Where Kazakh Banks Are Headed

The article «Loan Provision Is Growing Thanks to the Retail» published by Russian weekly Expert forecasts that, based on the results of 2019, the ratio of business loans to the GDP will finally increase after the three years of constant shrinkage up to the round figure of 50%. Meanwhile, in Kazakhstan, by our crude estimates, this indicator is unlikely to surpass 25% at the year-end.

Why do we think so? Because, as of November 1, 2019, the volume of Kazakhstan Tier-Two Banks’ (TTB) loan portfolio constituted only 13.763 trillion tenge (data taken from the table «The Financial Performance of Tier-Two Banks as of 01.01.2019») and is unlikely to grow more than by 2-3% during the two remaining months of the year. Whereas, according to the data provided by the Statistics Committee of Kazakhstan’s Ministry of National Economy, the 2018 country GDP determined via the production approach constituted 61.8 trillion tenge and, based on the preliminary results of the 9 months of 2019, it constituted 44.1 trillion tenge.

Since Kazakhstan and Russia do not simply share the state borders and have not only the tight political, economic, social and other connections but the similar economies and political systems as well, the question arises — why is Russia’s banking system so much more generous to the non-banking sector than Kazakhstan’s? Especially considering that Russia, since 2014, has been existing under the economic and political sanctions imposed by the US and Europe whereas Kazakhstan is believed to be a country that is pursuing flexible foreign policy and is not at quarrel with anyone.

In order to understand the reasons for such discordance, let us turn to the numbers again. Here is a table we have prepared based on the National Bank’s official data from Subsection «Total Balance Sheet» of Section «Total Reports» published on the regulator’s website. (The terminology used in our table corresponds to the terminology of the regulator).

In order to make the comprehension of this table easier, we have chosen to include individual data only. Nonetheless, the given data cover a rather prolonged period of time — from January 1, 2005, to October 1, 2019, and allow us to make certain estimates and conclusions.

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Let us start with the capital of Kazakhstan’s TTBs. If, as of January 1, 2005, it only constituted 271 bln tenge, then, by October 1, 2019, it reached 3.295 trillion tenge. In other words, it grew by more than 12 times. And this, in spite of the two serious banking crises that peaked in 2008 — 2010 and 2016 — 2018. Moreover, if we are to evaluate the dynamics of the TTB capital in the US dollars, we will see that it was positive as well and showed the growth from 2.08 $ bln to 8.49 $ bln, in other words, by 4 times.

The TTB loan provision to the non-banking sector did not increase in such a significant way. The volume of the claims to the clients, as of October 1, 2019, constituted 11.499 trillion tenge against 1.629 trillion tenge (as of January 1, 2005). In other words, it grew by just a little over 7 times. In the dollar terms, these indicators equal 12.53 $ bln and 29.64 $ bln, respectively; growth by 2.4 times. The other four indicators constituting the asset structure — the volume of the TTB funds held on correspondent accounts in other banks, the claims to the National Bank of Kazakhstan, the securities (both long-term assets assigned for sale and securities held until maturity) grew much more dramatically.

For instance, the volume of the TTB funds held on correspondent accounts grew from 150 bln tenge (as of January 1, 2005) to 2.592 trillion tenge (as of October 1, 2019) or by more than 17 times. In the dollar terms, the dynamic of this indicator is not as noticeable, but it still exists — 1.15 $ bln and 6.68 $ bln, respectively; growth by 5.8 times.

The TTB claims to the National Bank of Kazakhstan, as of January 1, 2005, grew from 79 bln tenge to 1.25 trillion tenge as of October 1, 2019, or by almost 16 times. This is what it looks like in the dollar terms: 0.61 $ bln and 3.22 $ bln; growth by 5.3 times.

The dynamics of the volume of the securities (both assigned for sale and held until maturity) looks just as impressive. The aggregate value of the former increased from 213 tenge (as of January 1, 2005) to 3.597 trillion tenge (as of October 1, 2019) or by almost 17 times. In the dollar terms, it means 1.64 $ bln and 9.27 $ bln; growth by 5.7 times. The latter grew from 136 bln tenge (as of January 1, 2009 when this indicator first appeared in the regulator’s reports) to 1.912 trillion tenge (as of October 1, 2019) or by 14 times. In the dollar terms, they constituted 1.13 $ and 4.83 $ bln, respectively; growth by 4.4 times.

What do these data demonstrate?

First, despite all the problems and difficulties, Kazakhstan’s TTBs have grown strongly in terns of their size for the past 15 years. However, at the same time, they are still weaker than their foreign «colleagues» from the developed counties and Russia while their aggregated indexes correspond to a medium-size Western bank.

Second, for the past 15 years, the volume of the TTB loan provision to the non-banking sector has increased more in terms of the national currency, by a little over 7 times, than in the dollar terms (by 2.4 times). With that, the dynamics of this indicator in terms of both the tenge and the dollar is several-fold weaker than the dynamics of the volume of the TTB funds held on correspondent accounts in other banks, the claims to the National Bank of Kazakhstan, the securities (both assigned for sale and held until maturity).


In our opinion, for the past fifteen years, the liabilities structure of Kazakhstan’s TTBs has undergone the important quantitative and qualitative changes. As of January 1, 2005, their total liabilities to the clients constituted only 1.618 trillion tenge whereas, as of October 1, 2019, they reached the mark of 17.131 trillion tenge, growth by almost 16 times.

The two following specifics have been a part of this growth.

First: if, as of January 1, 2005, the volume of the TTB claims to the clients (1.629 trillion tenge) almost corresponded to the volume of their client liabilities (1.618 trillion tenge), then, as of October 1, 2019, the picture seems to be completely different. The claims to the clients in the amount of 11.499 trillion tenge corresponded to the client liabilities in the amount of 17.131 trillion tenge.

In other words, the calculated ratio of the «turnover» of the temporary available cash funds of physical and legal bodies — the depositors into the banking system of the country against physical and legal bodies — the borrowers from the banking system decreased from 1.01 to 0.67.

Second: thanks to the massive-scale inflow of the available cash assets of physical and legal bodies, the latter became the main funding source for Kazakhstan’s TTBs. If, as of January 1, 2005, the share of their client liabilities constituted 66,9% of the total volume of liabilities, then, as of January 1, 2019, it reached 75,1%.

Taken together, these figures show that, to a large extent, Kazakhstan’s TTBs stopped performing their main economic role of collecting and redistributing temporary available cash funds within the national economy.

We have already answered the question of why the money get stuck in TTBs on several occasions, for instance in the publications such as these — On the National Bank’s «Wonder Emporium» and AFK’s Devious Means and On Halyk Bank’s Sabotage. Therefore, we will limit ourselves to simply registering this fact and its numeralization.

As of January 1, 2005, the total volume of TTBs’ available funds on correspondent accounts in other banks, of their claims to the National Bank of Kazakhstan, their securities both assigned for sale and kept until maturity constituted 442 bln tenge or 3.4 $ bln whereas, by October 1, 2019, it grew up to 9.351 trillion tenge or 24.1 $ bln; growth by 21 and 7.1 times, respectively.

The reason why Kazakhstan’s TTBs prefer to keep their temporary available funds on correspondent accounts, in securities and on deposits in the National Bank is obvious — the maximal profitability with the minimal risks. Why the National Bank of Kazakhstan spends gigantic sums to support TTBs as part of the withdrawing of excess liquidity from the market policy is also clear — in order to maintain the national currency exchange rate at the required level and, at the same time, to save the domestic banking system (or at least those financial institutions that are most «closely related» to Akorda) from the unavoidable collapse.  

In view of this, one can, once again, cast a stone at the National Bank and its Chairman Erbolat Dosayev as well as at Akorda and the «Library». However, one thing precludes us from doing this — TTBs cannot and should not increase loan provision indefinitely, especially if the country does not have enough high-quality borrowers (the physical and legal bodies that are not debt-ridden, can service their loans and guarantee their return).

And this is exactly what Kazakhstan has a huge problem with. The table we’ve prepared can help to comprehend its scale. It includes the inter-temporal changes of indicator «Accumulated interest income». This this the income of TTBs that was calculated in accordance with the loan agreements but not collected. 

The inter-temporal changes of these amounts and their absolute scale indirectly testify to the quality of the loans. So, if, as of January 1, 2005, they accounted for only 1,8% of the total volume of the TTB’s assets, then, as of January 1, 2010, they already accounted for 7,6% of the total volume of the TTB’s assets, and, as of January 1, 2012, they constituted 9,0% of the total volume of the TTB’s assets. Then, over a period of several years, the indicator value had been gradually decreasing reaching the mark of 3,1% as of October 1, 2019.


As part of evaluating the state of Kazakhstan’s banking system, we are going to offer a definition that the National Bank of Kazakhstan and TTBs may consider offensive but that we believe provides the most adequate characterization of the existing situation in the sector — «obesity».

In other words, when a certain living organism receives a great deal more of the nutritional substances than it needs to receive in order to function normally, the surplus is systematically stored in the form of fat that poisons the organism. And the caring «parents» (the National Bank and the Government) do anything in their power for this «overweight» being to continue accumulating the «fat».

Let us try and puzzle out when and how the «obesity» started.

The table shows that, up to January 1, 2010, the volume of TTB’s demands to the clients had surpassed the volume of their client liabilities. It was then when the ration changed to the opposite. If, as of January 1, 2009, the volume of TTBs claims to the clients constituted 7.928 trillion tenge against 6.885 trillion tenge of their client liabilities, then, in one-year time, these indicators constituted 5888 trillion tenge and 7.856 trillion tenge, respectively.

This is how the situation stands today. The plussage (albeit it fluctuated from year to year) on the whole has only been increasing. As of January 1, 2010, it constituted 1.968 trillion tenge declining to 774 bln tenge by January 1, 2011 and growing to 1.555 trillion tenge by January 1, 2014.

The next jump happened in 2017-2019: if, as of January 1, 2016, the surplus of TTBs client liabilities against their claims to the clients constituted 2.071 trillion tenge, then, as of January 1, 2017, it constituted already 3.812 trillion, as of January 1, 2018 — 5.787 trillion, as of January 2019 — 5.533 trillion and as of October 1, 2019 — 5.632 trillion tenge.

It is not hard to see that the periods of the growing «obesity» of the Kazakh banking system coincided with the periods of the banking crises and, therefore, of the active interference on the part of the state for the purpose of «saving» the banks. But here, again, we are not prepared to cast a stone at Akorda, the Government and the National Bank. In our opinion, their guilt, gigantic and irremissible, does exist but they too were a victim of certain developments within the national economy.

Of course, they themselves assisted these developments quite a bit. For instance, by using the 2008 financial crisis and the following worsening of the state of local TTBs in order to complete an individual political task. By our estimates, the 2009 seizure of BTA Bank JSC under the pretext or its «rescue» cost Kazakhstan at least 20 $ bln of the direct losses of the budget and the National Fund of the Republic of Kazakhstan. All this because the Leader of the Nation, curtesy of his immediate circle, decided that this was the best time for solving the problem called «Mukhtar Ablyazov».

Nonetheless, we believe that, in this instance, Nazarbayev, his main political opponent and Akorda together with all the state structures including the National Bank were hostages of what can be called the problem of the economic growth of the countries forced to switch from the state-planned economy to the market economy. The problem lies in the fact that, on the territory of the former USSR, the market economy and the market relations had been developing much faster than the quality of the population.

It is for this reason that we believe the state of the market economy in Kazakhstan is significantly worse than in the Baltic countries and by times worse than in the neighboring Russia. This seems to be one of the reasons for both the dramatic increase of the presence of the state in Kazakhstan’s economy and the absence of adequate possibilities for national investors to invest with the minimal risk and the maximal profitability. 

As a result, the banking system has become «obese». It is when individual social and business groups have more than enough money, yet its larger share is doomed, or moved out of the country to the offshore and private foreign bank accounts or deposited in local TTBs.


Probably everyone in the country knows that Kazakhstan’s banking sector is experiencing serious problems even though the situation may not be critical. Also, everyone knows that the share of the non-performing and uncollectable loans in TTBs’ portfolios is significantly bigger than their reports demonstrate. At the same time, it looks like no one including the National Bank knows what steps to take to remedy the situation. So, the regulator seems to be moving with caution by making small steps forward (such as conducting the outside evaluation of the loan quality while being ready to retreat or to rethink its decisions at any moment).

The reason for such cautiousness on the part of Akorda, the «Library», the National Bank and the Government are quite clear. For if the regulator starts reducing the volume of the excess liquidity withdrawal from the market in order to force TTBs to increase loan provision to business and the population, TTBs will find themselves in a trap with no way out. They will have to not simply deny the requests of their clients (first of all physical bodies) related to depositing funds on saving accounts but lower interest rates in a significant way.

Since, in our opinion, a large part of this «castaway» money will not end up on the consumer market, the Kazakhs will rush to buy foreign currency. Not so mush in order to make profit on it as to ensure the security of their savings since other possibilities comparable to keeping the money on bank accounts in terms of the risk and the adequate earning power simply do not exist in Kazakhstan and abroad. Therefore, the excessive domestic demand for dollars and euros will «crash» the market and the exchange rate will skyrocket.

Apart from the direct threat to the national currency exchange rate, the danger of this kind of moves on the part of the authorities lies in provoking a negative response of those who will suffer the most in these circumstances — the major depositors. We are talking about members of the ruling elite, a significant part of officials and entrepreneurs. In other words, those who, today, support Akorda and the «Library» since they are keen on preserving the internal political stability and their relatively safe standing in the country and society.

The paradox is that Kazakhstan has somehow forgotten that the banking sector is a part of the national economy (like the vascular system of a living organism). And if it is experiencing problems (in this instance, the cash «blood clot»), the causes of the disease must be searched for not only and not so much in the banking system per se as in the entire market mechanism.

This task is exactly what the First President and his immediate circle have not been able to accomplish. The reasons (both objective and subjective) are numerous, and the excessive administrative pressure together with the massive-scale corruption are not even the main ones. It is for this reason that, up until now, Nursultan Nazarbayev and his immediate circle, at the suggestion of local and foreign advisors, have been placing an emphasis on attracting foreign investors hoping that the latter will come to Kazakhstan and reform it.

We believe this policy has failed: foreign investors (first of all banks), had seriously «burnt» themselves in Kazakhstan during the 2008 — 2010 economic crisis. What we need now is time so that a new generation of managers takes the position of the leaders of international companies and investment funds. In other words, we believe that the massive-scale interest in Kazakhstan will appear at the turn of the 2030s, in other words, some 20-25 years after the 2008 crisis.

Until that time comes, foreign investors will come to the country on the individual basis and this will cost the country quite a bit. If only because the money has to be spent not only on PR-campaigns but also on the up-keeping of such a costly business-toy as the Leader of the Nation’s Astana International Financial Centre.


To sum up, let us repeat the idea we have already articulated in the article Does Kazakhstan Really Need Investments? 

«So, the question we would like to pose to the local market participants — the potential investors and authorities; the question that, in our opinion, must be — widely and actively — discussed inside the country is this. Does Kazakhstan truly need foreign investments?

Personally, we think it does not.

Why? Because, today, the country has enough of its own investment potential. It consists of:

а) the resources kept in the National Fund of the Republic of Kazakhstan (at the end of September 2019, they constituted US59.4 $ bln according to the official data).

b) the idle funds of the second-tier banks a significant part of which is taken by the National Bank of the Republic of Kazakhstan (about US9 $-10 bln),

c) the idle funds of the citizens deposited at the banks (8.7 trillion tenge as of September 1, 2019),

d) the idle funds of legal bodies deposited at the same banks (7.9 trillion tenge),

e) the idle funds of both legal and physical bodies deposited at the foreign financial institutes as well as on the offshore companies’ accounts (it is hard to estimate their size, but we are talking about tens of billions of US dollars).

It is difficult to assess the total volume of the monetary funds that belong to the Kazakhs that may eventually be invested in the economy, but we are certain we are talking about no less than a hundred billion dollars».

Let us repeat, in our opinion, Kazakhstan does not need foreign investments today since the country has more than enough of its own cash resources. The main question and the main problems lie elsewhere — in how to create a normal market attractive to the national investor? Up until now, the Kazakh authoritarian system and the super-presidential vertical have been doing everything in their power not to let the normal market appear in the country.

Currently, the situation is starting to change (at least, on paper) but, in our opinion, at least 3-4 years will have to pass until the big locally-oriented business that, logically, can and must become the leader of the economic changes risks to ask the authorities for even the smallest favor for everyone’s (not just its own) benefit. At this point, we will not even bring up the word «demand» since less than 20 years have passed after the defeat of the first Democratic Choice of Kazakhstan.


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