Problems in Lending and the Banking Sector

The current profitability of banks makes one wonder about the reasons for such remarkable success, and analysis shows that the sector's profitability is secured, among other things, by regulatory measures. For example, the ban on paying interest on current accounts and the caps on rates for foreign-currency deposits on average account for a third of profits: of the KZT 9 trillion in profit over five years, they provided KZT 3 trillion. In the past year alone, of KZT 2.5 trillion in profit, KZT 1 trillion came from regulatory arbitrage. Two points are worth making here:

• Most of the regulatory arbitrage accrues to the large banks, which means that in their profit structure it accounts for even more than 33%.

• Risk-free, high returns greatly weaken the incentives to lend to the economy and take on risk.

Between 2016 and 2022, Kazakhstan's banking sector lost more than 10 banks, and no new players entered the market. There are no new second-tier banks, and as yet there is no clarity on who will come to our market, even though our banking sector is considered one of the most profitable. The change of shareholder at Bereke Bank and the repositioning of Al Hilal cannot be called new entrants. Lesha Bank is a small investment boutique and cannot really be called a bank, while Bereke Bank is self-sufficient in this respect, and Al Hilal simply exchanged its Islamic licence for a conventional one because of the limited scope for Islamic finance in the country. The lack of competition in the banking market prevents lending from developing fully and holds back the development of the industry as a whole. A revision of the law on banks and banking activity is planned for this year, and it should help change the regulatory requirements for new banks. Banks with basic and universal licences should appear.

Banks' current lending to the real sector of the economy rests on a pawnshop approach. To reduce risks, second-tier banks demand liquid collateral and personal guarantees from founders, which greatly limits lending. This is primarily because we have no environment for selling companies as going concerns. Banks have very limited rights, and by the time they become the new owners, the company usually has no value left. How can we move from pawnshop lending to proper lending to businesses against their cash flows?

The current collateral policy is one of the most painful issues for businesspeople. If a businessperson values an asset at one price, the bank will always value it at several times less, which substantially reduces the scope for lending. This became especially noticeable after the asset quality review (AQR), which imposed excessively stringent collateral requirements. Banks also rely more on sales statistics, and the current environment does not allow distressed assets to be sold normally: lengthy recovery procedures and constant restrictions from the state make such assets unattractive. This greatly holds back lending.

Many industries cannot borrow because, owing to legislative restrictions, their main asset cannot be freely sold and therefore cannot serve as collateral for a bank. This category includes agricultural land and subsoil use. Sales of agricultural land are restricted, while subsoil use requires approval from ministries and carries the risk of contract revocation for failure to meet work programmes and contractual obligations, which a bank cannot guarantee.

Consumer lending in Kazakhstan has developed considerably, and one of the drivers was access to data, which made it possible to build proper scoring models and cut decision times to real time. In business lending this is much harder, because data either does not exist or is restricted in use. As soon as banks are able to assess a business's solvency using external data, the speed of decision-making will change dramatically.

In many countries, banks can take equity stakes in large projects, which gives them an additional means of controlling risk and earning income from more than just interest. In Kazakhstan, however, banks are prohibited from holding equity in large companies. Banks bring not only borrowed capital but also corporate governance and transparency.

Because of the restrictions on the UAPF and on rates for foreign-currency deposits, Kazakhstan has a very large pool of cheap foreign-currency funding (1% per annum). Yet banks have hardly anywhere to put it other than the National Bank and securities, because foreign-currency lending is subject to quite strict limits. Some industries, for example, are highly correlated with the tenge exchange rate even though they are not directly export-oriented: car sales in Kazakhstan, sales of exchange-traded commodities, and so on.

The introduction of the new Tax Code envisages a higher VAT rate and other initiatives. This will undoubtedly affect inflation. Even if the impact is felt in only one year, the combination of rising tariffs, the liberalisation of the fuel market and high government spending means that inflationary risks will persist for a considerable time. This year it is tariffs and fuel, next year VAT and other taxes. As a result, in all likelihood we will see no reduction of the base rate by the National Bank either this year or next, which means money will remain expensive throughout 2025 and 2026, and we will see the first base rate cuts only in 2027. So we can forget about lending growth over the next two years, and such growth as there is will be limited to the rate of inflation.

What we call big business would be considered small by the standards of large countries. In Kazakhstan, a company with revenue of more than USD 10 million a year is already classed as large. Yet a leap in productivity and efficiency requires companies with turnover and capital of more than USD 1 billion. There are very few such businesses in Kazakhstan. And it must also be understood that our banking system is unable to finance projects with a ticket size even above USD 100 million. In effect, banks today lend to small and micro businesses that cannot become competitive in the global economy. Without genuinely large businesses, industrialisation is extremely difficult.

Artificial intelligence is becoming ever more important in our lives, and within just 5–10 years it will be embedded quite deeply in them. How are banks using AI now, and how do they plan to use it? Will call centres in their classic form still exist? How will IT specialists work? What will happen to marketers and accountants? What should ordinary sales staff and managers do? What awaits them all?