On April 14, the National Bank of Kazakhstan officially marked its 20th anniversary.
June 20, 1991 was a decisive date in the history of our banking system. That was the day the law on banks and banking activity in the Kazakh Soviet Socialist Republic was adopted by the Supreme Council of the Kazakh SSR. This law became the legislative base for the reform of the banking system. It established for the first time the legal definition of a commercial bank and it allowed the creation of other credit institutions, especially private banks and banks with foreign capital.
The 1991 law stipulated the basic tasks and functions, including monetary and credit regulation of the state bank. But its most important innovation was the establishment of procedures to open commercial banks, terminate their activities and establish the principles by which the state bank would regulate them.
The second key date in the development of the National Bank came on April 14, 1993 when a law establishing it was enacted. The State Bank of the Kazakh SSR was then renamed the National Bank of Kazakhstan (NBK). The main task of the NBK was its role in directing and regulating state policy on the circulation of money. The 1993 law also defined the NBK’s structure, functions, rights, powers and responsibilities.
In mid-1993, it was decided to establish a state commission to introduce the new national currency, the tenge. The process of replacing the Soviet ruble with the tenge started at 8.00 am on Nov. 15, 1993 and it was successfully completed by 8.00 pm on Nov. 20, 1993.
On March 30, 1995 President Nursultan Nazarbayev signed a new decree giving new powers to the National Bank. This allowed the NBK to perform the specific central bank functions of regulating credit and currency exchange transactions. It also received the authority to lend to commercial banks in order to maintain their liquidity. Also in 1995, the government opened a new factory to print banknotes and created an inter-bank foreign exchange market.
The introduction of the new national currency, the tenge, allowed the National Bank to conduct an independent monetary policy. Its previous function of generating credit was transferred to the second-tier, or commercial banks. The National Bank began to solve its main problem of stabilising the national currency. In other words, it won the battle to bring down inflation to low levels and established a stable exchange rate for the tenge.
The NBK also began to issue its own securities, or short-term notes. It began to conduct open market operations and provide loans. The National Bank also became fully independent of the government and Parliament. It became accountable only to the president. This proved an important contribution to the effectiveness of monetary policy.
The period of the national currency’s introduction was characterized by a tremendous boom in domestic production, but also of soaring inflation. In 1993, the average inflation rate was 30.1 percent and the decline in real GDP reached 9.2 percent.
In these difficult conditions, the government and the National Bank identified as priorities the gradual reduction of inflation and curbing the decline in production. These measures succeeded and hyperinflation fell from 2,265 percent in 1993 to 60 percent in 1995.
Gradually, National Bank monetary policy improved, and the arsenal of its tools expanded. The bank used such financial instruments as the refinancing rate, reserve requirements and its power to intervene in the domestic foreign exchange market. Then, the NBK began to issue its own securities or short-term notes to grant overnight credits, to conduct open market operations with government securities and attract deposits from banks. The success of this policy was confirmed by the reduction of inflation in 1998 to its historically lowest level of 1.9 percent a year.
Monetary policy in our country is constantly improving, and therefore its goals and objectives also are changing.
From Jan. 1, 2004, the NBK was entrusted with the additional goal of ensuring price stability.
The basis of this decision was a common and classic international practice: to promote the rapid growth of household savings, maintain social stability, ensure the effectiveness of investments in the country and most importantly to stabilise prices in order to protect the value of incomes.
In 2008, when the global financial crisis began, the paramount challenge we faced was to coordinate government actions to prevent the breakdown of the entire national financial system. One of the most important documents to achieve this, the government and the National Bank adopted a joint action plan to stabilise the economy and the financial sector in 2009-2010. Under this plan, adopted on Nov. 25, 2008, considerable funds were allotted for state aid to be provided to four banks: the BTA, including its subsidiary Temirbank; the People’s Bank of Kazakhstan (Halyk Bank); Kazkommertsbank and the Alliance Bank.
These measures worked well. But foreign financial institutions were not able to continue medium- and long-term lending to the Kazakh banks through the financial crisis and therefore our banks were forced to turn to the domestic market to raise their long-term funds. Since then, there has been a lack of long-term sources to fund the Kazakh banks since the deposit base is a short-term source of funding. As a consequence, there remains a significant maturity mismatch of assets and liabilities.
To tackle this problem, align the credit lending structure and create additional incentives for economic growth, I think the banks need to attract alternative sources of long-term funding in the domestic market. They can do this by issuing new debt instruments to institutional investors. However, there are certain constraining regulatory requirements banks and institutional investors. These need to be revised in order to expand the sources of medium- and long-term funding.
At present, the overall rate of risks in the banking system remains at an acceptable level. However, the high level of credit risk is critical for the sustainability of the banking sector as a high level of non-performing loans in the total loan portfolio of banks, does not allow them to lend more actively to the real sector. However, the National Bank has introduced special arrangements to clean up the balance of non-performing loans by creating the FPC and setting up a new structure to cancel or “forgive” non-performing loans without tax liability. This is helping resolve that particular problem.
The National Bank now uses stress testing to regularly assess the stability of the banking sector in the event of another adverse macroeconomic scenario. Recent stress tests published in the “Report on the Financial Stability of Kazakhstan in 2012”, showed that, despite relatively high amount of expected losses, the capital adequacy ratio of the banks is in the range of valid values.
Today, the most urgent task of the National Bank is to introduce the new Basel 3 standards proposed by the Basel Committee on Banking Supervision. They will improve the ability of banks to absorb shocks arising from financial and economic stress. These standards will strengthen the quality and structure of capital. They will raise minimum values to the level of capital.
These new standards will be introduced in two stages:
Phase One will take place over the next five years from 2013 to 2017. They will phase out or exclude instruments that do not meet the standards of Basel 3, and will introduce new conservation buffers;
Stage Two will take place over the following three years from 2016 to 2018. They will gradually increase capital requirements.
The division of the schedule into two stages greatly facilitates the transition of the banks to the new requirements as the first phase involves the reduction of minimum values of capital compared to current requirements.
The author is deputy chairman of the National Bank of Kazakhstan.