Banking Structure and Regulations

6.2 Financial Instruments and Services 6.3 Trade and Investment Financing

6.1 Banking Structure and Regulations

6.1.1 Banking System

The banking system in Kazakhstan is currently in a state of transition, and attempts are being made by the private sector and the Government with the assistance of international donors¹ to adopt it to Western banking standards. The system is made up of a central bank, domestic and foreign-owned commercial banks and government-owned banks.

Nearly 95 percent of the assets of the banking system are in Almaty-based banks (US Embassy, 1997b).

The structure of the banking system has undergone important changes in recent years. In June1997 the Government had shares in only six banks, compared with 64 banks in early 1995. As a result of more stringent reserve requirements, the number of Kazakh banks dropped from over 200 banks in 1995 to less than half that number by mid-1997 (for recent data on banks and branch offices in individual oblasts, see Table 6.1 and Figure 6.1). There have also been several mergers and acquisitions in the banking sector. The development of the stock market, which has only been in operation since 1993, and more competitive pressure to increase capital along with tightened capital requirements by the National Bank of Kazakhstan (NBK), should lead to more effective control and better corporate governance.

The National Bank of Kazakhstan (NBK) is charged with the overall supervision and regulation of all banking activities in the country, and performs standard central bank functions. Under the Decree 'On Banks and Banking Activities' (the 'Banking Decree'), adopted in August 1995 and the Decree 'On the National Bank of the Republic of Kazakstan' (the 'National Bank Decree'), adopted in Mach 1995, the NBK has the responsibility for protecting the stability of the monetary-credit system and the interest of

1In June 1996 the World Bank approved a US$180 million Financial Sector Adjustment Loan (FSAL) to help build a sound and efficient banking sector. The objectives of the program are to address outstanding and questionable loans and problematic banks, and to improve the banking environment to reduce operating risks (World Bank news release, July 1, 1996).

creditors, depositors, and other bank clients. More specifically, under the Banking Decree, the NBK determines the criteria for entering into the banking system and the procedures for licensing of banking activities. That decree also sets the conditions under which a controlling interest in a bank can be acquired and the procedures for removing problem banks from the system.

Table 6.1

Number of Banks and Branch Offices in Kazakhstan, by Oblast, 1994-97

1994 1995 1996 1997

Total 184 1,042 130 1,036 101 949 95 734

Source: National Bank of Kazakhstan,Statistical Bulletin, No. 12 (37), December 1997.

The NBK implements its supervisory policies through prudential normative requirements with which all banks must comply. These requirements include minimum capital requirements, limitations on loans to a single borrower, a minimum liquidity ratio, and the limits of the bank’s open currency position. In addition, there are restrictions on relations between banks and persons connected to banks ('special relations' generally defined as management officials, physical persons holding more than 10 percent of the bank’s shares, close relatives of such persons, and legal entities in which such persons are large participants). The NBK is authorized to conduct inspections of banking activities.

Included in the measures that can be taken

Figure 6.1

Number of Banks and Branches in Kazakhstan, 1994-97

The Machinery Industry in Kazakhstan: Economic Conditions and Policies

annulment of a bank’s license, and the revocation of its permission to open.Other recent reforms include the NBK's introduction in 1996 of its own chart of accounts that conforms to international standards and that was prepared with the assistance of the IMF.

All Kazakh banks implemented new accounting methods that conform to international standards in April 1997 (US Embassy, 1997b).

Apart from the NBK, there are four main segments that make up the rest of the banking system: (a) nine large domestic banks with branches located throughout Kazakhstan; (b) 13 foreign banks; (c) four fully government-owned banks (the Almaty-based banks and 35 regional banks. Foreign banks have been active in Kazakhstan since 1993. Under existing legislation, foreign banks are not permitted to operate branches in Kazakhstan, but can establish subsidiaries, joint ventures and representative offices. Foreign investors are treated equally with Kazakh nationals, but their overall share of Kazakhstan's banking system capital must not exceed 25 percent (excluding portfolio investments), unless the NBK permits this limitation to be exceeded. If a bank is not a subsidiary of another bank, no person can own more than 25 percent of its shares without special permission from the NBK (US Embassy, 1997b).

2The Government Budget Bank, also a fully owned Government bank, was established in 1996 under a temporary basis to introduce a new classification system for the Treasury Department and to handle budget

Box 6.1 Rehabilitation Bank

The Rehabilitation Bank was created in 1995 under a World Bank project to assist in the restructuring of large state-owned enterprises (SOEs) that were considered by the Government to have high levels of accounts payable, while also having special economic or social importance. The eligibility criteria to receive loans as part of a restructuring plan mainly focused on the amount of debt owed to banks, the state budget, suppliers and intermediaries. Once accepted into the restructuring program, the Government isolated the insolvent enterprise from the banking system and became its sole creditor. An important goal of the program was the eventual privatization of the chosen SOEs on a case-by-case basis. Enterprises whose operations were no longer considered justifiable were

restructured according to one of the following methods: (a) segmentation of the enterprise to create several potentially profitable legal entities; (b) merging to an operational legal entity according to legally established procedures; (c) removal of excessive property according to legally established

procedures and sale of that property through tender or its lease with the right of subsequent buy-out; or (d) liquidation of the enterprise and disposal of its property.

In 1995 the Rehabilitation Bank provided financing in the amount of T600 million to 5 insolvent enterprises, many of which were involved in the machinery industry: (1) Almaty Machine Tool Manufacturing Plant, (2) Belogor Ore Enriching Plant, (3) Oskemen Tire Plant, (4) Petropavlovsk Electric Insulating Materials Plant, and (5) 'Himonerkasip.' Pavlodar Tractor Plant was also included in the Bank's restructuring program. Also in 1995, 33 insolvent enterprises were declared bankrupt and liquidated. By the end of the first quarter of 1996, 16 enterprises were declared bankrupt by decision of the court (Almaty Akshamy, April 24, 1996). Other industries were included in the Bank's restructuring program, including:

 Joint Stock Company (JSC) "Aktyubrentgen" in Aktubinsk

 JSC Instrument Making Plant in KoshetavJ

 JSC Electrobytpribor in Almaty

 Almaty Porschen Plant

 Ust-Kamenogorsk Tire Plant

 Petropavlosk Heavy Machinery Plant.

In recent months the Rehabilitation Bank has been faced with many problems, including having its assets frozen by the

Chinese and Russian banks have established 100 percent subsidiaries, and several Dutch and Turkish banks have established joint ventures. Citibank maintains a representative office in Almaty, with plans for expansion. Two Kazakh-American banking joint ventures, Texaka Bank and Lariba Bank, offer small, community-based loans. Texaka Bank provides personal banking services. American investment in both banks is very small, approximately $500,000 each. The Dutch bank ABN AMRO serves corporate clients' cash management needs. In 1993, the government began closing banks for failure to comply with reserve ratio regulations. Some of the largest banks in Kazakstan have correspondent arrangements with U.S. banks. The following banks have these arrangements: Kazkommertsbank, Narodny Bank, Center Bank, Texaka Bank, and ABN AMRO Bank. However, private United States banks have been reluctant to extend commercial credits or guarantee Kazakh bank payments (US Embassy, 1997b).

6.1.2 Foreign Exchange Controls

In the early 1990's, the Government of Kazakstan liberally issued sovereign government guarantees for loans from foreign creditors. In 1994-95, as government debt accumulated, Kazakhstan recalled as many as thirty guarantees. This move tarnished Kazakhstan's reputation in the international banking community. In an effort to regain its standing among international creditors, Kazakhstan paid US$87 million in arrears to foreign creditors by the end of 1995 (US EXIMBANK, one of these creditors, was paid its arrearages in April 1995). International creditors will likely continue to approach Kazakhstan with caution and carefully monitor payments on outstanding loans. In November 1996, Kazakhstan was given a BB minus long-term foreign currency rating by Standard and Poor. In addition, in December 1996, Kazakhstan sold its first Eurobond issue that was valued at $200 million (US Embassy, 1997b).

The NBK allows the national currency to float. It is fully convertible with the US dollar.

In July 1996, Kazakhstan joined Article 8 of the International Monetary Fund Charter, stipulating that the country would not restrict current account transactions such as currency conversions or the repatriation of investment profits. Money transfers in currency associated with foreign investments, whether inside or outside of Kazakhstan can take place without restrictions. For example, foreign investors are permitted to settle their obligations, including the payment of wages to their resident and non-resident employees, in foreign currency. In addition, foreign investors can convert and repatriate tenge earnings made inside Kazakhstan. In practice, though, the rate of tenge conversions is limited by the still primitive nature of Kazakhstan's currency exchange (US Embassy, 1997b).

Article 10 of the foreign investment law provides that foreign investors can open and maintain foreign currency accounts at any bank in Kazakhstan. Non-residents can open special 'Type I' accounts for conducting investment activities in the country. Transactions from these accounts related to privatization activities can be carried out by any non-resident legal entities, except non-non-resident legal entities having Kazakh shareholders

The Machinery Industry in Kazakhstan: Economic Conditions and Policies

investment activities can be carried out from 'Type I' accounts by all non-residents, excluding individuals who do not have authorization to carry out economic activity in their home country. Non-resident individuals cannot open joint accounts in tenge or make payments in tenge for expenses related to investment operations (including privatization).

'Type C' accounts in tenge can be maintained by non-residents for the purpose of financing export and import operations, excluding certain operations related to exports from Kazakhstan to which non-tariff provisions apply.