Financial system, and sme financing in Kazakhstan - bet 5

Enhancing Competitiveness in Central
Asia
(2018) report documented that an absence of access to finance for firms, especially
in the agriculture sector, is one of the central obstacles to improving the sector’s
competitiveness. Already low levels of loans have deteriorated further as a result of the
global economic crisis: the amount of loans granted to the agriculture sector decreased
significantly from KZT21.3 billion (equivalent to USD139 million) in 2007 to KZT14.6
billion (equivalent to USD95 million) in 2009 and only accounted for 4.9% of the total
bank loans in 2018 in Kazakhstan. SMEs, especially those in the agriculture sector, face
unfair competition from the informal sector, which accounts for 20% of the total
employment (OECD 2018).
Oil prices affect the economy via two channels—direct and indirect. Oil price shocks
could have an influence on bank profitability directly through increased oil-related
crediting, expanded business activities, or excess liquidity in the banking system. Oil
revenues generated in oil-exporting countries, and prospects of oil revenue, exert an
impact on fiscal spending, which in turn affects corporate and bank profitability through
credit to the private sector. The other indirect channel functions through the expectations
and the overall business attitude in the economy. Higher oil prices could induce
government revenues from oil exports and lead to favorable conditions, which boost the
1
For more information on the reasons behind the oil price fluctuations during the global financial crisis, see
Taghizadeh-Hesary and Yoshino (2014) and Yoshino and Taghizadeh-Hesary (2014, 2016).
2
Source: National Bank of Republic of Kazakhstan database (2018). “Loans to Economy, Regional
Breakdown.” http://nationalbank.kz/?docid=215&switch=english.
ADBI Working Paper 904
Y. Dosmagambet et al.
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domestic demand and in turn lead to higher levels of bank confidence and lending and
declining nonperforming loans. High oil prices also fuel public and private investment
and thus increase the productive capacity of economies. This is especially observable in
the example of the pre-crisis boom. With soaring oil prices, oil-exporting countries
promoted investment programs to diversify the domestic economy and improve human
capital. However, higher oil prices in oil-exporting countries often lead to a hike in the
inflation rate (Taghizadeh-Hesary et al. 2013, 2016).
Given the concentration of exports of resource-based countries on extractive industries,
the link between oil prices and the financial system, including the banking sector, is of
considerable policy interest in our study not only during the period of financial crisis but
also during the boom–bust oil cycles. Do oil prices influence the financial system and its
performance, and, if so, what could be the relevant channels through which they affect
the financial system? Furthermore, is there a link between oil prices and bank
performance and how does it relate to SMEs’ access to financial sources? The purpose
of this study is to conduct an empirical investigation on
these issues.
The banking sector turmoil has affected SMEs. Second-tier banks
3
in Kazakhstan have
performed badly since the 2008–09 financial instability, and the decline following the drop
in oil prices in 2014–15 adversely influenced them. This has been an obstacle
to recapitalizing the weaker commercial banks, forcing them toward consolidation.
Most of the smaller banks depend on a few clients and in some cases a single customer,
making them fragile when runs or rapid changes in corporate policy occur. The
government has undertaken action, including the acquisition of the shares of second-tier
banks, the establishment of the Problem Loan Fund,
4
and the backing up of
nonperforming loans and SMEs’ lending support. Nevertheless, the commercial banks’
access to foreign capital has halted, and the costs of borrowing have soared. For SMEs,
this has implied a considerable reduction in the bank credit availability.
Lower oil prices and the reduced supply of foreign currency in the domestic market have
tended to depreciate the domestic currency, increase the import costs, and cause an
increase in the domestic inflation rate. The depreciation of the domestic currency and
the dollarization have exacerbated the balance sheet risk (currency risks) of financial
institutions and impeded the credit growth extended to SMEs. In addition,
they have increased the concerns about the stability of the banking system, which
is still confronting the aftermath of the 2008–09 financial crisis. The rating agencies have
downgraded several large banks to junk status based on their significant foreign
exchange exposure and huge exchange rate risk following the local currency
depreciation and/or inadequate capital.
3
A bank that is not as large as the main banks in a country.
4
The Problem Loans Fund commenced operation on 11 January 2012 with the main objective of
implementing measures aimed at improving the quality of the commercial banks’ loan portfolios in
accordance with the requirements of normative legal acts. Its main activities include purchasing bad loans
from commercial banks, managing its assets, and issuing debt securities to finance its activities. Currently,
the central bank is a shareholder and owner of the Common Shares, State Property, and Privatization
Committee under the Finance Ministry, which is also a shareholder and owner of preferred stocks.
Accessed 5 November 2018. https://astanatimes.com/2017/03/kazakh-government-intends-to-take-
action-to-resolve-problem-loans/. The National Bank will hand the Fund of Problem Funds to the
Government. The Minister of Justice, Marat Beketayev, reported this at the plenary session of the Senate,
presenting the draft law “On Introducing Changes and Amendments to Some Legislative Acts
of the Republic of Kazakhstan on Improving Civil, Banking Legislation and Improving the Business
Environment.” Accessed 5 November 2018. http://www.government.kz/en/novosti/1007466-fund-of-
problem-loans-to-be-handed-from-the-national-bank-to-the-government.html.
ADBI Working Paper 904
Y. Dosmagambet et al.
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