INTERVIEW: Kazakhstan plans tighter regulation of financial sector
December 15. business new europe
Clare Nuttall in Almaty
One of the big questions facing local and foreign banks in Kazakhstan is how their business will be affected by plans currently being developed to strengthen regulation of the sector. Elena Bakhmutova, chairwoman of the board at Kazakhstan’s agency for financial supervision, the AFN, discusses the plans and their expected impact on the banking industry.
The blow that the crisis dealt to Kazakhstan’s banking industry and consequently the economy as a whole caused politicians, bankers and regulators to pool their efforts to ensure a disaster on this scale doesn’t happen again. Under instructions from President Nursultan Nazarbayev, the National Bank and the AFN have been working on plans for a roadmap for the sector.
Known as the “Concept for the post-crisis development of the financial sector” (the Concept), the focus is on promoting and developing domestic sources of finance, and introducing a counter-cyclical approach to regulation. “It’s no secret that the lack of adequate instruments to identify and manage systemic risk was one of the reasons why global financial and economic imbalances have persisted until today,” says Bakhmutova. “A key element in reforming the financial sector, both on a global and a national scale, is the development of a macro-prudential approach, and ensuring macro-stability through the introduction and strengthening of mechanisms for dealing with systemic risk.”
Financial services regulation in Kazakhstan is generally consistent with global standards. However, those standards are now being reassessed in the light of the crisis. “The global financial and economic crisis has demonstrated the shortcomings of financial models, both globally and nationally,” says Bakhmutova.
The AFN has been working to improve regulation of the sector. It has already introduced several new measures, including a mechanism for rapid recovery of troubled banks, early intervention measures that could be taken in the case of systematic deterioration of a bank’s financial condition, and higher requirements for banks’ minimum authorised capital.
Bakhmutova believes that in future domestic deposits, rather than international loans, should be the main source of banks’ funding. “To achieve this goal, we will take all necessary measures, including raising the confidence of the population and the business community in the banking sector, by strengthening the financial stability of banks, improving the deposit guarantee system, and improving financial literacy,” she says.
According to Bakhmutova, Kazakhstan’s banks have already become more conservative of their own accord. She notes that banks are more carefully assessing risks, and focusing on internal processes rather than pursuing aggressive growth. Nonetheless, tighter supervision by the AFN is planned. The new Concept is likely to see the introduction of counter-cyclical requirements for capital adequacy, and various measures to reduce risk. For example, if a bank is exposed to high levels of risk, the regulator would have the right to demand higher requirements for individual capital adequacy or higher level of provisioning. It would also take necessary measures to discourage the growth of off-balance sheet commitments, and to reduce excessive levels of borrowing by banks. Regulation of risks associated with structured products will be strengthened significantly, and mechanisms to limit hedging transactions in foreign markets will be introduced.
The Concept is also designed to protect the rights of investors and consumers by improving the quality of corporate governance and transparency of financial institutions, improving risk management, internal controls and corporate governance in financial institutions.
A controversial issue surrounding the Concept is whether measures to restrict foreign ownership in the banking sector will be introduced. As of October 1, 2009, Kazakhstan had 19 banks with some level of foreign ownership. The authorities have not turned against the idea of more; recently the governments of Kazakhstan and Abu Dhabi signed an agreement on the establishment of an Islamic bank in Kazakhstan. “Currently, there are no restrictions on the share of foreign capital in the banking sector,” says Bakhmutova, but adds that, “under the draft Concept for the development of the financial sector in Kazakhstan in the post crisis period, should competition in the financial sector increase, steps to limit foreign participation in the sector may be considered if necessary.”
However, as the economy recovers, the state will gradually reduce its role in the banking sector. “The state will create all the conditions for the recovery of the financial sector, which in turn will act as a driving force for the further development of the economy as a whole,” Bakhmutova explains. “As the recovery progresses, the role of direct government interference will decline, gradually giving way to private initiative.”
Banks will remain important to the development of the economy, and will retain one of their main functions – to stimulate the economy. However, Bakhmutova believes their role will change. In particular, she anticipates banks will reorient themselves away from the real estate and construction sectors to lending to consumers and small and medium-sized enterprises (SMEs). “We expect the share of SME and consumer loans among banks’ credit portfolios to double at least,” she says.
Meanwhile, Kazakhstan is looking to the end of the crisis, though Bakhmutova says it is still too early to say when the country will emerge from it. “In the macroeconomic sense, Kazakhstan is a small economy, which is exposed to external shocks because of its openness,” she says. “In this regard, a strong banking sector also depends on many factors, including the stabilisation of the situation on world markets. So it is premature to talk about any specific dates at this time.”