Kazakhstan’s Banking Sector Struggles Under Weight of State Support

Kazakhstan’s banking sector has been heavily reliant on state support over the past decade, with the government providing at least 24 fiscal interventions between 2009 and 2023. Despite this support, the measures have incurred a substantial fiscal cost, estimated at KZT 7.9 trillion or USD 27.3 billion, but failed to achieve the desired outcomes.

Consequences of State Support

The extensive state support has led to a decline in key performance metrics for the banking sector, including:

Credit provision to the economy: dropped from 35% in 2011 to 23% in 2021
Corporate lending: fallen significantly
SME lending: stagnated
Non-performing loans: increased

Concerns about State Interventions

The government’s support measures have included unconventional mechanisms such as:

Acquiring non-performing assets at inflated prices
Providing deposits at preferential terms

These practices have raised concerns about moral hazard and the lack of transparency in state interventions.

Regulatory Reforms Needed

To address these challenges, regulators are urging the need for:

Clearer rules on public support to banks
Tighter regulations
A wind-down of subsidies

The Agency for Regulation and Development of Financial Markets has initiated legislative amendments aimed at banning non-market mechanisms to support bank stability, which is expected to minimize state involvement and shift responsibility to shareholders.

Addressing Structural Governance Issues

Regulators also emphasize the importance of addressing structural governance issues, including:

Risks associated with politically exposed person bank ownership
Introduction of a legal framework and procedures for defining and approaching these risks

This is necessary to ensure financial sector stability.

Targeted Support Programs

Business support programs need to become more targeted, shifting from interest rate subsidies to guarantees that alleviate credit risks for banks without distorting market interest rates. This would stimulate healthy competition and promote access to finance for small and medium-sized enterprises (SMEs).

Path Forward

By strengthening the banking system, establishing necessary institutional mechanisms to resolve banking problems, and supporting banks’ risk-taking and SME’s access to finance, Kazakhstan can:

Restore confidence in its financial sector
Promote sustainable economic growth