MODERNIZATION OF THE BANKING SYSTEM OF KAZAKHSTAN:

PROBLEMS AND SOLUTIONS

I.V. Poryadina, candidate of economical science,

docent, the Eurasian Institute of Humanities

Astana, Kazakhstan

The banking sector of Kazakhstan on dynamics of the development is far ahead both growth rates of gross domestic product and the most successful non-primary branches of the country. Involving external financing, banks along with the oil companies are the main suppliers of currency means to the republic, making essential impact on the national currency rate fixing. Banks are also the main players in stock market of the republic, providing the main turn of means and being main suppliers of financial instruments.

Modernization of the banking sector can be characterized by the following factors:

- reduction of growth rates of a banking system;

- reduction of crediting volumes of the corporate sector;

- reorientation of the banking sector to delivery of the short-term credits;

- strengthening the financial control of the bank activity by the National bank of Kazakhstan;

- an inverse relationship between overall performance of banks and their sizes.

The banking system is the most dynamically developing sector of Kazakhstani economy. On level of penetration into economy (about 90 % of gross domestic product) it is comparable to indicators of the European Union countries [1]. Thus the external funding is one of the main factors of growth of a banking system of Kazakhstan. The emergence of global crisis of liquidity became unexpected for the banking system of the republic. The consequences of restriction of access to the international capital markets could be rather serious, considering a big share of a foreign funding in the formation of liabilities. It can be noted that as a whole the banking system of Kazakhstan has managed to cope with the main negative consequences of the global crisis. Quality indicators (sufficiency of the capital and liquidity) of a banking system, taking into account the situation in the international capital markets are sufficient to meet payments on existing debt. However, the available internal resources are insufficient to ensuring observed growth rates. At present, the need to maintain a high level of liquidity for payments of short-term loans against narrow domestic market, especially in the conditions of the international crisis of liquidity, leads to reduction of growth rates of a banking system. A number of banks in this regard substantially reduced the loan programs in order to consolidate means for the forthcoming payments. There is a reorientation of banks to the short-term credits that is connected with the need of providing a fast turn of assets and liquidity maintenance for payments on external loans. In Kazakhstan, against the reduction of corporate sector crediting, the growth of retail crediting volumes proceeds. Thus in structure of a retail portfolio volumes of consumer crediting increase at simultaneous reduction of mortgage loans that has already led to decrease in demand in the construction market and to sharp reduction of real estate prices. The share of overdue loan in total loan portfolio is not critical yet, but can become one of the factors of instability in medium-term prospect. Stagnation in the construction sector, connected with decrease in volumes of mortgage lending, worsens bank assets in connection with a high involvement of banks into crediting of construction companies. In long-term prospect political risks remain high that is connected with absence of power continuity experience in the country. Opacity level is still high (especially at the largest banks), however, positive shifts regarding disclosure of final owners in a segment of large and average banks are observed.

Cancellation of the restrictions for nonresidents to enter the capital of domestic banks allows to сredict the increase in a share of the foreign capital in financial sector. Efficiency of bank activity remains rather high. At an average value of ROA (in annual expression) 2.4 % inverse relationship between the size of bank and indicators of efficiency of activity is observed. Rather high level of financial supervision is a consequence of the thought-over reforms in the banking sector, and also rather small amount of financial institutions. At the same time, prevalence of corporate interests in bank community and low efficiency of interaction of commercial banks and a regulator can slow down the development of a banking system in the long term.

At the moment in the banking sector of the Republic of Kazakhstan there are two state banks activity of which is regulated by special law acts and is highly specialized - Development bank of Kazakhstan and Bank of housing savings.

JSC “Bank Razvitiya Kazakhstana” (Development bank of Kazakhstan) is the bank focused on financing the undeveloped sectors of economy which are not connected with the use mineral resources, for example agriculture |2].

The areas of investment defined by a bank as priority (agriculture, industry development etc.), are inevitably interfaced to high credit risks especially in long-term investment prospect. High credit risks will cause deterioration of a loan portfolio as regarding the classification the bank submits to rigid requirements of Situation about classification of assets. Most likely, management doesn't want to assume responsibility for portfolio deterioration, receiving necessary profitability in the interbank market and investments into securities. Such strategy allows to avoid responsibility for losses from credit activity, but, unfortunately, nullifies mission of a bank.

JSC ”Zhilstroysberbank” (Bank of housing saving) was created as the specialized credit institution which is engaged in implementation of the mortgage lending program for the population. The German model of system of housing savings was taken as a basis of bank development - long-term crediting on favorable interest rates under condition of preliminary accumulation on customer savings accounts of a half from the sum necessary for purchase, modernization or repair of housing [3]. The minimum term of accumulation of a contribution makes 3 years, terms of financing of using a housing loan from 6 to 15 years depending on accumulation term. Today percent on deposits makes from 2 % per annum, according to loans from 3,5 % per annum. The given-out loans make 39 % of cumulative assets. In liabilities, own capital - 53 % and deposits of individuals - 43 % prevail. Despite a strong support from the Government the state banks in Kazakhstan don't make the essential competition to the commercial banks. Moreover, while they don't justify the purpose of the creation. The reality of the Kazakhstan market doesn't allow to realize mission of the state banks fully.

Decrease in rates of inflow of the foreign capital led to small decrease in a cumulative loan portfolio. There is a reorientation of banks to the short-term credits that is connected with need of providing a fast turn of assets and liquidity maintenance for consolidation of means for payments on external loans. In Kazakhstan, against reduction of corporate sector crediting, growth of retail crediting volumes proceeds. Thus volumes of consumer crediting grow in the structure of retail crediting at mortgage reduction that has already led to decrease in demand in the construction market and to sharp reduction of real estate prices. Outside of Kazakhstan decrease in rate of cross-border expansion due to the lack of excess liquidity is expected. In this connection, the most important condition of further development of a banking system is development and acceptance by banks of new strategic ways of the development considering changed market condition. Change of an extensive way of development into intensive (quality improvement development), increase of demand for bank services from small and medium business can become one of options of new strategy, among other.

It is obvious that instability in the world financial markets and the lack of access to a cheap foreign funding won't allow to provide so fast growth rates of a financial system. Now the Kazakhstan banks in the majority are inclined to return rather the money taken abroad than to refinance them under much big percent.

Absence of inflow of money and increase of rates on the given-out credits in the domestic market affected retail and mortgage lending. Besides, reduction of demand for housing as a result of decrease in activity of banks in the mortgage market put the construction branch of the country in severe conditions.

The market of retail crediting of Kazakhstan has got a powerful impulse of development after the growth in a corporate segment has been stabilized and the growth of the monetary income allowed the population to use more actively such financial instrument as retail crediting. Due to this fact the Kazakhstan banks joined the dynamic competitive fight for clients. A number of banks declared the retail direction as a leading or as one of the main in the strategy of development. Staking on retail such banks as JSC “Alliance Bank” and JSC “Temirbank “ achieved substantial successes in building of the economic potential.

In the conditions of vital inflow of foreign money (before world crisis of liquidity) banks faced need of its investing. Retail with its rather high profitability and rather low level of development was an ideal segment of an investment that explains high rates of its development. At the same time with reduction of inflow of money from abroad mortgage programs of the banks in the third quarter of 2007 were essentially cut down.

In September 2007 the reduction of a cumulative loan portfolio on 11,9 billion tenge was registered for the first time. And the reduction of corporate sector crediting volume made 13,6 billion tenge at growth of the retail - on 1.7 billion tenge. This fact illustrates that banks are forcedly reoriented on short-term retail crediting for providing necessary cash flows for payments on the loans which expiring term comes.

Thus, considering retail crediting it should be noted that the volume of mortgage loans within September was reduced to 10,5 billion tenge (to 670,9 billion tenge) taking into account that the credits for the consumer purposes of the citizens increased to 14,8 billion tenge (to 1 246,1 billion tenge).

In the banking sector active development of services within consumer crediting is observed. Among the retail products are car loans, loans for the purchase of durable goods and unsecured consumer loans to microcredit.

The main reason of such increase in demand is improvement of welfare of the population and the absolute growth in the population of the country. The essential factor increasing credit risks of a banking system is the growth in the share of unsecured lending. Currently this type of loan is very popular among customers. Simplicity of receiving the credit and the minimum list of the documents lead to the fact that loans are given virtually no restrictions to any person who has a stable income. In the short to medium-term delivery of similar loans will lead to the growth of reserves size (according to the Kazakhstani «Rules of classification of assets, conditional obligations and creation of provisions (reserves) against them, charging them to the category of doubtful and hopeless», formation of reserves for unsecured loan is necessary even at timely payment of the credit) which affects profitability indicators. In the long term, increases the potential risk of massive defaults of loans as a result of a possible sharp decline in revenues from oil exports and declining real wages.

The increase in mortgage loans which have been given out to the population at the high prices for residential real estate (about 3500 US dollars in Almaty for the beginning of August 2011г.) puts in dependence quality of mortgaging base of bank from possible cyclic fluctuation in prices of real estate. Besides the large volume of the mortgage loans which has been given out at the moment of a favorable environment (growth of economy and the located income of the population) increases the dependence of a bank from external adverse factors connected with possibility of falling prices on the collateral that the realization of a negative scenario can cause problems with repayment of mortgage loans.

The main risks connected with development of these products are the liquidity risk and credit risk. In the first case, a large concern is the growing urgency of crediting. None of the banks in Kazakhstan today has corresponding terms of funding as mortgage loans stand out now till 30 years.

Risks of refinancing of the taken obligations increase on considerable terms of the given-out mortgage loans, as term resources raised by the bank is much shorter. Taking into account that now the foreign markets become the main source of funding the growth of bank, its dependence on a world financial environment increases and is seen first of all in need of refinancing of the taken loans from abroad as the sizes of the domestic market of resources are insufficient. In terms of credit risk in the event of a large fall in the value of real estate there are risks of falling collateral value of mortgage loans.

Thus, strengthening of the state control by acquired participation in problem banks, on the one hand is connected with the maintenance of stability of the banking system of the country, and on the other hand, can negatively affect the competition in the banking sector.

Literature

1. The report of rating agency JSC “KzRating” 2007-2011.

2. Financial report of JSC “Bank Razvitiya Kazakhstana”.

3. Financial report of JSC “ Zhilstroysberbank”.