Commercial banks and commercial banking in Kyrgyz Republic

Commercial banks and commercial banking in Kyrgyz Republic

CONTENT:

1. Introduction………………………………………….3
2. Overview of the sector………………………………4
3. Basic indicators of banking sector…………………..5
4. Financial intermediation…………………………….10
5. Problems…………………………………………….12
6. Recommendations…………………………………..14
7. Emerging services…………………………………..15
8. Conclusion………………………………………….17
9. References………………………………………….18

1. INTRODUCTION

Accounting for trillions of assets worldwide, banking systems are crucial components in the global economy. Commercial banks are just one part of the range of financial institutions, which also include investment banks, insurance companies, finance companies, investment managers and other companies that profit from the money flows. As financial intermediaries, banks are placed between depositors who supply capital and borrowers who demand capital and have productive uses for it. The result of successful banking system development is a steady long-run economics growth for the country. Due to the abovementioned fact, it is very important to study the sector in order to supervise and control the situation if needed. Kyrgyzstan, being a small open economy, presents some peculiarity in its relatively recently established banking sector. A study of a small developing country with emerging banking system might be a good example of difficulties or progress to other countries. This paper aims at analyzing the problems the sector is facing and proposing policy recommendations through the framework of the historical background and current situation of banking system in Kyrgyz Republic.

The general overview of the banking sector of Kyrgyzstan is provided in the first section of the paper. The next sections introduce the statistics on basic indicators of development. The role of commercial banks as a financial intermediary is emphasized in section four. The next two sections outline the problems and recommendations for solving the problems respectively. Lastly, the importance of innovation including emerging services is discussed. The References section contains the information about the interviewed people, sources of graphs and data tables, and academic articles, which were used for the analysis in this paper.

2. OVERVIEW OF THE BANKING SECTOR

In 2013, the banking system of Kyrgyz Republic consists of the National Bank of Kyrgyz Republic (NBKR) and 23 commercial banks. The Law “On National Bank of Kyrgyz Republic” which defines goals, principles, legal status and authority of the National Bank, states that NBKR has the right to supervise activities of commercial banks and issue licenses for banking operations (NBKR, 1997). All commercial banks have to receive a license of Bank of Kyrgyzstan in order to conduct banking operations.

Banking system of Kyrgyz Republic had undergone several important stages in its development (КАБАР, 2007). First stage, from 1991 to 1995, was characterized by transition to market economy accompanied by high inflation rates and inevitable misbalance, caused by structural change in the economy of the country. Since banking system is closely interconnected with general economic situation in the country, political and economic events of that period were reflected in the activities and financial standings of commercial banks. In 1992, laws “On National Bank of Kyrgyz Republic” and “On Banks and Banking Activity in Kyrgyz Republic” were passed, according to which NBKR became the central link in banking system.

Second stage relates to the 1996-1997 period of time, during which the comprehensive Financial Sector Reform Program supported by a Financial Sector Adjustment Credit funded by World Bank. The program reformed banking system, making it more efficient and competitive, restoring the health of commercial banks in general.

Third stage spans from the years of 1998 to 2001. Then, the development of commercial banks was influenced by macroeconomic destabilization of 1998. Russian crisis provoked devaluation of the countries–trade partners, and worsened issues already present in the banking system of the country. These issues were caused by inefficient credit policies of separate commercial banks, mistakes in interest policy, inadequate monitoring of loans, low management quality. This stage demonstrated the vulnerability of banking system not only to the general economic situation in the country, but to the external shocks as well. During that time, to prevent system crisis and improve the health of banking system, National Bank in cooperation with the government had actively worked on restructuring and improvement of insolvent banks. NBKR worked on improvement of normative legal base and addressing a number of issues pertaining to opening a commercial bank, using warning activities to improve financial health of banks and evaluate management quality. As a result, system risk in banking sector was localized and eventually neutralized.

During the fourth period, from 2001 to 2005, the reform of banking sector was finished; the banking system was growing rapidly, without any external shocks or internal problems.

However, the fifth stage, which occurred during 2005-2010, was completely different - with initial credit boom, and consequent world economic crisis, causing the slowdown of banking system growth. Political instability of 2010 has entirely stopped the positive tendencies of commercial banks as a whole, and growth resumed only in 2011(NBKR, 2012).

3. BASIC INDICATORS IN BANKING SECTOR

In order to have a clear understanding of the development of banking system, it is rational to look at the major banking indicators, such as assets, loans, and deposits. Looking at statistics the progress is clearly visible, with significant improvement almost in every area of banking during the last 10 years.

Source: NBKR bulletin 2012

The graph above shows the dynamics of asset, loan and deposit growth over the period of 2003-2012. The growth is constant throughout the period, with the exception of 2010, when April events occurred and leading bank at that time, Asia Universal Bank was declared bankrupt and reorganized into Zalkar Bank. Apart from that unfortunate event, indicators show consistent positive trends; even financial crisis of 2008 has not affected this dynamic.

While previous graph focused on the absolute values of major indicators, the graph below shows the growth rates of assets, loans and deposits every year, that is, how fast these indicators were growing.

Source: NBKR bulletin 2012

As it can be seen, this graph provides more comprehensive information on the development of banking system. Here, the effect of 2005 March revolution is reflected in decreased rates of growth, which, however, rapidly picked up the speed and continued to stay at very high levels until 2008. When financial crisis hit, however, the credit boom ended, and banks could not get funds and issue loans as easily as they did before, which contributed to the lower growth rates. In 2010 the situation became even worse due to the political instability that even caused a contraction in the size banking system’s assets and deposits (Akylbekova, interview). Fortunately, the negative effects lasted only through 2010, and period of 2011-2012 was marked with accelerating rates of growth for loans and assets, a positive trend, which promises a bright outlook for the banking system in general.

 Source: NBKR bulletin 2012

The graph above duplicates the previous one, only here it shows the growth rate of overall income of the banking industry. Income is another, very important indicator, which cannot be ignored in the industry assessment, and the graph demonstrates that in the period of 2004-2012, with the exception of 2009 and 2010, the income growth rates remain positive. Due to financial crisis of 2008 and political instability of 2010, the income of commercial banks was shrinking during those two years, however, the growth that followed after the problems were dealt with more than compensated for the losses.

However, it is necessary to compute return coefficients, such as ROA (an indicator of company’s profitability) and ROE (the amount of net income returned as a percentage of shareholder’s equity), in order to understand how well banking industry is returning its investments. The indicators are shown in the graph below. Banking system of Kyrgyz Republic demonstrates quite high rates of ROE and ROA. There was not a single period during which the rates were negative, even after 2008 financial crisis and 2010 instability, the rates decreased, yet remained positive. Moreover, return rates have regained their position after the difficult period was over and the positive dynamic is likely to continue to the future, with the government and NBKR currently undertaking a number of measures to increase the attractiveness of banking industry of Kyrgyz Republic (NBKR, 2011).

Source: NBKR bulletin 2012

While earlier indicators show positive trends and growth throughout the banking industry of Kyrgyz Republic in the recent years, there is still room for improvement, especially in the area of financial penetration. Today, only a small part of national economy utilizes banking products and services, due to the people preferring to remain in the shadow economy, outside of the closely monitored financial industry (Akylbekova, interview). Yet, if the situation changes, this can mean a huge potential for development of banks, since the market of financial services is far from its full capacity.

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