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  KAZAKHSTAN №6, 2014
 The Ballad of Poor Bankers

The Ballad of Poor Bankers

On November 7, Almaty for the first time hosted a forum on Financing Growth in Kazakhstan, which actively discussed problems of the domestic banking sector, as well as the prospects of the southern capital as a financial hub for Central Asia. The event was organized by the Kazakh-British Chamber of Commerce and the international media-holding Financial Times with support of the National Bank.

Opening the Forum, the moderator, Brian Kaplan, Editor of The Banker magazine, notes that according to his estimates, in 2014 the economic growth in Kazakhstan will be approximately 5%. In this regard, he invited the participants to consider whether the financial sector is able to ensure such a high rate, and then he handed it over to the Prime Minister of our country Karim Massimov.

It is noteworthy that the head of the government did not attend the event in person, and reported via video link. First of all, he recalled that now the republic is implementing the Kazakhstan-2050 strategy, one of the main stated purposes of which is the republic’s entry among the top 30 world developed countries. In his view, the southern capital will play a key role in the implementation of this "bold" strategy. "The government is working hard to develop Almaty as a regional financial centre, is engaged in infrastructure construction, development of human capital and improving the regulatory environment". The main task is to ensure "a more predictable path and way of investment in the region."

It turned out that the positive evaluation of the efforts of our authorities is already reflected in the Global Financial Centres Index. According to the latest data, the rating position of Almaty went 15 points up and it became the 43rd financial centre in the world in order of importance. "We are ahead of such dynamic centres as Milan, Moscow and others. We have made progress, but need to achieve even more. I want to assure you that Kazakhstan will do its utmost to ensure that Almaty continue to be the leading financial centre in the region," said Mr. Massimov.

The next speaker, Akhmetzhan Yessimov, the Akim of Almaty, also referred to the said rating clarifying that we also are ahead of Rome, Bangkok, Brussels and Prague in it. According to the head of Kazakhstan's only metropolis, this is an incentive for the further development of Almaty as a hub for international business and cooperation.

Jonathan Dunn, the Deputy Director of the Middle East and Central Asia Department of the IMF, was less optimistic in his estimates. He stressed that Kazakhstan's GDP growth over the past 10 years showed high volatility. This is due to the fact that the republic’s financial base is "very narrow", since its foreign trade is based on the raw material resources. According to Mr. Dunn, last year their share in the total exports has reached above 70%. "Narrowed export base makes the country very vulnerable to possible shocks and turmoils. In particular, it is strongly influenced by changes in oil prices."

The speaker recalled however that oil wealth has helped Kazakhstan to get the status of middle-income country; the figure has already exceeded $12,000 per capita. "The short-term economic forecast is less favourable. However, if we assume that the government will continue its policy, the medium-term prospects are good enough. An increase in growth based on the contribution of the private sector in a more diversified economy is the key to ensuring sustainable development and welfare in Kazakhstan."


Should We Expect Devaluation?

The participants in the Forum were especially looking forward to the address from Kairat Kelimbetov, the Chairman of the National Bank. In response to questions from the moderator, he recalled that in the early 2000's, Kazakhstan was proud of its banking system, but in 2007 the crisis has changed the situation negatively.

At the same time, as the head of the National Bank stated, thanks to previous financial upheavals, today we have become stronger, richer and a little smarter." And he put the entire blame for the crisis in the financial sector on bankers. "We have experienced the effects of the crisis because our banks were greedy then, they obtained loans from international banks. After the Lehman Brothers’ collapse, all this turned into big debts. We adopted the anti-crisis program. The consequences were drastic for us: Kazakhstan has spent 6% of GDP to support the banking sector. And now we make use of the lessons learned."

The head of the National Bank also drew attention to the February devaluation. And among its causes he mentioned the external factors and, above all, the growing conflict between Russia and Ukraine. "It was also clear that the development of relations between China and the European economy will slow down. It was clear that oil prices will fall. We needed to make a "security cushion" for ourselves. We had a fixed exchange regulation. In order to prepare for challenges, to prevent further risks in the three years term, we had to change over to a new structure." That is why in February the National Bank held a devaluation of tenge.

However, Mr. Kelimbetov hastened to reassure that a crash of the national currency is not expected, "When these risks that we foresaw start to materialize we are asked the question: should we expect the next devaluation? The answer: is of course not! Because our basic base has changed, and the factors that affected the forecast in February, are now under control."

The head of the National Bank encouraged not to see an analogy between the Russian and Kazakhstan's foreign exchange market because of sanctions against Russia. As a result, the Western capital markets have been partially closed for Russian companies and banks. In addition, the Russian Central Bank is firm in its decision to let the rouble float freely and to change over to inflation targeting. However, the picture in Kazakhstan differs: “We have full access to international markets. We recently released sovereign bonds. The government announced the SMEs aid programme, for which 1 trillion KZT was allocated. The country's external debt is 2.5%, and this is the lowest debt when compared with Europe. Reserves are more than $100 billion. The problem of the banking sector is not so serious. Yes, there are difficulties, but Kazakhstan is prepared for what would happen, it is ready to cope with challenges."


Second-Tier Banks Have More Than Enough Problems

However, the head of the National Bank believes that the main challenge for the financial system remains a high proportion of non-performing loans indicating a unworkable model of the banking sector. "If we have 33% of NPLs, when in Singapore or South Korea they do not exceed 1%, in such a situation it is clear which markets will attract foreign investments."

In order to solve the problem of “bad” loans, unprecedented tax preferences were provided to banks. According to Mr. Kelimbetov, they will allow most of the second-tier banks to painlessly write off non-performing loans and to start off with a clean slate. Of course, there are issues that remain open for banks, which endure the suffering and hardships of restructuring. However, he believes that the main problem is low involvement, when “not all of the population have access to financial services. Due to high prices for these services, or because of their unavailability or restrictions."

In this regard, the speaker suggested considering the way of financial market development in this situation, and where banks would go in their strategy. To this effect he gave the floor to Miklós Dietz, Managing Director of McKinsey & Company, who added some more problems to those already listed by the head of the National Bank. As Mr. Dietz has rightly noted, the Kazakhstan people have little savings, interest rates on credit are high, and the country is suffering from the dollarization of the economy.

He predicts that the banking system soon will live through a real revolution – in the next 10 years there will be more changes than in the previous 300 years. The catalyst will be introduction of advanced new technologies, which will give the country a chance to reach a new level of development. "This will allow each Kazakhstan citizen to have immediate identification with access to all services. Just by pressing a button one can pay for everything. Credits and discounts could be obtained by telephone. This will ensure control of savings, control of finance to every Kazakhstan family, will help companies to get to markets not just through funding, but have direct access to customers.”

All this, according to Mr. Dietz, will give a quick, cheap and effective way to attract capital at a low cost of financial intermediation. To illustrate his findings the representative of McKinsey & Company even showed a video painting a vivid picture of the bright future of Kazakhstan’s advanced financial sector.


Focus on Customers

Magzhan Auezov, Managing Director of Kazkommertsbank and Chairman of the Board of BTA Bank, also touched upon the main problems of the industry. Among the key current tendencies the banker above all mentioned the completion of the State’s withdrawal from the major banks capital. "The shares of BTA, Temir and Alliance were sold to private individuals. For the first time since 2009, all the major players have private shareholders."

Secondly, the government and the National Bank have solved one of the historical problems – shortage of tenge in the domestic market. “The solution was found in the integrated pension fund’s placement in the form of 5- and 10-year bonds and bank deposits, which allowed not only to use the pension system’s funds in the country's economy, but also to enhance the return of the Integrated Accumulative Pension Fund.”

The speaker believes that the 2014th year will be a turning point for the financial sector in terms of mergers and acquisitions. As an example, he cited the Kazkom and BTA merger, as well as the Halyk’s purchase of Kazakhstan’s HSBC subsidiary. "This will lead to a substantial redesign in the sector in the nearest future."

All this is happening at the time when the share of foreign banks in the domestic financial market is decreasing. Therefore it is a special challenge for local STBs in filling the vacuum that inevitably forms under those circumstances. "According to many analysts, during this year and the next one, we will face increasingly strong adverse winds. Those are declining oil prices, the pressure currently put on the rouble, and its influence on the competitiveness of domestic manufacturers and companies. It can be quite significant."

However, the key issues facing the STBs today are not how to deal with external challenges and answer for their obligations, but how the banking system would be able to maintain its customer focus. "A few years ago, lending was the main competitive tool. With solution of the key issue – access to tenge – this product will no longer be a strong competitive advantage. The main task of banks is to expand the product line and provide customers with non-credit products that will allow to develop business. Those banks, which will manage to implement this, will be able to provide a formidable degree of competitiveness.” Mr. Auezov says.


Will Common Currency Be Available?

Another speaker, Timur Suleimenov, a panel member, the Minister for Economics and Financial Policy of the Eurasian Economic Commission, in his report focused on the financial aspects of the Treaty on EEU. According to him, common financial market is, firstly, a market in which standardized or harmonized standards are applied. Secondly, mutual recognition of licenses and other permitting documents, possibility to operate without having to establish a legal entity. Thirdly, it is an effective administrative and information cooperation of regulators.

He recalled that the harmonization of legislation in the Customs Union countries is based on the international principles. Therefore investors should know that the rules of the game, which are formed in the EEU, will be very similar to those in their countries. However, no one is going to create a common bank code or general bank act. "The parties agreed to create a supranational financial regulator located in Almaty. This will happen before 2025. This is a reasonable time. If possible to have this completed earlier, then there is no reason for delay."

In addition, the Minister described number of agreements already prepared within the framework of the Customs Union. First of all, there is the financial markets requirements agreement, which prescribes the harmonization procedure, which is to make decisions on it, and what aspects should be harmonized first of all.

The second agreement is on interchange of information that he said will be signed before the end of the year. The agreement provides for interchange of not only publicly available information, but also confidential. Even now, an harmonization plan is being worked out to establish a common financial market. "When it comes to possibility to operate without establishing a legal entity, than a regulator should have full information, which is available to the parent regulation organization."

Mr. Suleimenov said that activities of brokers and dealers will be a sort of test platform for the common financial market, because "this is a less sensitive" sector. "An agreement on direct access for licensed brokers and dealers to foreign stock exchanges already exists. There is also an agreement on a common credit records bank. In addition, a common financial market development strategy is being prepared, which is aimed not to replace existing strategies of our countries, but complement them."

The Minister touched upon the question of the creation of a common currency within the CU and EEA assuring that it is not on the agenda. However, he expressed himself in favour of the need for close coordination of exchange rate policies. "In the absence of customs borders an exchange rate may be a significant factor in the competitiveness of a nation. Therefore, coordination of exchange rate policies is carried out through a specially created body, the Coordination Council on Exchange Policy. The confidence of our National Bank in respect to the designated tenge’s trading band is based on that work, on close collaboration that takes place within that body."


Focus On Big Banks

Nurlan Abdrakhmanov, the Director of the Control and Supervision Methodology Department of the National Bank, opened his speech with an overview of changes in regulation methods of the banking sector. "We wanted to introduce the effective methods Basel II and Basel III, improve the banks structure, in particular non-performing loans portfolios. We would like to improve the competitiveness of the banking system, first of all of our 10 most important banks. We will evaluate their policies and give our recommendations on their development plans."

According to him, a National Bank task is to formulate a more sustainable model of STBs development and form conditions for international integration. The regulator intends to mobilize domestic financial resources to sustain economic growth and reduce systemic risks.

The banker further recalled that, before 2019 the minimum equity requirements for banks will increase from 30 billion to 100 billion KZT. However, he assured, it does not mean that the STBs, which will not be able to achieve this level, will be liquidated or become bankrupt. "This means that the bank will not be allowed to attract retail deposits worth more than 50 billion. If the equity capital will be more than 50 billion, then no restrictions on attracting will be imposed. Eight banks already have a capital over 100 billion KZT." 

According to the speaker, after the measures are adopted 10–12 large STBs will operate in Kazakhstan. The National Bank expects that this will increase the competitiveness and financial cohesiveness of the banking sector through enhancing STBs’ skills in mobilizing users. "This will help to form the basis for the continuation of the banking activities, to support public confidence in banks. It will improve the banks competitiveness in Kazakhstan and will allow competing with 50 major banks of our neighbour Russia." the expert concluded.

Table of contents
Help for the Engineering Industry  Askarbek Makhmutov 
The Ballad of Poor Bankers   Sergey Zelepukhin 
Administrative Reform Is Needed  Askarbek Makhmutov 
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