KAZAKHSTAN

Critically Evaluate the Banking System in Kazakhstan



Critically Evaluate the Banking System in Kazakhstan

Kazakhstan's financial system is currently undergoing a trying period coping with lack of liquidity caused by the subprime crisis in the United States. The banking system is the most developed among the CIS states, possibly even counting Russia, but massive lending sprees in international financial markets and overexposure to the (suddenly hurting) real estate sector seem to be stretching its limits.

The first sign that international investors grew wary of Kazakhstan's success story was the public offering of the GDR's of Kazakhstan third largest bank, Alliance Bank, on the London Stock Exchange(Sloman, 2003). The bank tried to capitalize on global appetite for Kazakhstan's IPO's that enabled two other large Kazakh banks to raise record amounts of money on the LSE and made Timur Kulibaev officially a billionaire.

However, by the time Alliance presented its shares for sale, it was clear that investors were going to pay closer attention to what was offered. The subprime crisis was still contained to the United States, and it seemed likely that the only victims would be a few overleveraged hedge funds whose bets went wrong. But investors suddenly became wary of inherent risks not only in exotic derivative products but also in exotic emerging markets like Kazakhstan.

At the first look, Alliance Bank was a success story and a poster child of Kazakhstan's emerging banking sector. Within less than three years it grew from being the tenth largest retail lender in Kazakhstan to being the leader in June 2007. The bank was a trailblazer in marketing strategies (some rather controversial) to attract retail and SME clients and was the fastest growing banking institution in Kazakhstan. However, the risk factors that this fast growth brought are representative of Kazakhstan's banking sector as a whole.

The overexposure to the retail and construction sectors (in the case of Alliance retail lending represented 45 percent of its loan portfolio) has made the banks vulnerable to macroeconomic shocks(Almaty, 2006). This systemic risk has not been a factor yet as Kazakhstan's overall economy remains relatively stable and healthy. Another important risk factor, however, exposed Alliance, and other Kazakh banks, to the current crisis - its dependence on foreign credit.

More than fifty percent of Kazakh banks' borrowing is conducted abroad, and only 2006 they managed to obtain a combined $18 billion from international creditors. As long as credit was cheap, this influx of foreign money helped fuel the rapid growth of Kazakh banking sector and significantly contributed to the real estate booms in Almaty and Astana. The downside, however, was the ever increasing dependence on the willingness of foreign lenders to finance this growth. Until this summer, credit spreads were extremely low as compared to historical averages. This was thought to be due to a better ability of investors to understand and manage risk with derivative instruments.

The fallacy of this view is clear now but for several years it contributed to the willingness of international lenders to overlook the inherent ...