Money and Risk Are Different Things: Why Business Lending Is Not Growing

I am often asked why lending to legal entities is developing so slowly in our country. Recently I read someone's indignant remark: so much money is being allocated through government programs, yet loans to business are not growing.

My main thesis is this: money and risk are different things.

Let me try to set down a few thoughts on the subject.

Banking regulation in Kazakhstan is among the most advanced in the post-Soviet space, helped by the adoption of Basel III standards, asset quality reviews (AQR), stress testing and so on. The crises of past years taught us these lessons and drove the progress. Risk models are being calibrated and ever more risk assessment tools are being introduced, which in turn raises the requirements banks place on borrowers to meet these principles.

The number of borrowers that meet risk assessment principles is very small. In other words, alongside the regulation of banks, the quality of the borrowers themselves must improve. But this is not something that can be done quickly, and it requires structural change, because the key influence on a business is the environment in which it operates.

Let me give one small case as an example.

Recently, a case was lost in court. The essence is this: a certain organization gets new management. It digs up old documents and sees that, say, 10 years ago the previous management sold a building at an understated price. The building was then sold again, and a company that owned it later pledged it as collateral to a bank. The bank foreclosed on the building in bankruptcy proceedings and then sold it on. The organization's management decided to contest all of the transactions and went to court. Our "humane" court, against all logic and common sense (and there were at least three bona fide purchasers before the final buyer), decided to annul all the transactions and return the building to the original organization. The building itself is nothing special, but it sits on a good plot of land. How are banks supposed to assess risks when accepting property as collateral if we have no protection of private property rights or of bona fide purchasers? Otherwise, they will have to conduct a full check on all previous owners of the collateral and on how it was acquired. This lengthens the lending process, raises collateral requirements and puts credit out of reach for many.

In other words, as long as such strange decisions continue, banks will play it safe on both collateral and guarantors, because the probability of losing the collateral, or even of later transactions being overturned, is simply very high.

In my own practice, I have even seen entrepreneurs take out a small loan just to pledge their property as collateral in order to protect it.

These are examples of our environment, in which private property is not guaranteed, and this undermines every effort to create a favorable investment climate.

Therefore, for lending to grow, we should not be fighting interest rates or liquidity right now. We should start by understanding the risks and how to minimize them for businesses and banks alike. And there is no end of work to be done there. Court decisions are inconsistent. Notarial enforcement inscriptions and the enforcement of arbitration awards simply do not work. Tax legislation is open to double interpretation. There is no well-functioning mechanism for determining customs value. There is no established practice of selling pledged subsoil use rights, nor are there protective mechanisms for banks. After all, during foreclosure a bank cannot carry out the work program under such contracts. Public Service Centers (PSCs) bear no responsibility for changing the chief executives of organizations on the basis of illegitimate decisions. And this list could go on and on.

It is from such small details that the operating environment is made up, one that does not allow risks to be assessed properly or loans to be made normally.