Where Will the Money to Lift the Economy Come From?

In the course of my work, I often deal with second-tier banks. Recently I also approached one of them for a mortgage. My subjective experience, both professional and personal, shows that we have serious problems with lending. I will not write about specific banks, but the trends are as follows:

1. Second-tier banks do not want to issue mortgages.

2. Second-tier banks do not lend to business in tenge, only in dollars and only for short periods.

3. The only money available is state money, which is issued only for specific priority projects and not to everyone.

The reasons lie on the surface and, in my opinion, are as follows:

1. At present, second-tier banks are funded only by state money and household savings. There are no other sources.

State money is channeled through three routes:

• development institutions, which lend for specific projects or programs, such as Damu Fund or the Development Bank of Kazakhstan. This money is earmarked, and not everyone can use it;

• the UAPF (Unified Accumulative Pension Fund), which places deposits with second-tier banks, but this money is expensive because the UAPF needs a return, and there is not that much of it either;

• money from the quasi-public sector, but given recent trends in global markets, and given that this is not long-term money, it is not a reliable source of long-term lending.

Household money is highly mobile and cannot guarantee long-term availability. Given the lack of liquidity, this money is also expensive and is mostly held in US dollars.

2. The external market is closed. Since the 2009 crisis, our banks have barely borrowed from abroad, because Western investors do not trust them. And even if they do borrow, the money will be in foreign currency, which raises the question again: whom do we lend to in US dollars? Or else the banks must take on the currency risk themselves. They could avoid it by passing it on to the client, but the rules of the National Bank do not allow lending in foreign currency to everyone, only to those with foreign currency revenue.

3. Devaluation expectations. The joint statement issued by the government and the National Bank in December was far too vague. It contained a great deal that was already known: as the saying goes, 90 percent about Nurly Zhol and 10 percent specifics. It seemed to me that it was written in a way that leaves room to backtrack. Another, more significant point is that oil prices continue to fall, and today the price has already dropped below $49. Below $50 a barrel, the rate of the rent tax falls, and below $40 it will be zero. All this means lower budget revenues, and it makes everyone worry about the stability of the tenge. Accordingly, nobody wants to lend in tenge over the long term, in order to reduce currency risk.

4. A wretched financial market. Previously, second-tier banks could raise additional funds on the Kazakhstan Stock Exchange (KASE) by placing their long-term bonds among market participants. After the merger of the pension funds and the general decline of the financial sector, nobody buys these bonds or wants to buy them. Our market is populated only by small local traders, who do not move it. There are no Western participants. I have not seen any program for developing the stock market either.

5. There are no decent projects, and weak corporate culture, opaque ownership structures, a weak system of external audit and a lack of reliable marketing information prevent our banks from properly analyzing projects. All of this leads only to collateral-based lending. In a falling market, the value of collateral also falls, which reduces the capacity to issue loans.

6. A flawed system of regulation of lending by the National Bank. The National Bank has created a credit file system under which a borrower needs at least a month to assemble the documents. Loan officers say that 50–60 percent of the file is never even looked at and is assembled merely to tick a box, for inspection by the Financial Supervision Committee. In other words, the National Bank has simply created additional unnecessary obstacles for banks, which only increases transaction costs and has no effect on decision-making. It would be better to focus not on the number of papers in the credit file, but on the quality of the information provided by the borrower. That requires changing the legal requirements for legal entities, audit, corporate law and so on, developing audit standards and strengthening oversight of audit activity.

All this means that second-tier banks, as commercial organizations, will not be able to lend to the economy amid so many risks and so much bureaucracy. They will act only as agents for distributing state money, handling "operations" and restructuring their own loan portfolios.

What needs to be done:

1. In the short term, bring back the swap program. This would have a multiplier effect: tenge liquidity would increase and confidence in the tenge would grow, since the National Bank would be sharing risks with the banks.

2. Use state money to finance only 50 percent of a project, with the second-tier bank contributing 30 percent and the borrower 20 percent. In that case, the banks would have to provide part of the financing in tenge. Yes, the rate for the borrower would rise, but the banks could then be allowed to lend 40 percent of all state money to any projects, which would also expand the scale of lending.

3. Conduct a full review of the credit file and ease collateral requirements.

4. In the long term, develop a concept for stock market development, so that the exchange becomes a source of funding for both large businesses and second-tier banks.

5. Develop a program to improve corporate law. Rather than forcing everyone to be a member of the National Chamber of Entrepreneurs, it would be better to require large and medium-sized businesses to undergo an audit. It costs the same money, but accounting in companies would improve and there would be at least some transparency. It would be easier for banks, since they would receive genuine financial statements rather than fabricated ones.

6. Improve oversight of auditors and appraisal companies. This would also improve the country's business climate.

7. Prohibit by law the withdrawal of money before a deposit expires, so that money can be withdrawn only at the cost of forfeiting the interest. This would reduce the flow between deposit currencies and the rivalry among second-tier banks, which currently prevents them from making a proper forecast of assets and liabilities and, accordingly, from extending long-term loans.

Of course, the problem needs to be studied in more detail, but without proper financing of the economy, there are serious doubts about achieving the planned GDP growth targets for 2015.