Bolat Zhamishev, chairman of the board of the Development Bank of Kazakhstan (DBK), recently spoke with “Liter” national daily newspaper about the results of the bank’s activities, its new product offerings and raising capital in foreign and Islamic finance markets.
What were the financial indicators of the DBK last year and could you highlight key points in the bank’s work for the time you have led it?
Let us first talk about figures. The net (net of provisions) consolidated loan portfolio of the bank grew more than two times (115 percent) in comparison with 2013 to 815.2 billion tenge (US$3.4 billion). The volume of provisions to loan portfolio decreased from 12.2 percent to 4.03 percent from Dec. 31, 2013 to Dec. 31, 2014. Consolidated net profit amounted to 11.26 billion tenge (US$47 million), which is 41 percent less than in 2013, but much higher than expected. Therefore, we have fulfilled all the figures on the development plan and strategy.
The quality of the loan portfolio is very high due to the transfer of problematic loans to the Investment Fund of Kazakhstan. Generally, the condition of our balance sheet is such that we have no problems at the moment in order to engage in our core business – lending of large loan projects (i.e. according to our memorandum of projects from $30 million). This is speaking about the financial indicators. If talking about achievements in the system of corporate development, I would like to highlight a number of points. For last year and this year, we made a decision regarding optimisation of business processes and significantly reduced the duration of consideration terms.
What are they for today?
As the result of the decision, the consideration terms were reduced by 31 days (from 85 to 54), including the stages: primary selection – from 15 to 11, bank examination – up to 20 from 30, the stage of decision making – from 30 to 17 working days and the preparation and signing of contracts – from 10 to 6 days.
Fifty-four days – it is still a long time, no? You must understand that we, as a development bank, deal only with major projects. I previously gave you the minimum threshold amount that ranges from $30 million. Moreover, this is production projects and often projects are greenfield, i.e. from scratch. In addition, we made significant progress on a number of products offered by the bank.
And what about you, do you work in the greenfield sphere? Could you tell us more about new products offered by the bank?
We used to have the same procedures in credit process on export and pre-export financing and for investment projects. We changed it. Since export and pre-export financing requires a valid business for which working capital must be allocated under the export contract, other approaches were needed. Therefore, we reviewed these processes to ensure that they conform to classic practice.
I think we can say that the DBK is the only bank in the country, rather than anyone else, which provides project financing in compliance with the classic requirements for this instrument. A financing project is when there are any hard collateral or guarantees in providing and when 70 percent of the components can be EPC contracts with contractors or offtake contracts.
It should be noted that the clearer these contracts are written, the lower the risks that the contractor will leave the initiator of the project with unfinished work and will perform all required work and will run the project; the clearer conditions, the smaller the discount factor. Same with offtake contracts. It is clear that we do not accept memorandums of intent to purchase the products; the more clearly written contracts for the purchase of products, the less our discount. Generally, as I said, the maximum of these two contracts can be up to 70 percent of the collateral of the project. Therefore, we are really engaged in project financing where future businesses are ensured, not an existing business. This is generally regarding our new products. Now we are working on the possibility of granting syndicated loans. Since we are a bank that lends to large projects and we have restrictions on the limit per borrower or group of borrowers who make up 25 percent of the bank’s capital, that is the situation where we are not able to self-finance the entire project. In that case, we co-finance projects.
We have developed this tool and now we are working on the possibility of attracting syndicated loans. A syndicated loan is when several financial institutions issue loans under one agreement. In addition, here we do not necessarily see ourselves as the organiser of the transaction. We can enter into a syndicate as participants. Now we are working on a legal framework; the relevant proposals were sent to the National Bank. In addition, it is necessary to amend the draft laws, in particular, in business code. Moreover, we are making amendments for project finance, because now there is a law on project finance and securitisation, which does not work. It is clear that the improvement of business processes involves computerisation, so since March we have implemented a system that allows us to completely abandon a paper-based system. In fact, due to computerisation we reduced the lead time at different stages of our lending activities.
What is the structure of the bank’s loan portfolio?
On March 31, 2015, 73 percent of the loan portfolio was accounted for with investment projects, 14 percent – project bonds, 9 percent – interbank loans, 3 percent – loans to the affiliated company DBK Leasing and 1 percent – export operations. As for greenfield projects, since the launch of DBK, decisions were adopted to fund 108 projects worth $8 billion; 62 of them are greenfield amounting to $4.2 billion. As for the current loan portfolio, there are 16 such projects with funding of $2.9 billion. That means we are a bank which finances mainly greenfield.
The funds of the National Fund: how much were allocated, for what purpose and what volumes mastered? The total allocated was 245 billion tenge (US$1 billion), including 75 billion tenge (US$312.8 million) to finance the investment projects under the second five-year state programme of accelerated industrial and innovative development (SPAIID-2), 100 billion tenge (US$417.1 million) (in two equal tranches) on loans to large enterprises in the manufacturing sector, 70 billion tenge (US$292 million) for financing domestic manufacturers of cars, helicopters and passenger cars and export loans.
The financing structure of projects in SPAIID-2: the National Fund – 75 billion tenge (US$312.8 million) and DBK own and borrowed funds – 150 billion tenge (US$625.6 million). The purpose of the National Fund under SPAIID-2 – it projects in the manufacturing industry – 70 percent of total funding (metallurgy, petrochemical industry, chemistry, machinery, construction materials, food industry, pharmaceutical industry and others), projects in other sectors of the economy – 30 percent. The mechanism of development of credit resources is a direct lending project by DBK. Funding of projects in the manufacturing industry consists of two equal tranches of 50 billion tenge (US$208.5 million) each. Both tranches are channelled through commercial banks. Overall, 13 banks are involved in the development of the first tranche and 12 in the second for financing such projects as 23 sectors in the manufacturing industry, including food manufacturing, clothing, paper products, refined petroleum products, basic pharmaceutical products, etc.
The funds of the National Fund in support of a number of existing industries and promotion of Kazakhstan’s exports (70 billion tenge) (US$292 million) are distributed as follows: 35 billion (US$146 million) – export loans (goods manufacturing), 20 billion (US$83.4 million) – to support the automotive industry, 10 billion (US$41.7 million) – Eurocopter helicopters (through leasing) and 5 billion (US$20.9 million) – passenger cars (direct lending from KTZ). Funds to support the car industry of Kazakhstan are provided in the form of conditional funding of second-tier banks (a total of six banks) under the programme of preferential car loans to individuals (15 billion tenge) (US$62.6 million) and lease special (except agricultural) technology using DBK Leasing (5 billion tenge) (US$20.9 million).
What are the plans of DBK regarding external funding: the programme, volume, timing, and tools?
We attracted $1.15 billion from two Chinese banks and according to our calculations, we have no need to attract foreign currency loans, including next year. Such requirements of the bank will appear in 2017. We certainly would like to see effective placement in foreign markets made by the Ministry of Finance, because we need a positive benchmark for corporate borrowers. After that, we could also start to examine the options and maybe even hold a road show without accommodation in order to prepare the ground for our possible loan at the end of next year. But this need depends on what projects come to us. That is, if we actively lend in excess of our plans to our borrowers in foreign currency, we will have major new projects and then, perhaps, this need will appear in the next year.
DBK was the first bank in Kazakhstan that made borrowing through an Islamic financial tool – sukuk…
I should say that we analysed it and came to the conclusion that it was not a very effective campaign, or more precisely, non-systemic. Let me explain why. If you have obligations in sukuk, it is logical that you have assets or loans in Islamic instruments, too. Because otherwise, it’s more a PR move than an economically-justified and effective operation. And now DBK Leasing works on amendments to the legislation (by the way, some of these amendments have already been adopted) on the issues of Islamic finance.
Why DBK Leasing?
I believe that leasing transactions according to their economic model is very close to the essence of Islamic finance. Because there you can do without an interest rate; that is, acquiring fixed assets at one price and passing them at a different price to the lessee. This is quite consistent with the spirit and principles of Islamic finance. With recently adopted legislation, we are considering a tool that will be able to provide leasing operations on the principles of Islamic banking. In this case, our DBK Leasing could effectively look for partners among Islamic financial institutions and accordingly, finance their customers on the basis of Islamic financial instruments. That’s when it would be a finished, reasonable scheme. We are working on it very actively. There is a caveat; we are trying to implement this scheme in the framework of the amendments that were adopted. However, regarding appropriate legislation on Islamic banking, the real needs of the market can be understood only when these deals are real. So far, all the amendments were made on the basis of theoretical background and therefore numerous amendments have led only to a partial, not a comprehensive solution to the issue.
Do I understand correctly you have attracted Islamic money, but have not done any agreement with clients on Islamic finance?
Yes. We do not have any project that we did. But once again, the best option is to do it using DBK Leasing, so we do that now.
The article is published in a shortened version. The full version appeared in “Liter” newspaper. Translated and placed with permission.