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Financial system of Kazakhstan: from banks to microfinance organizations

In the current difficult time of reducing the number of banks in Kazakhstan, attempts to isolate the closest neighbor and largest trading partner of Kazakhstan, Russia, from the global financial system and the risks of its transformation and fragmentation, a possible decrease in confidence in international payment systems, it is worth understanding the essence of the financial system of our own country and its structure. The financial system is the accumulation of cash income and its subsequent distribution.
Financial system of Kazakhstan: from banks to microfinance organizations

The history of the financial system of independent Kazakhstan began, to a large extent, with the creation of the national currency, tenge, in 1993. In 1998, a pension reform was carried out in Kazakhstan, and in 2000, the National Fund of Kazakhstan was established to ensure stable socio-economic development and reduce dependence on adverse external factors.

National Bank of Kazakhstan

The central bank of the country is the National Bank of the Republic of Kazakhstan. The National Bank’s goal is to ensure price stability in the country. The National Bank’s tasks of are development and implementation of monetary policy, ensuring the functioning of payment systems, promoting the stability of the financial system and developing financial statistics.

With the economy transfer to a market management model, a two-tier banking system has been created in Kazakhstan: the first level is the National Bank, called so since 1993, and the second level is all other banks.

The law No. 2155 “On the National Bank of the Republic of Kazakhstan” dated March 30, 1995 is currently in force. Large organizations and subsidiaries of the National Bank include: Kazakhstani Interbank Payment Center (KIPC), which conducts interbank payments and money transfers and ensures the security of payment systems and the availability of hardware and software, Kazakhstani Mint, Banknote Factory, Kazakhstan Deposit Guarantee Fund, Central Depository securities and others.

The National Bank cooperates with the Eurasian Economic Union (EEC), the Shanghai Cooperation Organization (SCO), the European and Asian central banks, the International Monetary Fund (IMF), a specialized agency of the UN, the World Bank, the EBRD and other financial institutions, concluding loan agreements and developing market indicators.

Banking sector

The financial system of Kazakhstan is characterized by a bank-centric model: banks account for about 85% of assets of the financial system, and other sectors of the financial market form 15%. As of July 1, 2022, there are 22 second-tier banks operating in Kazakhstan, of which 13 are banks with foreign participation, including 10 subsidiary banks.

In June 2022, 1 advisory supervisory response in terms of submitting a report on the implementation of the AQR action plan and two written orders for violations of prudential standards and law norms on banks were applied to the banks with the violations detected.

Despite the write-off of about T7 trillion of problem loans, the bank loan portfolio has grown by 46% to KZT18.5 trillion, which is 22.5% of GDP. Profit of Kazakhstani banks dropped following the results of 6 months of 2022 by 46% and amounted to KZT355 billion, the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan (ARDFM) reported. As of July 1, 2022, return on banking assets (ROA) decreased by 0.5% to 2.7%, return on equity (ROE) fell by 4% to 21.9%.

Apparently, the banking system is beginning to shrink along with the Kazakhstani economy. Bank liabilities as of March-May decreased by 3.4%, or by KZT1.1 trillion to KZT32.4 trillion, the capital of second-tier banks of the Republic of Kazakhstan as of June 1, increased by 1% or KZT46 billion to T4.7 trillion, compared to March 1, 2022.

Kazakhstan experienced severe economic shocks in the early 1990s, but by the early 2000s, economic recovery began and the annual growth of gross domestic product (GDP) at that time reached 7%. Compared to the Central Asian post-Soviet countries, Kazakhstan had a fairly high level of GDP per capita, which in 2010 was $12,800 per person.

Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market (ARDFM) has twice been separated from the structure of the National Bank specifically for the financial market regulation.

ARDFM supervises the activities of second-tier banks and their affiliates, JSC Development Bank of Kazakhstan, banking conglomerates, mortgage organizations, the subsidiaries of the national managing holding in the field of agro-industrial complex, the national postal operator, credit bureaus, provisional administrations and bank liquidation committees by focusing oversight resources in most risky areas.

The state assets of Kazakhstan are concentrated in the state holding Samruk-Kazyna, which supports banks if necessary by buying back stakes in these banks or by creating subsidiaries such as the Distressed Assets Fund.

ARDFM consumer rights protection was mainly associated with the consideration by the agency of borrowers' applications for assistance and reduction of their debt burden.

Insurance sector of Kazakhstani financial system

As of July 1, 2022, the insurance sector of Kazakhstan is represented by 27 insurance organizations, 9 of which are life insurance companies. The assets of insurance (reinsurance) organizations grew, mainly as a result of an increase in income from insurance activities and a positive revaluation of the value of foreign exchange assets, by 7.7% since the beginning of 2022 and amounted to 1.97 trillion tenge. Over the past five years, the assets of insurers have doubled to KZT1.8 trillion and reached 2.3% of GDP, which is associated with an increase in insurance premiums.

In June 2022, 2 advisory supervisory response measures were applied to insurers, 3 consents for the election of an executive employee and 1 refusal to issue consent to acquire the status of an insurance holding company were issued, 1 license in the general insurance industry was reissued.

Kazakhstan securities market

The securities market is a range of economic relations associated with the issuance and circulation of securities. In the Kazakhstani stock market, capitalization is KZT44.2 trillion or 53.8% in relation to GDP, having increased by 70% over the past five years. In the capitalization structure, stocks form 65% and bonds - 35%.

The ARDFM provides the state regulation of the securities.

Microfinance sector

The regulation of microfinance sector began later than other sectors. It is playing an increasing role in the financing of small and medium-sized businesses (SMEs).

Due to inclusion of all credit institutions in the regulation perimeter, the volume of microloans has increased by more than 4.5 times to KZT1.4 trillion since 2019. In the structure of microcredits, 49% are loans to businesses and individual entrepreneurs. As of January 2022, the volume of microlending amounted to 743 billion tenge.

The reform of the microfinance sector has become a priority for the ARDFM since 2020. All microcredit companies: pawnshops, online lending companies and credit partnerships, were included in the perimeter of the agency's regulation.

The work of credit partnerships is actively developing in the villages. The total number of agricultural producers involved in the credit cooperation system is more than 23,000. Credit partnerships are financed by contributions from participants and within the framework of state business development programs through the Agrarian Credit Corporation. The funds received are redistributed in the form of credits for participants.

Microfinance organizations do not accept deposits from individuals and do not have their own funding base. Loans are financed by shareholders' funds in the form of equity and funds borrowed from banks, stock market or international financial organizations. The cost of funding is much higher than the one in banking.

In order to attract additional funding, MFO access to the stock market and the procedures for opening accounts and registering in the KASE and central depository systems are being simplified.

For the 1st HY 2021, according to the National Bank, the Kazakhstani microfinance organizations (MFOs) have received 43.5 billion tenge of net profit, credit partnerships - 9.5 billion tenge of net profit, pawnshops of the Republic of Kazakhstan - 19 billion tenge of net profit.


Photos are from open sources.

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