The Problem of Mortgages and Lending

A BI Group roundtable on mortgage market development took place the other day. I regret that I was unable to attend, but I would like to share my views on the subject. I believe the issue should be considered more broadly: the problem lies not in the mortgage market as such, but in the state of our financial market as a whole, which hampers lending both to the real sector of the economy and to homebuyers.

The question of the base rate, currently 14%, has become tiresome, and in my view the effect of keeping it this high has turned negative. The main problem is no longer inflation itself. The imbalance has now shifted to another quarter: the state budget, which has a revenue problem. Several factors affecting the budget are familiar to everyone: a strong tenge, which reduces exporters' earnings and puts pressure on local producers; high public debt servicing costs, which depend on the base rate; and weak incentives for corporate growth because of high interest rates. All three factors depend on the base rate. For developing countries, achieving sufficiently low inflation is extremely difficult, and I will write a separate post on this later. For now, it is time for balancing the budget and economic growth to move to the forefront.

But beyond the rate itself, there is the question of the availability of long-term liquidity in the market, and this is a major problem for lending. Long-term liquidity can be achieved in two ways:

A developed stock market, in which short-term money is transformed into long-term money. Those with short-term liquidity can buy long-term securities, yet if they urgently need cash, they can either sell them or borrow against them.

Developed institutional investors, such as pension funds, mutual funds, insurance companies and other investment funds. In our country, however, all types of funds are simply underdeveloped, and after the merger of all pension funds, institutional investors have effectively disappeared from Kazakhstan. The long-term money held by institutional investors is constrained by prudential liquidity requirements, which prevent them from buying long-term assets and assets rated below BBB, a level that most banks do not meet.

At the same time, the presence of institutional investors is one of the key factors in developing the stock market. The UAPF does exist in the market today, but its purchases are made largely on a manual basis, to carry out particular economic policies of the state.

As a result, many banks cannot issue long-term bonds and sell them on the market, and neither can corporate clients and other players. To make long-term debt instruments attractive, there must be a developed repo market for these securities, and we do not have one. If institutional investors existed, they would most likely be willing to take on repo risk on long-term securities, where the risk is covered by the rate and the collateral haircut. But at present, the UAPF is essentially the only large player in the market, and it plays no part in its development. To develop the repo market, someone must act as a central counterparty and provide liquidity, regulating demand through the rate and the haircut. For government securities, that role is currently played by the National Bank, which will provide any amount of liquidity against government bonds. No such facility exists for corporate (including bank) and quasi-government securities. The matter is open to debate, but if the National Bank were to operate in the repo market through its funds, it would greatly increase other players' interest in the securities of banks and corporate issuers. That would make it possible to raise long-term funds on the market, and thereby provide liquidity for mortgages and projects with long payback periods. As things stand, even with enormous liquidity at their disposal, banks find it extremely difficult in practice to finance long-term projects and mortgages.