Stabilizing Kazakhstan's Banks: Clear Rules and Tighter Regulations Needed

Reforms are needed to increase the resilience of Kazakhstan’s banking system. Photo: ADB
Reforms are needed to increase the resilience of Kazakhstan’s banking system. Photo: ADB

By Mirzo Iskandar Gulamov, Aliya Tlegenova

Kazakhstan's banking sector has seen extensive state support, leading to increased fiscal costs and a growing dependency on public funds, with key performance metrics showing a decline. To address these challenges, rules governing state support to commercial banks need to be clarified and banking regulations tightened.

In Kazakhstan, over the past decade, the practice of extensive state support to the banking sector has become the norm, following the banking crises of 2008-2009. Over time, this has involved larger amounts of public funds mobilized and employed using more intricate mechanisms.

The government made at least 24 fiscal interventions between 2009 and 2023, including both conventional bailout assistance targeted at specific banks, and more unconventional support measures (such as compensations of exchange rate loss to depositors, refinancing mortgage loans, and writing-off consumer debts).

These interventions incurred a substantial fiscal cost, estimated at KZT 7.9 trillion or USD 27.3 billion. To put it in perspective, in 2017 alone bailout expenditures reached 7.2% of the GDP or 44% of government revenues of the respective year. Yet, it is difficult to conclude that the amount spent helped to achieve the desired outcomes. In addition, the government has been deploying opaque and non-market mechanisms of bank support, such as acquisition of non-performing assets at inflated prices (often more than 10-15 times higher than the fair market value).

Other questionable mechanisms of bailouts include provision of deposits at preferential terms and subordinated bond issuance through designated and non-transparent state entities, but also the National Fund, Samruk Kazyna, and the National Bank of Kazakhstan. Some of the examples include KZT 625 billion stabilization loan to Kazkommertsbank in 2017 and purchase of NPLs from Tsesna Bank in 2018-2019 for the total amount of KZT 1,054 billion.

These bailouts were coupled with an increasing engagement of commercial banks in state business support programs and mortgage lending programs that provide banks access to highly subsidized resources without commensurate improvements in risk management practices.

In 2021 alone, public credit to the economy is estimated at KZT 6.2 trillion. Furthermore, between 2010 and 2022, the volume of subsidies paid to the private sector to support entrepreneurs amounted to KZT 533.2 billion.

Despite numerous programs aimed at supporting SMEs, the sector that comprises 99.9% of all registered entities in the country is still in need of financing.  Kazakhstan remains at the bottom of among 48 economies that participated in the OECD Financing SMEs and Entrepreneurs Scoreboard, when it comes to SME loans as a share of total business loans (32%) despite all the efforts channeled through the state programs.

Credit provided to the economy by second-tier banks in Kazakhstan has dropped from 35% in 2011 to 23% in 2021. The share of corporate lending in the total bank loan portfolio fell from 58% to 17% in the similar period. And while SME lending stagnated throughout the period, the share of SME non-performing loans has increased. Finally, government subsidies and guarantees are of limited coverage – only 0.5% of the operating MSMEs are receiving state support in the framework of different programs.  



As a result,  the banking sector in Kazakhstan has grown increasingly dependent on continuous and systematic state support, and the development of the sector that the government had intended to secure has slowed down, across nearly all key performance metrics. Some of the serious weaknesses of Kazakhstan’s banking sector remain: poor risk management, disproportionate growth of retail lending, lack of creditworthy borrowers, and slow savings mobilization.

At the same time, issues related to banking sector consolidation and the increasing concentration of politically exposed persons in bank ownership structure are becoming more pronounced. While the total number of banks decreased from 37 in 2009 to 21 in 2022, bank ownership by politically exposed persons has increased threefold.

To address the situation, the authorities may consider the following actions:

Set clear rules. Rules on the provision of public support to banks need to be outlined to minimize the potential costs and prevent future bank distress that would require further public funds allocation. The rules must ensure that the main principles of bailout provision, such as protection of healthy competition in the banking sector, reducing the risk of moral hazard realization, and, most importantly, preserving financial system stability, are safeguarded. The best international experience suggests targeted state support for commercial banks, sanctioned only in cases of distress of viable and systemically important institutions when the financial system stability is at risk. Furthermore, shareholder funds should be primarily and fully utilized before turning to public funds to minimize the risks of moral hazard.

In this regard, legislative amendments initiated by the Agency for Regulation and Development of Financial Markets in banning any form of state intervention on non-market mechanisms to support bank stability promise a positive forward-looking scenario. These well-intended changes are expected to minimize state involvement in the sector and move the responsibility for resolving bank instabilities to the shareholders and at their expense.

Tighten the regulations. Issues related to moral hazard are most effectively resolved by adequate prudential supervision and regulation. The Agency for Regulation and Development of Financial Markets will need to prioritize addressing and managing liquidity and capital requirement risks well in advance of the crisis using clear and predictable action plans.

Expansion of the scope of banking regulation to address reporting gaps and definitional issues might also be necessary. Bold actions will be required to enhance monitoring and containment of risk exposures related to conflict-of-interest situations.  The risks associated with politically exposed person bank ownership must be adequately addressed by introducing the legal framework and the necessary procedures for defining and approaching the politically-related risks in the financial sector. Addressing structural governance issues will also lower the barriers to entry for private and foreign capital that remains crucial for increased competition and effectiveness of the banking sector.

Wind down subsidies. Business support programs with funding through second-tier banks need to become more targeted, shifting from interest rate subsidies to guarantees. This would alleviate credit risks for banks and not distort market interest rates at the same time, stimulating healthy competition.

Taking these actions will strengthen the banking system, establish the necessary institutional mechanisms to resolve banking problems while supporting banks’ risk-taking and SME’s access to finance.