Banking system prospects in the Republic of Kazakstan

Oraz Jandosov
Governor, National Bank of Kazakstan

Banking system: overview

The period since the introduction of the national currency, the Tenge, has been crucial for the banking system in Kazakstan. Measures have been undertaken to further improve banking legislation, expand the instruments and methods of monetary regulation, toughen the requirements for commercial banks and support financial market development.

At present, the banking system is represented by the National Bank and 102 second-tier banks. Under present economic conditions, the National Bank's monetary policy aims to keep the financial system stable and further reduce inflation rates. The National Bank's efficient monitoring of monetary parameters and the condition of the financial markets gives it the opportunity to influence current processes.

Refinancing policy

The mechanism for refinancing banks has undergone considerable changes. The function of crediting the economy has been transferred from the National Bank to the second-tier banks, which aim to provide normal financial intermediary services through accumulating available funds through deposits and foreign loans. The National Bank has focused more on the functions typical of central banks: crediting the second-tier banks to support their liquidity, and general monetary and foreign exchange regulation. The role of auction credits began to diminish with the development of the interbank market. As a result, arrears on these credits are falling.

The National Bank's interest rate policy has been aimed at keeping the refinancing rate positive in real terms based on the current and projected inflation rate. Interest rates fall with the fall in inflation rates and, conversely, inflation growth forces the Bank to review its interest rate policy. Given that inflation rates went down from 8.9 per cent in January 1995 to 2.4 per cent in September 1995, the refinancing rate was gradually reduced from 210 per cent to 45 per cent. Inflation growth during subsequent months to 4.44 per cent per month prompted the National Bank to increase the refinancing rate from November l995 to 52.5 per cent. These changes affected commercial banks' interest rate policies. Taking account of the national currency's degree of stability, the refinancing rate has been revised five times.

Reserve policy

The Bank has continued to regulate mandatory reserves in order to ensure optimum money supply, reducing banks' risks and protecting their depositors' interests. In March 1995, the mandatory reserve requirement has been set at 20 per cent of deposit liabilities in Tenge and foreign currency. In the face of falling inflation and the need to broaden the banks' ability to provide credits to the economy, the National Bank lowered the mandatory reserve requirement to 15 per cent in May 1996, and has increased the charge for balances at the banks' accounts.

Credit policy

A tendency to reduce the share of centralised credits in the credit investment total has recently appeared. Most crediting since the beginning of 1996 has been provided through the interbank credit market where Kazcomertsbank, Eximbank, the Central Asian Bank and the Narodny (savings) Bank are active. Returns in the interbank market decreased with the change in the refinancing and inflation rates. However, it should be noted that the number of transactions in this market fell in 1996, firstly because lending banks are now assessing more thoroughly the reliability of borrowing banks.

The securities market

The Government securities market has developed dynamically, proving confidence in it as a highly reliable instrument with attractive yield, as well as its possible use in transactions in the secondary market.

The Ministry of Finance has consistently increased the supply of government securities with six-month maturity, and auctions of T-bills with 12-month maturity were launched in the second half of 1996. Demand in the Government securities market is increasing. The scale of the open market operations of the National Bank in the secondary market of government securities is also growing.

National savings

Jointly with the Ministry of Finance, the Bank is working on the sale, registration and circulation of the forthcoming issue of national saving bonds. These are government interest-bearing securities with a one-year maturity. On the basis of their tenders, financial agents have been selected through which national saving bonds will be sold by subscription among legal entities and individuals, residents and non-residents of the Republic of Kazakstan.

Exchange rate policy

The Bank's exchange rate policy aims to smooth the dynamics of the Tenge exchange rate caused by temporary changes in the market. The exchange rate throughout 1995 was mostly stable, with the exception of July and August, when sharp devaluation against the US dollar occurred because of substantial inflows of foreign currency into Kazakstan from foreign loans, increased exports and the transfer of a number of enterprises to foreign management.

Given positive trends in the creation of a liquid foreign exchange market, the National Bank has found it possible to reduce the obligatory surrender requirement of export foreign exchange proceeds to 30 per cent in the second half of 1995, with a subsequent elimination of the surrender requirement. The number of transactions taking place in the over-the-counter (OTC) foreign exchange market exceeds those in the regular market, which proves that foreign exchange deals are moving to the interbank market. The foreign exchange market remains one of the most dynamic sectors of the financial market. Interbank market transactions are determining market conditions.

Future strategy

The Government's medium-term programme envisages further inflation reduction, ensuring a stable balance of payments and accelerated economic reforms in order to achieve substantial GDP growth. The primary objective of the reform programme in the banking system in 1996-98 is to enhance the internal and external stability of the Tenge to strengthen the commercial banking system to increase the economic financing possibilities.

To achieve the programme's goals, it is necessary to ensure the stability of the financial system. This will allow the creation of a favourable investment climate, domestic resources mobilisation and corporate and individual savings. This will be possible with further qualitative reform of the republic's banking system and an increase in monetary policy instruments.

The National Bank's future monetary policy will focus on a steady reduction in inflation rates. Exchange rate policy will be mainly defined on the basis of supply and demand, though the bank will ensure purchasing power parity of currencies and bar the excessive development of speculative transactions.

Improvements in monetary regulation are vital. The experience of centralised credits showed that their repayment is very unreliable. In this respect, the interbank market, lombard credits, repo operations, bills' rediscounting and centralised credits to exclusively meet banking needs in short-term liquidity through credit resource auctions should be more widely developed.

New relationships with the Ministry of Finance are being formed, which are characterised by decreasing direct budget crediting and increasing domestic sources of budget deficit financing.

The National Bank intends to pursue a policy of comprehensive support for government securities market development. As the primary market grows, the volume of open market operations will increase, including the sale of treasury obligations with longer maturities. Monetary policy will basically focus on these, with a view to completely ending, in 1997, budget deficit crediting with National Bank resources.

Because of the weakness of the securities market, the National Bank's interventions in foreign exchange markets will remain an efficient instrument of monetary regulation. Taking into account the experience of other countries, the National Bank intends to continue its policy of a unified exchange rate for the Tenge, which reflects supply and demand in the foreign exchange market.

In the medium term, reforms to banks' accounting systems will be complete. The reforms require a tremendous concentration of effort from all the links of the banking system to train personnel and to introduce new charts of the accounts of the National Bank and second-tier banks.

The reach for international standards

Reforms of the bank supervision system should have brought banks up to international standards by the end of 1996. The Bank has in place strict requirements for opening and licensing banks. This allows only the admission to the market of financially viable and competitive credit and financial institutions.

In the medium term, special attention will be paid to reform and further development of the system of second-tier banks. By the end of 1998, the second tier of the banking system will consist of deposit and investment banks and will be complemented by a system of non-banking financial institutions represented by lombards, credit associations, trusts, leasing and factoring houses and other non-banking financial institutions.

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