Caparova R.B. Banking system of the Republic of Kazakhstan

Timely and efficient banking sector reform; Timely and efficient banking sector reform; Solid legislative base; Solid legislative base; Effective supervision; Effective supervision; High internal competition; High internal competition; Introduction of international management and control principles in banks. Introduction of international management and control principles in banks. Main Pre-requisites for the Development of Banking Sector

Kazakhstan Banking Sector Reform Stages First Stage ( ) : Adoption of Statute On Cooperation; First cooperative banks ; Restructuring of specialized state branch banks. Second Stage ( ) : Extensive commercial banking sector formation and development ; Formation of the national banking legislation; Adoption of two new statutes in April "On the National Bank of Republic of Kazakhstan" and "On Banks and Banking Activity in the Republic of Kazakhstan". Third Stage (from November 1993): Introduction of national currency – tenge, on November 15, 1993; Division of function between National Bank of the Republic of Kazakhstan and Banking supervision; Graduate transition to international banking regulation standards.

1995 г. Banking sector reform, transition to market-oriented crediting of economy and formation of financial market, bank privatization г. Transition to international principles (incl. Basel banking supervision principles) on adequacy of capital, quality of assets, quality of management, accounting гг. Introduction of consolidated banking supervision г. Introduction of international principles of corporate management and risk management. Independent audit of banks risk management practices гг. Strengthening of consolidated banking supervision and prudential regulation in accordance with the New Basel Accord on Capital. Establishment of the Credit Bureau. Transition to International Banking Regulation Standards

Kazakhstan has a two-tiered banking system. The first tier is comprised of the National Bank of Kazakhstan (NBK), which reports to the president. The second tier includes 38 commercial banks, including one state-owned bank and 16 banks in which foreigners hold 30% or more of the banks shares. The National Bank acquired the functions of a financial regulator after merging with the Financial Supervision Agency in April 2011, and is therefore charged with overall supervision of the banking sector.

The role of banks in economy Kazakhstan National Bank facts The National Bank of Kazakhstan represents within the limits of its authority, the interests of Kazakhstan republic in the relations with the central banks, with banks of other countries, with international banks and other financial-credit organizations. Kazakhstan National Bank should not be guided by the aim of gaining profit in performing its tasks. Kazakhstan National Bank is accountable to the President of the Republic of Kazakhstan, but within the limits of authority granted by the legislation, is independent in its activity. Kazakhstan National Bank coordinates its activity with Kazakhstan Government, in its activity takes into consideration the economic policy of the Government and facilitates its implementation, if doing so is not in conflict with the realization of its main functions and implementation of monetary policy. The primary goal of Kazakhstan National Bank is to ensure the stability of prices in Kazakhstan.

Kazakhstan National Bank functions realization of the state monetary policy in Kazakhstan; issuance of banknotes and coins on the territory of Kazakhstan; the function of a bank of banks; the financial advisor and financial agent of the Kazakhstan Government; organization and supervision of functioning of payment system; realization of currency control and currency regulation in Kazakhstan; management of the gold currency assets of the National Bank of Kazakhstan; control and supervision over the activities of the financial organizations and regulation of their activities within the competence of the National Bank of Kazakhstan; management of assets of the National fund of Kazakhstan.

Dynamics of Changes in Number of Banks in Kazakhstan As of January 1,2007 number of bank branches – 324, Outlets – 1489, Kazakh bank representative offices abroad - 22, Foreign banks representative offices in Kazakhstan - 23.

The banking sector consists of 38 commercial banks, which account for 77 percent of total financial system assets and 44 percent of GDP. Public sector assets represent 60 percent of total banking assets at end-February There are 17 banks operating in Kazakhstan, including 14 foreign subsidiaries. Kazakh banks have a presence in neighboring countries and in Europe.

Banks with foreign participation Banks with foreign participation ( ). - 14, share of foreign bank aggregated assets - 4%. The main target is big corporate clients and trade finance. The largest foreign banks in Kazakhstan are: ABN-AMRO – 11th position on the asset size ($816,1 mln.); Citybank – 13th position ($657 mln.); HSBC – 14th position ($378 mln.); Texakabank (acquired by Russian Sberbank in 2006) – 15th position ($214mln.) Number of foreign bank representative offices - 23, (growth from 17 to 23 in 2006). WTO regulations require foreign bank branches access to internal market of a country. Kazakhstan has therefore, abolished the norm, which limited the participation of foreign investors in bank s capital (previously 50%).

The financial system of Kazakhstan is recognized as one of the most progressive, which is confirmed by leading international experts. Kazakhstan was the first among the CIS countries that has created a National Welfare Fund "Samruk Kazyna" to ensure sustainable social and economic development and reduce dependence on negative external factors. The financial system of Kazakhstan meets basic international standards with the banking sector as the most advanced one.

Capital of top 5 banks of Kazakhstan as of January 1, 2007

Measures on restrictions of banking sector liabilities 1. Мinimal Reserve Requirement are set as following (from 2006): - For internal liabilities – 6%; - For other liabilities – 8%. 2. Decrease in limits of open foreign exchange position (from 1st October 2006): - Open foreign exchange position limit decreased by 12.5% from 15% of equity capital value; - Foreign exchange net-position limit by 25% from 30% of equity capital value. 3. Introduction of Currency liquidity requirements (from 1st October 2006): - Limit of current currency liquidity is set at no less than 0,9; - Limit of short-term currency liquidity is set at no less than 0,8; - Limit of medium-term currency liquidity is set at no less than 0,6.

Measures on restrictions of banking sector liabilities 4. Introduction of maximum limits on attracted short-term liabilities of non-residents in amount of Bank s Equity capital (from 1st September 2006) 5. Introduction of two additional requirements on foreign borrowing restrictions (from 1st April 2007) - Liabilities limit of the Banks to non-residents taking into account placement of Securities; k8(2-4), - Liabilities limit to non-residents without taking into account Securities. к9 (4-6).

Introduction of Basel II standards from 2006 Detailed risk weighed ranking of assets and contingent liabilities when calculating capital adequacy with use of external ratings of borrowers and issuersв; Approach to an evaluation of market risk in accordance with international practice of banking supervision; Approach to an evaluation of operational risk (where capitalization requirements weighed as per operational risks according to new Basel agreement on capital are required to be included in calculation); Including into capital calculation the perpetual financial instruments (hybrid capital); Implementation of separate norms and limits for banks where a main participant is the banking holding.

Consolidated supervision of banking holding companies In financial sector of Kazakhstan there are 9 financial groups established by commercial banks Within the framework of consolidated supervision, the following monitoring is conducted: Financial standing of large participants and banking holdings of banks ; Transactions that are being executed between banks and affiliated entities ; Compliance of the banks, which hold banking groups, with prudential norms for banking groups; Entities, which have significant influence or activity, control on the banks.

SWOT – analyses High capitalization of the banking sector corresponding with the growth of banking assets ; Stabilization of exchange rate of national currency and level of inflation, low market risks; High level of trust, high sovereign ratings, favorable investment climate ; Satisfactory quality of loan portfolio; Satisfactory indicators of profitability and liquidity. High qualified personnel. low transparency of ownership structure ; low diversification of the banking activity, the major part of income flow is concentrated in lending, high level of loan portfolio concentration by sectors and separate borrowers, significant share of lending in foreign currency ; increase of credit risks level because of the growth of loans to non-residents.. decrease of a margin as a consequence competition strengthening Strength Weakness

SWOT – analyzes SWOT – analyzes High growth rate of economy development determines not decreasing lending needs of real sectors, primarily processing industry enterprises, construction and service sectors; Income growth of population forms demands in retail lending developments, other banking services (card business, banking accounts and etc.); Development of concurrent banking services, in particular, broker-dealer, consulting, trust management of assets and accounts and etc.; Further liberalization of currency relations, simplification of investments mechanisms (among them loans) and payments outside Kazakhstan; Creating of credit bureaus, that will simplify control mechanism of unreliable borrowers, and strengthen transparency and reliability of loan facilities market; Improving work efficiency of development institutions – Development Bank of Kazakhstan, Investment Fund of Kazakhstan, National Innovational Fund, Small Entrepreneurship development fund, State Insurance Corporation for the insurance of export credit and investments, and other. Further perfection of monetary policy instruments, and bring into proximity with European Union standards; introduction of supervision international standards of Basel Committee on banking regulation. Competition improvement, among them: - Coming of foreign banks with more advanced technology and cheap resources; - Along with development of credit societies, micro credit organizations conducting separate types of banking operations; Further concentration of banking system by means of Mergers and acquisitions, increase in a number of banking holdings; Strengthening of banking Supervision requirements, in part of prudential regulations and other normative standards execution. Оpportunity Threat Оpportunity Threat

Thank you for attention !