Kazakhstan News

Financial Sector Assessment Program (FSAP)

financial sector

The Financial Sector Assessment Program (FSAP) is prepared and developed by the International Monetary Fund (IMF) by country. The Assessment’s purpose is to estimate the financial situation of a country as a whole, and not individual organizations and institutions. The FSAP helps countries to find the le elements of systemic risk and to develop adequate financial policies to reduce the risk and keep it under control.

Kazakhstan might have gotten back on its feet after the 2008 financial collapse, but the country’s banking system got one or the other scratch. Before the crisis, the economy was growing at a steady pace, but sectors like construction that heavily relied on bank credits came to the point of unsustainability.

When the global stock market crashed, international funding in Kazakhstan declined, taking a toll on the banking system, which at the end caused a drop in bank assets. To avoid the collapse of the largest banks, the government intervened and nationalized the largest ones, which saved the banking system. Nevertheless, according to FSAP, the government has still not addressed some of the major issues like the diversity of assets. The banking system is also still struggling with the piled up non-performing loans (NLPs), which resulted from the crisis.

The IMF in its FSAP report also mentions the lack of modern and advanced risk management tools which could help identify major risks that could hit the economy. Indicators that the pension fund and insurance market could also be at risk have also been pointed out. Funding needs to be provided beside the expanded coverage for the work accident plan. It is still not enough, and in the case of any disaster, the fund could easily wind up empty.

The securities market is also not ideal, but the good news is that Kazakhstan is working on it. The main issues that the report pointed out are legal uncertainty, which makes the securities market riskier than it should be.

Nationalization of Banks in Kazakhstan

While the USA intervention on Wall Street in 2008 included rescuing of financial institutions, not only by injecting capital into the financial system but they also addressed bad or toxic assets in order to phase them out at one point. Kazakhstan did also save three of its largest banks by bringing them under government supervision and giving them money, bad assets in Kazakhstan were not addressed properly. The devaluation that took place in 2009 triggered problems with meeting external debt obligations, so the government took over, but the banks still struggled faced with a failure of real estate prices and continued devaluation.

The Financial System- Banks, Pension Funds, and Insurance

The financial system is mostly dominated by banks. The 38 commercial banks provide for a total of 77% in overall financial assets. Kazakhstan also has branch offices of its banks in the region and neighboring countries. Even if the largest banks were the main leaders in Kazakhstan, medium-sized banks stepped up and extended their lending, whereby subsidiaries of international banks and large domestic banks fight for large corporate clients.

When it comes to consumers, they mostly lend their money in the three biggest banks in the country.

Kazakhstan used to have 10 private pension funds which were owned by banks until the government decided to nationalize them as well in 2013. The gradual process was planned to last for a year, and by 2014, all pension assets were merged into the Unified Accumulation Pension Fund (UAPF) in government ownership. There are no other shareholders.

The insurance market and other non-banking financial subjects are relatively small in Kazakhstan and account for only 3% of assets in the overall financial system. The Securities Exchange in Kazakhstan is also not significantly large and is rather passive than active when it comes to equities and corporate debt. Therefore, Forex is large enough and extremely active and liquid.

Anti-money laundering laws should also be amended to be more efficient. Even if the FSC has been making on sight inspections with successful outcomes, the law needs to be in line with international regulations. Kazakhstan expressed its willingness to work on the matter and adjust the AML to fit international standards.

Overall, Kazakhstan appreciates the help, and this report since it now has clear guidelines what to work on to improve the banking sector and economic growth.