Kazakhstan’s Banking Sector in Need of Regulatory Overhaul Amid Growing State Dependence
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Kazakhstan’s banking sector has become increasingly reliant on state support, with extensive interventions over the past decade leading to a decline in key performance metrics. The government must clarify rules governing state support and tighten regulations to address the sector’s structural weaknesses.
Fiscal Interventions: A Significant Cost with Unclear Outcomes
Between 2009 and 2023, the government made at least 24 fiscal interventions, including conventional bailouts and unconventional measures such as refinancing mortgage loans and writing-off consumer debts. These interventions have incurred a substantial fiscal cost of KZT 7.9 trillion (USD 27.3 billion), with bailout expenditures reaching 7.2% of GDP in 2017.
The Growing Dependence on Public Funds
Despite the significant sums spent, the desired outcomes are unclear. The government has employed opaque mechanisms, including the acquisition of non-performing assets at inflated prices and provision of deposits at preferential terms. These practices have contributed to a growing dependency on public funds, with commercial banks increasingly engaged in state business support programs and mortgage lending.
Concerning Sector Performance
The sector’s performance is concerning, with credit provided to the economy by second-tier banks dropping from 35% in 2011 to 23% in 2021. The share of corporate lending has fallen, while SME non-performing loans have increased. The government’s subsidies and guarantees are limited, covering only 0.5% of operating micro, small, and medium-sized enterprises.
Key Challenges Facing the Banking Sector
The banking sector is plagued by:
- Poor risk management
- Disproportionate retail lending growth
- Lack of creditworthy borrowers
- Slow savings mobilization
- Issues related to consolidation and concentration of ownership by politically exposed persons
Recommendations for Reform
To address these challenges, the authorities must:
- Set clear rules on state support provision, ensuring competition protection, moral hazard reduction, and financial system stability preservation
- Prioritize addressing liquidity and capital requirement risks
- Expand reporting requirements
- Contain risk exposures related to conflict-of-interest situations
The government should also:
- Wind down subsidies and shift focus to targeted guarantees
- Alleviate credit risks for banks while promoting healthy competition
By implementing these reforms, the banking system will be strengthened, structural governance issues will be resolved, and SMEs’ access to finance will be improved.