CFO Summit Panel on the Role of Banks

CFO SUMMIT KAZAKHSTAN 2024

PANEL DISCUSSION No. 2

Topic: "The Role of Banks in the New Kazakhstan"

Panel composition:

Moderator:

· Yeldar Abdrazakov, Chairman, Kazakhstan Growth Forum.

Participants:

1. Madina Abylkassymova, Chairperson, Agency for Regulation and Development of the Financial Market (ARDFM) of the Republic of Kazakhstan;

2. Alina Aldambergen, Chairperson of the Management Board, KASE;

3. Bekzhan Pirmatov, Chairman of the Management Board, Forte Bank;

4. Umut Shayakhmetova, Chairperson of the Management Board, Halyk Bank;

5. Galim Khussainov, Chairman of the Board of Directors, Teniz Capital Investment Banking;

6. Yerzhan Dossymbekov, Managing Partner, Grant Thornton.

Key questions for the panel:

• The President has criticized banks for providing insufficient financing to the real economy. Which of Kazakhstan's strategic economic challenges should and can commercial banks address?

Our banking system really does not fully perform its lending function. But we need to understand that banks here are commercial institutions, and they lend to whatever is profitable. Right now that means the consumer segment, including BNPL, car loans and so on. So we should ask why corporate lending is less attractive than consumer lending. In my view, the underlying problem lies in the institutions and the environment in which companies operate.

First, business in Kazakhstan is highly opaque, which means risk assessment takes a long time.

Second, when banks go through recovery proceedings, they run into serious difficulties: the rule of law does not always work, and the laws themselves currently lean toward borrowers, which makes it extremely hard for banks to recover and sell collateral.

Third, there is no competition in the market. After a large number of banks were closed starting in 2016, the number of banks fell sharply, so borrowers no longer have a choice of where to take their projects.

Fourth, since the introduction of Basel III and continuous supervision, banks have to meet the established requirements, while borrowers themselves do not meet those criteria, because our market is not yet developed. Perhaps we rushed to adopt Western standards while the market was still immature.

Fifth, we have no long-term liquidity, because the stock market has been in its infancy for some 20 years now and is not developing.

Perhaps we should address the institutional problems that make the sector unattractive.

• The economy of the New Kazakhstan needs to develop its non-resource sectors. What are the goals of your bank's current strategy?

We have been talking about developing the non-resource sector for a couple of decades, yet we have not achieved much. Perhaps we should not place such emphasis on it, spending enormous amounts of public money on subsidies.

It is better to build infrastructure and create conditions for companies, pursue sound monetary policy, reduce inflation and increase competition, and the market will develop on its own.

• What products are aimed at solving the problems of SMEs?

For SMEs, it is critically important to obtain loans quickly. This requires developing unsecured lending and creating lending platforms, such as factoring platforms, as well as leasing products. It also requires access to government databases, so that scoring models can be introduced and decision-making times shortened.

• The understanding that clients need banking services but do not need banks themselves has given rise to fintech. Share your vision of the development of new financial services and the digital transformation of your organization.

We are in the middle of a digital boom, and banks are its drivers, at least in our country. Banks are themselves turning into digital ecosystems and becoming lifestyle apps, where you can buy goods, tickets or order food.

At the same time, banks still have room to grow and much to build, since many processes have yet to be digitized.

There is great potential for further integration into govtech.

• Household over-indebtedness has become one of the critical factors holding back economic development. Share your vision for solving the problem.

Over-indebtedness does exist in Kazakhstan, and it concerns the segment of unsecured loans. But we cannot do without consumer lending: once people have the opportunity to consume today rather than tomorrow, they are unlikely to give that up quickly. In this sense, it is important to move toward greater competition and the demonopolization of certain segments, which will bring lower interest rates on loans.

We need more disclosure. For example, with BNPL we do not know what the effective interest rate really is.

We need to promote financial literacy, because people often cannot calculate costs correctly: they count in absolute terms and think in terms of overpayments, ignoring the time factor.

I am not a big supporter of bans and restrictions, because they reduce competition.

The main problem in consumer lending lies in the low level of real household incomes. To reduce consumer lending, we need to raise real incomes, but that is a completely different and very large-scale task.

• The exchange rate is one of the main instruments of economic policy. Share your view of the factors that will shape the tenge rate over the next two years and your forecast for the rate at the end of this year.

Many factors affect the rate under market pricing. First of all, these are the trade balance and the current account. Globally, the exchange rate of any currency depends on inflation: if inflation is high, the currency will weaken over the long term. Inflation results from various factors, including monetary ones, such as the base rate, and budget spending. The higher the base rate, the lower the inflation; the more spending, the higher the inflation. Right now we see very high budget spending alongside a high base rate, and as a result the Government and the National Bank of Kazakhstan are acting out of sync.

Non-monetary factors include growth in supply to meet demand and growth in labor productivity, so that our goods can compete with foreign goods.

We should understand that when the state budget is unbalanced, with revenues not matching expenditures, the only option is to raise nominal revenues while holding spending, and the fastest way to do that is to devalue the currency, so that exporters earn more profit in tenge and thereby pay more taxes.

Now we see imports rising, exports falling, a negative current account and an unbalanced budget, and all of this puts pressure on the tenge. At the moment the tenge is being held up through front-loaded currency sales from the National Fund and various unscheduled currency sales, such as last year's sales to purchase KMG shares.

• Economists are greatly concerned by the shortage of equity capital and the heavy dependence on borrowed capital. Share your vision of developing sources of equity capital.

Development of the stock market

Improvement of the institutional environment

Development of the AIFC and AIX

There is a unique opportunity now: Russia used to be the regional hub, and today we can and should become one.