Current situation of banking system of the Republic of Kazakhstan

MINISTRY OF SCIENCE AND EDUCATION OF RK

INTERNATIONAL ACADEMY OF BUSINESS

FINANCE DEPARTMENT 
 
 
 
 
 
 
 
 
 
 

Course work

Theme: “Current situation of banking system of the Republic of Kazakhstan”.  
 
 

                                               Done by:

                                Alexeyenko R.

                                                           F 0801

                           Checked by:

                                                                              Serikbayeva Zh. D.

                                                            c.ec.s, docent IAB. 
 
 
 
 
 
 
 
 

Almaty 2010. 

TABLE OF CONTENT 
 

Introduction           3  

Chapter I. Concept of bank and banking system     5 

Chapter II. The current situation of  banking system

of the Republic of Kazakhstan        12 

Chapter III. Problems and perspectives of development

of banking system of the Republic of Kazakhstan     19 

Conclusion           25                

References           27      

INTRODUCTION 

     The modern economy represents very difficult system each part of which is closely connected with others and plays an important role. But, one of the major roles is played by the bank system providing at the present stage development of economic mutual relations, normal functioning of all economy as a whole. For today banks are called:

     • to accumulate free money resources,

     • to carry out functions of cashiers of economic subjects,

     • to make issue.

     Now it is impossible to present harmoniously developed state without the branched out network of banks. And it is valid, banks play in modern economy a role of numerous "hearts", which help probably development and formation of economic-political power of the state.

     Economic-political as the political doctrine in which the economy would be considered separately from a policy isn't created yet.

     For today, banks are the economic tool in government hands.

     Despite imperfection of the bank legislation, the Kazakhstan banks occupy strong position in home market of capitals, and open branches abroad.

     The modern bank system of Kazakhstan has developed as a result of the various transformations resulted within the limits of bank reform which has been spent in our republic since 1987.

     The transition period during which old and new bank structures coexisted, has appeared rather short. As a result in Republic there was the two-tired bank system which first-tire represents National bank, and the second or bottom level is represented by the state, commercial, joint and foreign banks. The national bank is the main bank of Kazakhstan and is in its property. On the one hand, it is the legal body which is carrying out certain civil-law transactions with commercial banks and the state. On the other hand, it is allocated by wide imperious powers on management of a monetary and credit system of republic which are fixed in the Law "On National bank of RK".

     In the given work development of bank system in modern economy is investigated.

     The purpose of the given work to consider modern lines of development of banking in Kazakhstan.

     Proceeding from the purpose we will try to carry out following problems:

     • to consider history of development and formation of bank system RK;

     • to study modern condition of bank system;

     • to investigate problems and perspectives of development of bank system in RK.

     Object of research of the given work is bank activity and bank system as a whole and the subject is the bank system in the Republic of Kazakhstan.

     The task in view has been executed by the analysis of the economic literature and magazines, newspapers devoted to economic subjects, the data of National bank and FSA, laws and legal acts.

     The urgency of the set theme is caused by that one of the major attributes of market economy is the bank system which acts some kind of the generator, accumulating supplying the state and all members of a society as financial assets. Creation of a steady, flexible and effective bank infrastructure - one of the major (and extremely difficult) economic reform problems in Kazakhstan. 

CHAPTER I. CONCEPT OF BANK AND BANKING SYSTEM 

     Banking system is one of the major and integral structures of market economy. Development of banks and commodity manufacture and reference historically went in parallel and closely intertwined. Banks as financial intermediaries involve capitals of economic authorities, population savings, and other free money resources liberated in the course of economic activities, and give them out in time of using to borrowers, carry out monetary calculations and render other numerous services for economy, thereby directly influencing production efficiency and the reference of a public product and promoting growth of productivity of social activities. Today, in the conditions of the developed commodity and financial markets, the structure of banking system sharply becomes complicated. Have appeared new kinds of the financial institutions, new credit tools and methods of service of clientele.

     Creation of banking system in Kazakhstan has begun after sovereignty reception, in December, 1990. For high-grade development of economy the decision on creation of the two-tiered bank system recognized all over the world as the most effective in the conditions of the market was accepted. It allows spending an independent monetary and credit policy, to solve problems of inflation and financial maintenance of the state and a society needs.

     In essence, the Law "On Banks and Banking activity in Kazakh USSR", accepted in January, 1991 became the beginning of banking reform in the country. The given Law has provided formation of bases of two-tired bank system.

     Then, in 1995 the law “On Banks and Bank activity in the Republic of Kazakhstan” has been passed on which the bank admits as the legal body which is the commercial organization and carries out bank activity according to the Law "On Banks and Bank activity in the Republic of Kazakhstan". The official status of bank is defined by the state registration and presence of the license of the authorized body for regulation and supervision of the financial market and the financial organizations.

     As earlier it has been noted, banking system of RK is two-tired, the representative of the first-tier is National bank of RK, and the second – all other banks, except Development Bank of Kazakhstan. Also in banking system are included banks with foreign participation, Islamic banks and intergovernmental banks.

     The National bank of the country has been organized from the moment of formation of independent Kazakhstan, but, despite it, it still wasn't the central bank of the country in its classical definition. The national bank continued to carry out a number of minor functions, besides, not all was clear with its status in system of state structures. So, during the period from 1991 till 1993 the National bank was submitted to all branches of the power. The government gave orders to it, deputies supervised its activity and delegated to it additional orders, often demanding of their immediate execution.

     For the decision of the given problem in March, 1995 by the President of Republic of Kazakhstan N.A.Nazarbayev has been confirmed the Law "On the National Bank of the Republic of Kazakhstan" according to which the National bank became the legal body, has independent balance and together with the branches, representations and organizations makes unified structure, in the activity it is accountable only to the President. Since then no authority of representative and executive power has the right to interfere with activity of National bank. But, nevertheless, as well as in all other countries, the National bank of the Republic of Kazakhstan should coordinate questions of nation-wide economic policy with the Government. Same 1995 the first program of reforming of bank system of republic has been accepted. The essence of this program consisted in maintenance with banks of crediting of economy at the expense of savings of the population independently involved with them, available assets of managing subjects and external loans.

     So the National bank has been "released" from political pressure and from functions which could carry out banks of the second level. Now the National bank has passed to performance of direct functions of the central bank of the country –carrying out of an independent monetary and credit policy and creation of the bank system meeting modern requirements. [1]

     The national bank is endowed with wide imperious powers on management of a monetary and credit system of republic which are fixed in the Law "On the National Bank of the Republic of Kazakhstan". The Primary purpose of National bank is maintenance of internal and external stability of national currency of the Republic of Kazakhstan, and also working out and carrying out monetary policy, monetary circulation regulation, the organization of bank calculations and currency relations, assistance to maintenance of stability of monetary, credit and banking system, protection of interests of creditors and investors of bank. NBRK also acts as the emitter of the state securities, participates in service of the internal and external debt of RK guarantor of which is Government of RK. The National bank carries out supervision of activity of commercial banks and the organizations which are carrying out operations under the purchase, sale and an exchange of foreign currency and establishes prudential standards which regulate activity of banks. That is National bank bears full responsibility for functioning of monetary and credit sphere and represents interests of RK in relations with the central banks and financially-credit institutions of other countries. [2]

     Reforming of banking system of Kazakhstan has passed practically in three stages.

     At the first stage (1988-1991) in a condition of existence of the USSR has been spent reorganization of the state branch specialized banks by transfer of a part of functions of the center republican divisions of corresponding banks, there is begun creation of the first commercial banks and initial steps under the legend to the State Bank of separate functions of the central bank are taken.

     The second stage with (1992-1993) is characterized by gradual transition of National bank to performance of some functions of the central bank within the limits of existence of a rouble zone, extensive formation and development of commercial banks, the beginning of formation of national bank is standard-legal base.

     At the third stage (since November 1993) in connection with introduction of national currency full responsibility for functioning of monetary and credit sphere, introduction of classical principles of its mutual relations have been assigned to National bank with the budget and banks, strengthening of system of regulation of bank’s activity.

     Follows that in the beginning of the third stage the condition of banking system of the country in essence didn't answer requirements to the full objectively-shown to them. It concerned as to National bank which by then hadn’t traditions and experience in a part of performance of functions of the central bank, and to banks of the second-tired which wasn't capable in necessary volumes to carry out crediting of economy at the expense of own and is independently mobilized financial resources and to carry out all complex of bank services.

     In these conditions the National bank has developed and confirmed by the president of republic the concrete program of reforming of banking system in Kazakhstan for 1995. The program has been coordinated with actions of the government for deepening of reforms and an exit from an economic crisis, and also considered recommendations of the international financial organizations. During performance of this program certain positive results have been received:

• necessary coordination of activity of National bank, of the Ministry of Finance     in carrying out of a financial policy of the state has been reached;
• introduction of all spectrum of tools of monetary and credit and currency   regulation, characteristic for classical central banks has been finished;
• following mechanisms of system of supervision and regulation of activity of banks of the second-tired have been developed;
• the normative base has been created, there has begun processing of system of currency regulation and control;
• measures on increase of level and efficiency of the analysis of macroeconomic processes, their forecasting and decision-making use have been taken;
• considerable work on achievement of adequacy of used system of accounting of National bank and bank of the second-tier by international standards to requirements of market economy has been spent;
• has been reduced quantity of banks, directly violating established economic specifications and the rights of the enterprises and physical persons - clients of banks;
• quality of mechanisms of accumulation of financial resources by second-tier banks, and also level of an estimation of projects has raised at crediting of managing subjects and degree of risk of a reflexivity of credits;
• positive tendencies have been outlined in increase of level of capitalization of the banks, allowing them independently to carry out financing of large-scale projects on an intermediate term and long-term basis;
•     work on increase of vocational training of the personnel has been made active.

      Carrying out consecutive and interconnected steps on reforming and development of banking system of the country, and also realization of moderate-rigid monetary policy has allowed to bridle inflation, to stabilize a course of tenge and to lower level of interest rates. [3]

     Representatives of the second-tier of banking system are commercial banks.

     The organizational device of commercial banks corresponds to the standard scheme of management of Joint-stock company. The supreme body of commercial bank is general meeting of shareholders which should pass not less than once in a year. There are representatives of all shareholders of bank on the basis of the power of attorney. General meeting is competent to solve the questions taken out on its consideration if in session take part not less than three quarters of shareholders of bank.

               Board of directors controls the bank activity. The board of directors carries out the general management of bank activity. The bank executive office is joint body or the person who is individually carrying out functions of an executive office which name is defined by the charter. An executive office carries out the current activity. The credit committee considers projects of credit and other plans of bank, confirms plans of incomes and expenses and bank profit, the board of directors considers questions on opening and closing of branches of bank and other questions connected with activity of bank, both mutual relations with clients and development prospects.

     The board supervises over directly activity of commercial bank. It bears responsibility before general meeting of shareholders and council of the Bank. The board consists of the chairman of the board, its assistants and other members. Into structure of boards of commercial banks usually enters representatives of the largest participants of bank.

     Bank board meetings are spent regularly. Decisions are accepted by majority of votes. At equality of voices the voice of the chairman of the board is solving. If trustees or its chairman don't agree with the board decision, they can inform the opinion to council or general meeting. Definitive the decision of council of the Bank in this case is. Board decisions are put into practice by the order of the chairman of the board of bank.

     Bank audit is made by the auditor organization. Carrying out of audit for the results of a fiscal year is necessarily for banks. Copies of the report and the recommendation of the auditor organization should be presented by banks, or the auditor organizations to the authorized body within thirty days from the date of data acquisition of documents. The consolidated annual financial reporting of bank should be assured by the auditor organization. The auditor organization states results of audit and the conclusions in the report represented to board of directors and board of bank, at the necessity defined by bank, to other legal bodies that are a part of a bank conglomerate. The auditor report of the financial reporting of bank or other legal bodies which are a part of a bank conglomerate doesn't make a commercial secret.

     Big banks usually consist of departments, managements and departments which are created to a functional sign. Their heads provide normal work of these divisions. Directors of departments, chiefs of managements and their assistants coordinate activity of departments and services, define their concrete purposes and programs, advise, supervise and estimate their work. The quantity of departments depends on size and character of activity of bank, volumes and complexity of bank operations and a variety of services given to clients.

     The account in commercial banks is carried out according to the rules established by National bank. Banks represent to National bank or its management in the location of commercial bank balance on the first date, the quarter turnover sheet and the annual accounting report.

     With a view of publicity maintenance in work of commercial banks and availability of the information on their financial position their annual balances confirmed by general meeting of shareholders, and also on account of profit and losses should be published in the press (after acknowledgement of reliability of the data presented to them by the auditor organization).

     With a view of operative credit-settlement service of the enterprises and the organizations – the clients of bank territorially removed from the location of commercial bank, it can organize branches and representations. Thus the question on opening of branch or representation of commercial bank should be coordinated with Central administrative board of National bank in a place of opening of branch or representation.

     The isolated structural divisions which are located out of a place of its finding and carrying out all or a part of its functions are considered as bank branches. The branch isn't the legal entity and makes delegated to it head bank of operation in the limits provided by the license of National bank. It concludes contracts and conducts other economic activities on behalf of commercial bank, which it was created by.

     The representation is the isolated division of commercial bank located out of a place of its finding, not possessing the rights of the legal person and not having independent balance. It is created for maintenance of representation functions of bank, fulfillment of transactions and other legal actions. The representation isn't engaged in settlement-credit servicing and has no correspondent subaccount. For realization of household expenses to it the current account opens. [4]

     The essence of activity of banks is shown in performance of certain functions by them, which distinguish them from other bodies. Grouping the basic operations of commercial banks, it is possible to formulate basic functions carried out by them:

     1. Accumulation and mobilization of the monetary capital;

     2. Intermediary in the credit;

     3. Carrying out of calculations and payments in an economy;

     4. Creation of means of payment;

     5. The organization of release and placing of securities;

     6. Consulting servicing.

     Mobilization of temporarily free money resources and their transformation into the capital – one of the oldest functions of banks. Free money resources accumulated by bank legal and physical persons, on the one hand, will be brought in to their owners by the income in the form of percent, and with another – create base for carrying out of loan operations. The concentrated savings can be used on any economic and social needs. By means of banks there is a concentration of money resources and their transformation into the capital.

     Other important function of commercial banks is intermediary in the credit. With direct credit relations between owners of free money resources and borrowers interferes not coincidence volume of the capital offered in the loan, with requirement for it, and also term of liberation of the capital with term on which it is necessary to the borrower. Direct credit communications between owners of the capital and borrowers complicates. The proprietor of the capital can not have the information on a financial position of the borrower. Commercial banks, acting in a role of financial intermediaries, eliminate these difficulties. Bank credits go in various sectors of economy, provide manufacture expansion. The stable economy can't exist without the organized and debugged system of monetary calculations. From here the great value has a role of banks in carrying out of calculations and payments.

     The basic part of calculations between the enterprises is carried out by a non-cash way. Banks, representing itself as the intermediary in payments, carry out calculations on the instructions of clients, accept money for accounts and keep account all monetary receipts and deliveries. Centralization of payments in banks promotes reduction of distribution costs, and for acceleration of calculations and increase of reliability of payments electronic systems of calculations take root.

     Special function of commercial banks is their ability to create or destroy money that is to increase or reduce monetary weight. Creation of means of payment is directly connected with depositary and credit activity of banks. The deposit can be created by two ways: entering by the client of cash into bank or delivery to the borrower of the credit. Thus specified operations by various image influence volume of monetary weight in circulation.

     However banks are capable not only to create, but also to destroy money. It is possible at repayment by borrowers of credits by write-off of money from their depositary accounts. In this case the general monetary weight in an economy is reduced.

     In the presence of demand for the credit the modern issue mechanism allows to expand borders of monetary issue that proves to be true growth of monetary weight in industrially developed countries. But it is required to economy optimum, instead of the excessive quantity of active money, therefore commercial banks operate within restrictions (obligatory reserves), established by the central banks.

     Commercial banks carry out issue-promotional function, carrying out release and placing of securities, in particular, shares and bonds. Thus banks have possibility to direct savings on the industrial purposes. The securities market as though supplements system of the credit and cooperates with it. On the instructions of the enterprises needing long-term investments both resorting to a share issue and bonds, banks incur definition of the size, conditions, issue term, a choice of type of securities, and also duties on their placing and the organization of the secondary reference. Banks guarantee purchase of the let out securities, getting and selling them at own expense or organizing for this purpose bank syndicates, give to buyers of actions and loan bonds. Obligations for the considerable sums which have been let out by the large companies can be placed by bank through sale to direct clients, instead of a method of free sale at a stock exchange.

     The sufficient economic awareness and possibility of control of economic situations allow banks to carry out consulting service. Banks carry out the analysis of financial activity of the enterprises, conditions of their accounting, estimate strategy of development and reveal possible directions of increase in incomes. Being engaged in operations with securities, banks estimate perspective of release of new actions of the client and a reality of their placing; advise clients in a choice of the firms, ready to incur placing of new securities, and other consulting services render: from opening of accounts to the recommendation about fulfillment of operations in the monetary and commodity markets. [5]

     Recently commercial banks have faced a sharp aggravation of a competition from numerous specialized credit institutions which stimulates search by banks of new fields of activity, increase in number of services offered clients and improvement of quality of service.

     Development of a tendency of expansion of functions of commercial banks in modern conditions proceeds. For strengthening of the positions in the market they carry out operations not characteristic for banks more actively, taking root into nonconventional spheres for them financial business. The role of banks in economy functioning thereby rises.

CHAPTER II. THE CURRENT SITUATION OF  BANKING SYSTEM OF THE REPUBLIC OF KAZAKHSTAN 

     For January 1, 2010 38 second-tier banks operate in Kazakhstan, including the city of Almaty where are registered 35 banks, 34 branches and 372 additional premises of banks, in 2009 the number of banks was 37, and in 2008 - 35, increase in the number of banks is due to an improving economic situation in the Republic of Kazakhstan. More detail the structure of the banking system of Kazakhstan can be observed in table 1. 

Table 1 - Structure of the banking sector, [6]

     Table 1 shows that on January 1, 2010 there was an increase in the number of tier two banks’ representative offices abroad, number of non-resident banks’ representative offices in the Republic of Kazakhstan, number of participant banks in mandatory collective insurance system for individuals’ deposits, number of banks licensed to engage in custodian activity.  
 Next, let’s consider the structure of assets of two-tier banks, of liabilities of two-tier banks, of capital of two-tier banks, of liquidity and profitability of the banking sector.

     For 2007 the banks’ total assets increased by 2,811.4 bln. tenge (31.7%) and for January 1, 2010 totaled 11,557.3 bln. tenge (table 2).  

Table 2 - Structure of total assets of the banking sector, [7]

     The banks’ asset mix shows the prevalence of loans to customers, followed by cash, refined precious metals and correspondent account balances, securities portfolio, deposits in other banks.

     During 2008, bank total assets increased by 205.0 bln. tenge (1.8%), and on the January 1, 2009 constituted 11 889.6 bln. tenge.

     From 2008 bank loans and reverse REPO transactions have increased by 376.2 bln. Tenge or by 4.2%; cash, refined precious metals and correspondent account balances decreased by 192.9 bln. tenge or by 19.0%; securities increased by 100.4 bln. tenge or by 12.7%, deposits in other banks decreased by 65.7 bln. tenge or by 10.2%, capital investments increased by 97.0 bln. tenge or by 43.6%.

     On-balance sheet debt increased from 100.5 bln. tenge by 156.5 bln. tenge (2.6 times) up to 256.6 bln. tenge

     Account balances reflecting the past due interest payments increased from the beginning of the year by 31.6 bln. or by 2.8 times and reached 49.0 bln. tenge as of 1 January 2009.

     During 2009 the decrease in assets has equaled to 332,3 bln. tenge (2,8 %), bank loans and repo operations have increased by 394,4 bln. tenge (4,3%), reserves (provisions) have increased by 2 968,4 tenge.

     In 2009 in comparison with 2008 and 2007 are the lowest rates of total assets. 

Figure 1 - Structure of assets, [7]  

     The largest share of the asset structure falls on Bank loans and reverse Repo as they bring great profit (figure 1).

     During  2007, total liabilities of two-tier banks have increased by 2,255.1 bln. tenge. (that is by 28.2%), and totaled 10,256.7 bln.tenge, as of the end of the reporting period (table 3). 

Table 3 - Structure of total liabilities of the banking sector, [7]

     The greatest contribution to the increase in banks’ liabilities came from special-purpose deposits (SPV) of bank subsidiaries, which have increased by 971.9 bln.tenge, that is by 62.4%, followed by due to individuals, which increased by 413.6 bln. tenge, that is by 40.0%; while loans from other banks and institutions engaged in certain types of banking operations have increased by 379.1 bln. tenge to 1,798.2 bln. tenge.

    From beginning of 2008 total liabilities of second tier banks increased by 177.5 bln.tenge (or by 1.7%), and formed 10 437.0 bln.tenge, as of 1 January 2009.

     SPV deposits in total liabilities of the banking sector decreased by 244.5 bln. tenge, or by 9.7%, liabilities to individuals increased by 52.4 bln. tenge, or by 3.6%; while loans from other banks and institutions engaged in certain types of banking operations decreased by 348.0 bln. tenge to 1 450.2 bln. tenge.

     Total liabilities of commercial banks in 2009 increased by 2 099.8 bln. tenge or by 20,1%. In the structure of liabilities, corporate deposits have increased by 978.2 bln. tenge or 31,7%, retail deposits by to 437.1 bln. tenge or 29,1%. Special purpose deposits of subsidiaries have decreased by 489.0 bln. tenge or 21,4%, loans from other banks and institutions engaged certain types of banking operations by 202.7 bln. tenge or 14,0%.  
 Foreign currency deposits in 2009 increased by 966.2 bln. tenge or 1.5 times. 

Figure 2 - Structure of liabilities, [7]  

     The largest share of the liabilities structure falls on corporate deposits and SPV as they are based on large sums of money.

     Line-item change in capital for 2007-2009 is presented in Table 4. 

Table 4 - Calculated own capital of two-tier banks, [7]