All the questions
The events of 2021 have forced the Kazakh economy, especially the financial sector, to face the combined challenge of a continued decline in oil prices and new strains of covid-19. However, according to the Financial Market Regulation and Development Agency (AFR), the negative impact of these challenges on the Kazakh banking sector has not been as severe as expected and, in 2021, the banking sector has started to recover gradually. In 2021, annual lending to the Kazakh economy amounted to 18.5 trillion tenge, an increase of 26.5% compared to the previous year. The net income of the banking sector increased by 77.6% compared to the previous year.2 The level of non-performing loans fell from 6.8% to 3.9% in 2021.3 The beginning of 2022 has added new challenges, such as the unrest in Almaty in January and the war in Ukraine with subsequent sanctions against Russia, which will certainly have an impact on Kazakhstan due to the close link between the economy of Kazakhstan and the Russian economy. The local currency has already fallen dramatically. Time will test the stability of the Kazakh banking system in the face of these unprecedented challenges.
The Kazakh banking services market is represented by various players, including banks, organizations that perform certain types of banking operations (banking organizations), payment service providers and microfinance organizations (MFOs). In line with the global trend, fintech companies are also becoming crucial players in the market. Banks operating in Kazakhstan include local banks (conventional and Islamic) and subsidiaries of foreign banks operating as Kazakh legal entities under Kazakh law. As a result of recent legislative changes, foreign banks can now conduct banking business not only through their subsidiaries, but also through branches, which was previously prohibited. There are currently 22 banks in Kazakhstan; of these, 14 banks have foreign ownership, including 11 subsidiary banks, and one bank is 100 per cent state-owned.4 The top five banks by assets are Halyk Bank, Sberbank, Kaspi Bank, Otbasy Bank and First Heartland Jysan Bank.5
The regulatory regime applicable to banks
There are three financial regulators in Kazakhstan: the AFR, the National Bank of Kazakhstan (NBK) and the Astana Financial Services Authority (AFSA). The AFR is responsible for the regulation of banks, branches of foreign banks, banking organizations, MFOs, insurance organizations, pension funds and securities market subjects. The NBK, as the central bank of Kazakhstan, is responsible for monetary policy, stability of financial and payment systems, foreign exchange control and regulation, and regulation of payment systems, system operators payment and payment agencies. The AFSA regulates financial and payment services provided under the Astana International Financial Center (AIFC); namely, financial and payment services provided by AIFC entities to other AIFC entities.
ii Main players in the banking sector in Kazakhstan
The banking business in Kazakhstan is made up of banks, banking organizations, MFIs and, more recently, fintech companies (without a banking license) that provide traditional banking services, such as payments and money transfers. In addition, some special (mostly quasi-state) entities (for example, the Development Bank of Kazakhstan, the national postal operator, KazPost and the Agrarian Credit Company) can also perform banking operations without a banking license provided that permission is expressly granted. by legislation.
Banks and banking organizations
Banks and banking organizations can carry out banking activity on the basis of licenses issued by the AFR or the NBK, or the AFSA for banks established and operating within the AIFC. The list of authorized banking operations for each particular bank or banking organization is detailed in its banking license. Banks are generally prohibited from engaging in any type of business activity other than banking, subject to certain exceptions. Banks, banking organizations and their shareholders are also subject to strict regulatory requirements, including a minimum regulatory capital requirement, prudential ratios and other standards, management and premises requirements, and the assets in which they are held. allowed to invest.
In Kazakhstan, local Islamic banks and branches of foreign Islamic banks can operate alongside conventional banks. Islamic banks are subject to separate regulation by the AFR. They are generally prohibited from charging interest on loans and paying guaranteed interest on deposits. Islamic banks are prohibited from investing in businesses related to tobacco, alcohol, weapons, gambling and certain other activities prohibited by the Council on the Principles of Islamic Finance (the Islamic Council). The Islamic Board is an obligatory body corporate of an Islamic bank which determines key matters of the bank’s business, including permitted transactions, rules of conduct and internal credit policies.6
Foreign bank branches
Since December 2020, branches of foreign banks are allowed to carry out banking activities in Kazakhstan, subject to numerous AFR requirements.
MFOs have a strong position in the Kazakh financial market. Following recent legislative changes, only MFOs, pawnbrokers and credit companies are authorized to issue microloans. Microcredit activity by any other legal entity is prohibited.
Fintech companies are becoming key players in the financial services market. Initially, fintech companies in Kazakhstan operated in the field of microcredit and payments. However, in 2020 the regulator forced companies providing online loans to re-register as MFOs, which are subject to AFR regulation. As a result, most fintech companies now only operate in the payment space. In February 2022, there were 81 payment organizations in Kazakhstan.7 According to the NBK, in 2021 the value of cashless payments increased 2.1 times to 73.1 trillion tenge.8
The payments industry in Kazakhstan is represented by both local payment systems, such as the interbank payment system operated by the NBK, and international payment systems, such as Mastercard, Visa and UnionPay. Payment systems provide payment infrastructure and various high-tech services associated with payments to Kazakh banks. Operators of foreign payment systems must notify the NBK of the start of their operations in Kazakhstan and must comply with general requirements of Kazakh law, such as reporting, personal data and antitrust regulations. However, there are still no detailed regulations applicable to foreign payment systems and their services, which provides them with great opportunities in the Kazakh market.
Cross-border lending to Kazakh borrowers by foreign banks
In practice, it is common for Kazakh borrowers to attract funding from foreign banks that are not present in Kazakhstan on a cross-border basis. The provision of a loan or other financial service by a foreign bank located outside Kazakhstan to a Kazakh customer is generally not considered banking activity for the purposes of Kazakh law and, therefore, may be performed without a Kazakh banking license. However, foreign banks that intend to market and provide loans and other services to Kazakh customers on a cross-border basis must take into account mandatory provisions of Kazakh law, such as advertising restrictions, securities market regulation and currency control regulation.