Sembieva Lyazzat Myktybekovna

Higher Doctorate of Economic sciences

Professor of Eurasian National University named after Gumilev

Republic of Kazakhstan, Astana City

INFRASTRUCTURE OF THE KAZAKHSTAN BANKING SECTOR,

A NEED OF ITS REFORMING

The banking sector in practice is a mirror image of the situation in the economy. In recent months Kazakhstan shows good results and an increase which is primarily related to the export-oriented sectors of the economy.

As a rule, the development of Kazakhstan’s banking system can be divided into several phases. Each phase is identified by its own characteristic features appropriate to a particular period of historical development of the Republic of Kazakhstan (Table 1).

Table 1. Stages of Kazakhstan banking system development

Period	Characteristic
1988	Creating on unit basis first co-operative banks, which later laid the foundation for development of market relations in the banking sphere. Public sector banks were reorganized, the institutional bases of banking were set up, and the first commercial banks appeared
1990	The Supreme Council of the Kazakh Soviet Socialist Republic adopted the law "On banks and banking activities in the Kazakh SSR", which laid the legal foundation for renovation of the Kazakhstan banking system
1993-1995	The introduction of the national currency of the RK. The National Bank began the regulation of the banking by modern market methods. The program of reform of the banking system focused on several stages. The negative value of real interest rates and rapid collapse of the ruble. This paved the way for the formation of numerous fly-by-night banks, profiting from short-term speculation. Gradual transition of the National Bank to fulfillment of functions of the central bank, extensive shaping and development of commercial banks. Introduction of the national currency of the RK. The National Bank began to regulate banking activities with up-to-date market methods. Approval of the program of banking system renovation focused on several steps
1996-1998	Consolidation of banking capital, increase the capitalization rate of commercial banks. Aligning banks to the international standards. Formation of the register system. Personnel retraining to meet the international standards requirements. Decline in the share of foreign capital in the banking sector, as well as reducing the state share in banking capital. Reduction of number of financially unstable banks
1999-2003	A new relationship between the National Bank and the Kazakhstan Government. Use of classical monetary-credit instruments, control of loan volumes, interest rates, reserve requirements, short-term government securities
2004-2007	Establishment of the Agency on Regulation and Supervision of Financial Market and Financial Institutions. Part of the oversight functions of the National Bank delegated to the Agency. Deepening of monetary-credit management, in particular, NBK in its current monetary policy begun to use the method of control of inflation - inflation targeting, the meaning of which is to anticipate and manage the level of inflation in the financial market
2007-2010	This stage is characterized by the integration of Kazakhstan's economy in the world economy. Crude orientation of the economy, resulting in high dependence on world prices for raw materials produced in the country, excess of free cash and lack of sufficient opportunities for its investment, especially from the underdeveloped stock market in the country, and as a result a speculative atmosphere in the property market lead to high growth of prices in this market and its overheating in the end. The aggressive lending policies of most commercial banks are the reason for the high external debt of the country in a relatively short period of time. The result is a crisis in the financial sector
2010 -present time	This stage is characterized by a poor level of reserve funds and low-capitalization of Kazakhstan banks, as well as complexity of access to wholesale capital markets. This is despite the fact that the economy is showing signs of improvement, Moody's Investors Service predicts GDP growth in Kazakhstan on 2.8% this year, compared with 1.2% in 2009 but Kazakhstan's banking system remains weak. A policy of post-crisis development and updating of the national banking system is carried out

The assets of the banking sector over the past five years grew for more than 10 times, the owned capital by 11 times and economic crediting by 10 times.

If we consider the competitiveness of the banking sector on a global scale, it is determined by the presence of the bank’s competitive strategy:

- the image of long-term action in the struggle with competitors;

- improving the quality of services;

- reduction of costs;

- retention and expansion of a certain segment on the financial market;

- development of own infrastructure;

- increase in the capitalization and reducing the cost of basic services provided.

Thus, the presence of competitive advantages (both absolute and relative) at the banks contributes to financial stability in the country, which in turn initiates the growth of macroeconomic indicators. It needs to emphasize that the competitiveness of the banking sector strongly affects the stability of the banking law, not to mention its quality. Analysis of the current state of the Kazakhstan banking system shows that there is a problem faced by our banking system, this is an over-reliance on external funding on the one hand and the deterioration of asset quality on the other side.

As of the beginning of 2011 in the Kazakhstan banking sector operated 39 banks, 20 of which with foreign content and 29 representative offices of foreign banks. From the position of the foreign currency legislation, in connection with the liberalization of the exchange regulations, currently there are no restrictions on foreign investment inflow, except notification or registration records. There are no restrictions of normative legal character for foreign banks to enter the Kazakhstan market.

Trend of asset quality deterioration becomes one of the main problems of the Kazakhstan banking system. Analysis of total assets is presented in Table 2.

Table 2. Total assets of the banking sector billion tenge

Indicator Title	2009	2010	2011
Cash, refined precious metals and correspondent accounts	1 073,50	903,2	869,6
Deposits placed in other banks	1 065,50	855,4	886,8
Securities	1 641,90	2 305,10	2 393,40
Bank loans and "reverse REPO"	9 839, 5	8 974,30	9 082,70
Investment in capital	351,9	374,3	376,4
Reserves (provisions)	-4 082,5	-3 245,2	-3 251,20
Other assets	1 609, 0	1 781,90	1 785,70
Total Assets	11 558,80	11 948,90	12 143,40
Comments - Compiled as per data from Kazakhstan National Bank annual reports

According to Table 2, at the beginning of 2011 the assets of commercial banks increased on 584.6 billion tenge or on 5.05% and equal to 12,143,40 billion tenge. Bank loans and operations "reverse REPO" increased on 756, 8 billion or on 0.2%, and account for 9,082,70 billion tenge. Reserves (provisions) decreased on 831,3 billion tenge or on 1.5%.

The largest share in the asset structure is the article "Bank loans and operations" reverse REPO". The share is on average 72%. The lowest share is the article "Investing in the capital". The share is on average equal to 2.75%. Liabilities of the banking sector, as compared to the previous year, increased on 2,703 billion tenge and account for 10,698 billion tenge. Owned capital in 2007 was 880 billion tenge, today it has increased on 350 billion tenge and is respectively 1,230 billion tenge.

Depositors' confidence in the banking system increases, which indicates to an increase in deposits on 2,041 up to 6,756 billion tenge. Return on assets (ROA) increased on 11,3%. The greatest increase in this index occurred in 2011, which indicates an improvement in the economic situation in the country.

For many Kazakhstan banks question on how to optimize the portfolio liabilities is current. This is due to radical changes in the resource base of banks in general, changes in the value of each type of resources and increase of competition between the banks. Analysis of the structure of total liabilities of the banking sector is presented in Table 3.

Table 3. Structure of total liabilities

Title	2009		2010		2011
	billion tenge	% to total	billion tenge	% to total	billion tenge	% to total
Inter-bank deposits	231,5	1,8	222,6	2,1	184,9	1,7
Loans from banks and other institutions engaged in certain types of banking operations	1271,8	10,1	509,9	4,8	515,9	4,8
Loans from the Government of the RK	47,9	0,4	56,1	0,5	58,8	0,5
Loans from international financial organizations	101,2	0,8	72,4	0,7	72,5	0,7
Deposits of legal entities	4054,1	32,1	4604,7	43	4662,7	43
Deposits from individuals	1850,4	14,7	2 197,40	20,5	2 303,70	21,3
Deposits of subsidiaries of special purpose	1983	15,7	25,3	0,2	25,1	0,2
Released for circulation securities	1263,6	10	1492	13,9	1 607,70	14,8
“REPO” operations with securities	509,6	4	574,7	5,4	572,2	5,3
Other commitments	1320,2	10,4	961,3	9	835,7	7,7
Total	12633,3	100	10716,4	100	10839,2	100
Comments: Compiled as per data of RoK Agency on Financial Supervision Report for 2010

As of the beginning of 2011, total liabilities of commercial banks decreased on1,794.1 billion or on 14.2% compared with 2009. There was an increase of deposits of legal entities on 88.3 billion or on 1.9%, deposits of individuals on 52.8 billion tenge or on 2.3%. Deposits of subsidiaries of special purpose reduced on 0.3 billion tenge or on 1.2%, loans from banks and other institutions engaged in certain types of banking transactions decreased on 32.6 billion tenge or on 6.0%.

The main imbalances liabilities of the Kazakhstan banks at present are:

- high level of inter-bank resources;

- low level of operating assets;

- low level of attracted deposits.

Credit portfolio of the banking sector is some kind of an indicator of the financial situation of the banking system. Analysis of loan portfolio of the banking sector for three years is presented in Table 4.

Table 4. The loan portfolio of the banking sector billion tenge

Indicator Title	Main debt sum, billion tenge
	2009	2010	2011	Dynamics
Standard	2524,4	6 611,00	6 690,50	4 166
Suspicious	4241,2	4 988,00	5 083,10	841,9
Bad Loans	3073,9	2 239,70	2 188,80	- 885,1
Total	9839,5	13 838,70	13 962,40	4 123

From loan portfolio quality depends on bank policy in part of placing its assets, but being the main source of bank's income the loan portfolio is the main source of risk for placing their funds. Thus, the loan portfolio of banks since the beginning of 2008 increased on 5%, but since July 2009 decreased on 9%. Major banks in Kazakhstan begins restructuring of their loan portfolios, i.e. term prolongation, revision of rates. In this way they accumulate liquidity, but not redirect it to its new lending but apply conservative credit policy.

Liquidity is stored for possible further losses and cover the formation of provisions. Market participants note that asset quality will deteriorate due to bad loans and loans which are at risk. Table 5 reflects the profitability of the banking sector in Kazakhstan for three years.

Table 5. Total indicators of the profitability of the banking sector billion tenge

Title	2009	2010	2011
Revenues related to the receipt of remuneration	944,6	775,3	165,3
The costs associated with remuneration payment	505,6	438,3	102,1
Net income attributable to the receipt of remuneration	438,9	337	63,2
Income not related to the receipt of remuneration	4026,2	2372,6	453,4
Costs not related to remuneration payment	4573.9	2700,2	530,1
Net income (loss) not associated with the receipt of remuneration	-547,6	-327,5	-76,7
Net income (loss) before income taxes payment	-108,7	9,5	-13,5
Cost on income tax payment	9,6	10	2,3
Net income after income tax payment	-118,3	-0,5	-15,8
Comments: Compiled as per data of RK Agency on Financial Supervision Report for 2010

There is the fact: the smaller bank the more net income it has. The main reason for

this is a conservative approach in lending to population by such banks or focus on their own corporate clients. Current state of the banking system structure is presented in Table 6.

Table 6. Structure of the Kazakhstan banking system

The structure of the banking system	2009	2010	2011
Number of STB	38	39	39
Banks with 100% state participation in the authorized capital	1	1	1
Number of STB branches	374	359	370
Number of STB representatives abroad	13	17	17
Number of banks representatives – non-residents of RK	32	29	29
The number of banks participating in the system of compulsory guarantee of depositors (deposits) of individuals	36	34	34
The number of banks licensed to carry out custodian activity	11	10	10
Comments: Compiled as per data of RK Agency on Financial Supervision Report for 2010

Based on the analysis of the current state of the banking system and its infrastructure at the present stage, we can make some conclusions. The worst indicators of the banking sector in Kazakhstan are the following factors:

- credit quality, including volume of credits with overdue payment exceeding 90 days (NPL);

- low levels of profitability;

- capital adequacy;

- high concentration as per loans and deposits;

- high sensitivity of the economy to the impact of external negative factors.

Banking infrastructure in Kazakhstan has certain problems, including:

- continuously changing legislation;

- desire of most bankers to get short term profits, as a consequence is the development of only one way of activity;

- a limited number of financial institutions on debt financing;

- deficiency of relationships with banks of CIS countries;

- underdevelopment of specialized credit and banking institutions.

Thus, summing up, it should be noted that the use of experience of the developed countries in the development, management and improvement of banking activities and its infrastructure will contribute to the development of the banking system and economy of the country in general, in particular increasing the role of specialized financial-credit institutions, development institutions and monitoring of banking activities. Applying this experience, in our opinion, should have a positive effect, which will help to achieve the best financial results of the banking system activity and increase the main macroeconomic indicators of the country.