base by means of individual and corporate customers’ deposits. These factors should be taken into consideration while analyzing these institutions’ financial statements.

The recent two years are known for significant volatility on the international and national financial markets. Kazakhstan’s banking system, once setting the tone in the CIS, suffered from the global financial crisis as early as in summer 2007 due to its high dependency on external financing. In particular, such too-big-to-fail commercial banks as BTA Bank and Alliance Bank found themselves on the verge of bankruptcy and were nationalized.

The financial performance of DBK sharply worsened in 2008, but it managed to keep a relatively stable financial position. Despite the fact that the bank’s net interest and net fee and commission income showed a significant growth (Table 2), its net profit fell by 27%. It is a result of big impairment losses amounting $85.29 million that is 1332% more than it was in 2007 and makes up 35% of the operating income. The volume of loans to customers grew by 143% to $1660.3 billion. The biggest increase and amounts of the loans (351%, $676.2 million) fell on companies in agriculture, mining, metallurgy, and mineral resources, as well as transportation and warehousing. The increase in provision of loans explains the increase of liabilities by 122%. The bulk of loans were taken from OECD financial institutions and the parent company - Samruk-Kazyna National Welfare Fund.

As for EADB, its advantage over DBK is that it was established quite recently (in 2006), so that it has not had enough time to allocated the capital granted by the member states. Therefore, its risks of depreciation of assets or provisions are lower. By the end of 2008 the bank’s loans and advances to banks exceed loans to customers by 59%. EABR’s liabilities remained almost at the same level, but its shareholders’ capital was significantly increased, which demonstrated the member states’ commitment to further development of the bank. The positive picture was spoilt with net non-interest income of $12.00 million. They refer to losses on financial assets and liabilities at fair values, as well as losses on transactions in foreign currencies. For this reason EADB’s net profit remain almost the same, having increased just by 3%.

As the table 3 suggests, by the end of 2008 EADB was in a better financial position than DBK, its development partner in Kazakhstan. The bank demonstrated a high profit margin of 55.37% versus 13.63% achieved by DBK, but its assets utilization stayed at a moderate level. Both banks have a relatively low return on assets and equity as compared to leading banks in Russia and Kazakhstan. So, Sberbank Russia’s return on equity in the same year was 13.02% as compared with 2.24% in DBK and 2.65% in EADB. The two development banks enjoy a relatively low cost of liabilities, which is a result of support from the shareholders in the form of additional capital injections.

Development banks’ activities are subject to a variety of risks: credit, political, corruption risks, etc. That is why a high level of corporate governance should be their major attribute. One should pay attention to three issues related to development banks’ better performance. First, it is necessary to revise investment priorities taking into account the new realities. Infrastructure improvement is, of course, an important aspect, but it will be difficult to find a way to the country’s systematically new level development without investments in human capital. Second, efficiency criteria of banks and their investment projects are still important. Third, it is still not clear how to achieve synergy of development banks’ activities in Central Asia.

The times when Kazakhstan gets considerable income capitalizing on high prices for fossil fuels and materials may come to an end. The global economic crisis has demonstrated weaknesses of the national economy and encouraged decision makers to think about the future. Kazakhstan’s economy needs diversification, new infrastructure development, training new leaders will be able to put innovative ideas in reality. For this reason development banks are getting so important. They should not only allocate funds, but become real drivers of sustainable development and international cooperation.

 


Table of contents
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





Rambler's
Top100
Rambler's Top100

  WMC     Baurzhan   Oil_Gas_ITE   Mediasystem