The Agency for Regulation and Development of the Financial Market, along with the National Bank, is responsible for implementing state policy in the sector. The department and its head Madina Abylkasymova regularly come up with initiatives aimed at increasing the transparency and security of banking, brokerage and insurance services. One of the latest and most important proposals is related to the restriction of unsecured microcredit. The Agency is also actively fighting fraud and proposes to tighten the requirements for banking regulations. Abylkasymova is summed up the interim results of the work, spoke about the Аgency’s plans and how she sees the development of the financial market of Kazakhstan, in an interview with Kursiv.    

- Madina Erasylovna, in November is marked the 30^th anniversary of the national currency – tenge. We can say from this moment that, the financial independence of our country keeps its account. How could you describe the evolution of the system of supervision of financial institutions, in this regard?    

- The financial crisis of the last three decades have forced us to reconsider the architecture of global financial regulation.  

After the global financial crisis of 2008-2009 years the financial regulatory system has undergone dramatic reforms. The requirements of the Basel Committee on Banking supervision on capital and liquidity of the banking sector were revised, stress testing of banks was introduced, and macroprudential regulation tools were established to monitor and limit systemic risks. Banking supervision has become more intensive, especially with respect to systematically important banks. Bank resolution regimes have been improved to reduce expectations of emergency government assistance.  

In the post-crisis period in Kazakhstan, the primary task has been to introduce new standards and strengthen existing supervisory approaches.  

To create a system for effectively absorbing shocks, in the period from 2007 to 2014 years, the requirements of the Basel II capital adequacy standard were introduced, according to which the calculation of banks’ capital adequacy is carried out taking into account the weighing of banks’ assets by the level of credit, market and operational risks.    

Since 2015 year, the implementation of the Basel III standard began, which introduced new capital buffers (conservation, countercyclical and systemic), prudential liquidity requirements (LCR and NSFR), as well as a risk management requirements and basic prudential standards for banking conglomerates.   

The main attention is paid to strengthening countercyclical regulation, which provides for the accumulation of an additional reserves during periods of cyclical economic growth and their use during periods of slowdown and recession to maintain economic activity.    

Since 2018 year, the banking sector has switched to valuing financial instruments using the ‘expected loss’ model (IFRS 9), which requires financial institutions to estimate and take into account expected credit losses for all financial instruments.    

Since 2019 year, the process of identifying and resolving problem banks has been improved. The new resolution regime provides for the classification of problem banks depending on their financial condition. And at the legislative level, triggers for identifying problem banks are defined, as well as a deadline for increasing the capital of such banks. This year, the work has begun on the transition to a new model for resolving insolvent banks, aimed at minimizing state participation in the resolution of banks and regulating the interaction of government bodies in crisis situations.     

The institutional structure of financial market regulation has been improved. From January 1, 2020 year, the functions of regulating the financial market were transferred by the National Bank to the Agency for Regulation and Development of the Financial Market. At the same time, the role of the Financial Stability Council has been strengthened as a consultative and advisory body for interdepartmental coordination on issues of ensuring financial stability.      

Since 2020 year, a risk-based supervision model and motivated judgment have been implemented, in order to eliminate a formalized approach in the supervisory process. The central element of risk-based supervision is the European Union supervisory model SREP (Supervisory Review and Evaluation Process). The model is based on the calculation of quantitative and qualitative indicators in 4 main areas: assessment of the business model; capital risks; liquidity risks; corporate governance system.     

Determining the reliable and objective state of the banking sector in 2020 year, an independent assessment of the quality of bank assets (AQR) was completed according to the methodology of the European Central Bank.    

AQR results showed good asset quality in the banking sector and a sufficient level of bank capital to cover risks at the systemic level and the level of individual banks. The qualitative result of AQR was the transformation of all key business processes of banks, in accordance with international standards.      

International principles of regulation and supervision have also been implemented in the insurance sector. And since 2006 year, the solvency of insurance organizations has been assessed in accordance with the Solvency I model, in which only insurance risks are taken into account to determine capital requirements. Since 2023 year, the transition to the Solvency II principles has begun, which are aimed at ensuring the sustainability of the organization, taking into account market, operational and credit risks.   

In the stock market, in order to bring the infrastructure into compliance with the principles of the International Organization of Securities Commissions (IOSCO), in 2020 year a complete modernization of the trading and settlement and clearing system of the Kazakhstan Stock Exchange was carried out; in 2021 year, the institution of a central counterparty was introduced, and the functionality of the central securities depository was significantly expanded. To ensure the security and transparency of trading, the Scila supervisory system was introduced in 2022 year, which makes it possible to identify complex manipulation schemes in the securities market.    

In relation to professional participants in the securities market, the supervisory model Risk Assessment and Supervision System (RASS) is used, which allows, based on the analysis of quantitative and qualitative indicators, to determine the intensity of supervision.

 

-What measured of the Agency are aimed at the systematic development of the financial market? 

-Taking into account a global challenges and local trends, one of the key strategic directions for the development of the financial sector is strengthening stability, stimulating the growth of economic financing, developing and increasing the accessibility of financial services, introducing innovations and financial technologies, and developing the financial market on ESG principles. 

First. Sustainable development of the financial sector requires a regulatory and supervisory regime, that ensures financial stability at the level of the financial system and individual financial institutions.    

Today, risk-based supervision has been introduced in all sectors of the financial market. Regulation and supervision of the financial sector in Kazakhstan is built on the principles of the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors (IAIS), and the International Organization of Securities Commissions (IOSCO). These are key factors in the assessment of the financial sector by international experts, global investors and credit rating agencies.    

Second. One of the key elements of ensuring financial stability is a low level of stressed assets, which requires the development of a market for stressed assets through market mechanisms.     

The most important reform was the adoption in 2022 year of the law on the development of stressed assets, developed by the Agency, which created the conditions for the formation of a liquid market for such assets. This law provides the right to buy stressed assets to any private investors, as well as the creation of an institute of service companies for servicing and managing non-performing loans. In addition, in accordance with this law, banks and microfinance organizations are required to sell property accepted to repay borrowers’ debts within 3 years. Tax changes were also introduced, provided more attractive tax treatment for buyers of distressed assets.   

The creation of a full-fledged infrastructure for the sale of stressed assets is required for the further development of stressed assets market. To the end, this year the Agency has developed and introduced legislative amendments to the Parliament, that will create conditions and contribute to the growth of sales of stressed assets through digital platforms. This includes requiring the sale of distressed assets through digital platforms and giving the Agency accreditation powers to such platforms. Creating a market for distressed assets on market principles will serve two purposes. On the one hand, this is the return of frozen assets to economic circulation, on the other hand, the release of bank capital to expand lending to the economy.    

Third. The development of the financial market should contribute to public interests and increase welfare through the implementation of key functions of accumulating savings and their transformation into investments to finance the economy.    

To expand bank lending, prudential incentive measures have been implemented since 2020 year, within the framework of which the regulatory burden on the capital and liquidity of banks has been reduced, as well as the requirements for banks’ collateral policy have been relaxed.    

Currently, the Agency has prepared an additional package of regulatory incentive measures aimed at increasing the potential of banks in lending to the real sector, including expanding lending opportunities from subsidiary foreign banks.    

In addition, active work is underway to develop automation of lending processes for entrepreneurs. To increase the efficiency of loan issuance procedures, develop scoring models for banks and reduce the burden on businesses to collect the necessary documents, work is underway to provide banks with access to government databases on legal entities.   

However, it is important to understand, that achieving high-quality long-term lending growth, in addition to ensuring bank sustainability and regulatory incentives. It is necessary to solve structural problems on the demand side, as well as ensure favorable macroeconomic conditions, including low and stable inflation. A key aspect is strengthening the resilience of the corporate sector. For this purpose, it is necessary to improve the corporate governance system, improve the quality of reporting and audit mechanisms, as well as increase the efficiency of corporate bankruptcy procedures for the timely withdrawal of insolvent participants from the market.   

Increasing the role of the stock market in financing the economy and developing the securities market, measures have been implemented to increase retail and institutional demand, digitalize the financial services, introduce new financial instruments, and develop the stock market infrastructure.   

In order to further expand an institutional demand, the Agency is developing legislative amendments, provide for the introduction of new types of financial instruments (ETF, ETN) and investment funds, as well as the possibility of transferring the assets of endowment funds to private management companies.    

The insurance sector is one of the major institutional investors in the economy. Insurance protects the property interests of citizens and businesses. To increase the savings of the population, new types of endowment life insurance have been created in recent years, including the introduction of Unit-Linked investment life insurance.     

Fourth. The introduction of ESG principles in the financial market is an important priority area of the Agency’s activities. The Agency has created the necessary legal environment for issuing ESG instruments: green, social bonds, sustainable development bonds and bonds related to sustainable development. A new Environmental Code has been adopted, which introduces the concepts of “green” financing, “green” projects, “green” bonds and “green” loans.     

Fifth. The Agency is taking a stimulating approach to regulation and development of innovation, in the context of accelerated digital transformation of the financial sector.

In the financial sector, for this purpose, the Agency is creating appropriate legislative and regulatory conditions for the introduction of digital financial products and services.

Banks are also given the opportunity to invest in IT and Fintech companies with a share limit of no more than 10% of the banks’ capital. And this approach contributes to the competitiveness of the entire financial sector, and also strikes a balance between supporting innovation and ensuring control over risks in the financial system.      

Sixth. An important factor of trust in the financial sector is the creation of an effective system for protecting the rights of consumers of financial services. The following reforms have been implemented in this direction: an obligation has been established for financial institutions to disclose essential information about financial products to support borrowers, late payments have been limited, and a unified procedure for pre-trial settlement of problem debts has been introduced. In addition, the conditions for writing off blank balances on mortgage loans have been expanded, and the regulation of collection activities has also been tightened.  

- What key processes are taking place in the banking sector of Kazakhstan? 

- The banking sector is the largest segment of the Kazakh financial market, where advanced technologies are being introduced and the best corporate governance practices are used.    

Several key trends can be identified, that determine the current dynamics of development of the banking sector.    

First of all, this is a reduction in stressed assets and an improvement in the quality of banks’ loan portfolios as a result of the rehabilitation of the banking sector. Thus, the share of non-performing loans over the past 5 years has decreased by 2,5 times, from 8.1% to 3.3%, which is a historical minimum. This made it possible to reduce the level of stressed assets on banks’ balance sheets over 5 years from 7.7 trillion tenge to 2.6 trillion tenge.     

As a result of measures taken by banks to reduce stressed assets, non-performing assests worth about 527 billion tenge have been introduced into economic circulation, since 2020 year.   

The second important aspect is the increase in the equity capital and assets of banks, which made it possible to increase the stability of the banking sector. Over the past 5 years, bank assets have doubled, to 47.9 trillion tenge, which is 43% of GDP. The banking sector has a sufficient amount of equity capital, which has doubled over the past 5 years, to 7.1 trillion tenge. The stock of equity capital (k2) as to November, 1 of the current year is 3.5 trillion tenge. Deposits of the population and business are growing steadily, which have doubled over 5 years, to 32.5 trillion tenge, which confirms the high level of confidence in the banking system.   

The third trend should be noted is the active development of digital technologies and innovations, which has significantly changed approaches to the provision of financial services and increased competition in the financial market.   

An important trend is consolidation and increased competition in the banking sector. Over the past 10 years, the number of banks has decreased from 38 to 21 banks. Since 2017 year, the share of assets of the 5 largest banks has increased from 58% to 66%, and the loan portfolio – from 57% to 74%.  

We are also seeing a change in the structure of banks’ loan portfolios. In recent years, the share of mortgages and consumer loans in the structure of the loan portfolios has increased. Thus, the share of consumer loans in the loan portfolio of banks has increased over the past 5 years from 40% to 66%, including for consumer loans – from 25% to 37%, for mortgage loans – from 10% to 20%.     

New legislative initiatives have been developed additionally, and provide for the protection of the rights of borrowers on loans assigned to collectors. It is proposed to limit the sale of citizens’ loans to collectors, for whom debt settlement procedures have not been carried out, as well as to introduce the obligation of collectors to carry out the settlement procedure for previously assigned loans.   

In order to prevent the growth of overdue debt, a restriction is being introduced on the provision of consumer loans to the citizens, if there is a delay of more than 90 days, as well as on the accrual of interest after 90 days of delay on previously concluded consumer loans.     

Expanding the possibilities of borrowers for the pre-trial settlement of overdue debts, it is proposed to expand the powers of the Banking Ombudsman and introduce mandatory execution of its decisions by creditors.     

For qualitative assess the solvency of borrowers, the requirements for calculating the debt burden ratio (DBR) will be tightened. In particular, the DBR will be extended to all loans and all borrowers, regardless of their income level.     

Another important issue of consumer protection is reducing the risks of fraud in the financial market. Over the last two years alone, banks issued 7.8 thousand fraudulently issued loans in the amount of 14.6 billion tenge. At the same time, 82% of such loans were issued by citizens through bank mobile applications under the influence of fraudsters. In addition, over two years, fraudsters stole 6.1 billion tenge from clients’ card and deposit accounts.     

-What trends are observed in the insurance market? In what direction will the sector develop?     

- The insurance industry is developing at a dynamic pace, maintaining a high level of stability and solvency. The solvency margin sufficiency in the market is 5,01, with minimum requirements not lower than 1.         

The assets of the sector reached 2.4 trillion tenge, having increased 2.5 times over the past 5 years. The volume of insurance premiums over 5 years increased 2.8 times and amounted to 794.6 billion tenge.     

The growth of compulsory insurance was facilitated by the transition to electronic insurance contracts, which ensured the geographical accessibility of insurance services. The greatest growth is observed in compulsory motor insurance, premiums for which increased almost 3 times and reached 81.4 billion tenge, and compulsory insurance of workers against accidents – an increase of 2.6 times, to 65.7 billion tenge.     

The Agency has done a lot of work to introduce innovations and digital technologies in the insurance industry. From 2024 year, the full life cycle of an insurance service will be transferred to electronic form: from concluding a contract to receiving insurance payment.    

The expansion of the line of insurance products and the introduction of tax benefits for life insurance contributed to the development of life insurance. Various types of pension annuities (deferred, joint pension annuities) and unit-linked life insurance investment products have become available to consumers.

The growth of voluntary car insurance was facilitated by active digitalization and the implementation of government programs for preferential car loans.     

There is an increase in insurance coverage among the population. Since 2018 year, imputed types of insurance have been actively developing. Today, there are 19 types of imputed insurance and work is underway to introduce two new types: professional liability insurance for medical workers and liability insurance for owners of public places.

It should be noted, our country is at high risk of natural and man-made disasters. One of the important directions for future will be the development of an insurance model against catastrophic risks. This will make it possible to provide the necessary insurance protection mechanisms for the population and business in the event of natural disasters.

- In what direction is the securities market developing now? What are the main trends?       

- The stock market is an important source of financing for the economy and is an alternative to bank lending.      

Over the years of independence, Kazakhstan has formed a competitive stock market with a modern market infrastructure, which demonstrates steady and stable growth in all key indicators. Over the past five years, stock market capitalization has grown by more than 55%, amounting to 40.8 trillion tenge, as of October 1, 2023, or 36.9% of GDP. The volume of securities trading, increased almost 2 times, amounting to 9 trillion tenge at the end of 9 months of 2023 year. The KASE lists include non-government securities of 621 items from 225 issuers.      

Several trends in the development of the stock market can be identified. Firstly, this is digitalization and the development of financial technologies in the securities market, which contribute to an increase in the number of retail investors. Since 2019 year, the stock market has introduced the possibility of remotely concluding brokerage agreements through biometric identification using mobile applications. As a result, since 2019 year, the number of retail investor accounts has increased more than 19 times, to 2.3 million accounts. Today, 95% of customer accounts are serviced remotely.       

Secondly, it is the development of the stock market infrastructure. Since 2019 year, the KASE has completely modernized the trading and settlement and clearing system, introduced a central counterparty in the stock, foreign exchange, money markets, as well as the derivatives market.       

In addition, the functionality of the Central Securities Depository has been significantly expanded. And today, the Central Securities Depository is a regional accounting and settlement hub with a full range of depository and banking services.        

The third direction is expanding the range of available financial instruments and attracting companies to the stock market. Over the past two years, new instruments have been developed and introduced – private placement bonds, investment bonds, bonds without maturity, as well as ESG bond instruments. As a result, the Agency registered about 134 new bond issues with a total volume of 4.8 trillion tenge ($10.2 billion).       

Fourth is an insurance in retail and institutional demand in the stock market. As a part of attracting retail investors to the stock market, second-tier banks holding a brokerage license are granted the right to provide a full range of brokerage services. This made it possible to increase the accessibility of the stock market for the population, including in the regions.         

The fifth direction of the Agency’s work is the development of the derivatives market. In order to implement the provisions of the model law of the International Swaps and Derivatives Association (ISDA) into the legislation of Kazakhstan and improve the ability of Kazakh companies to effectively hedge their risks, a generally accepted procedure for conducting over-the-counter transactions with derivative financial instruments has been introduced into Kazakh practice.       

-The microfinance market is one of the main drivers of lending to micro and small businesses. What are the prospects for the development of the sector and what has been implemented to date?       

-The current vector of development of the microfinance market is largely determined both by the effectiveness of the measures implemented by the Agency in terms of regulation and supervision of market entities, and by the ability of the entities themselves to quickly adapt to changing conditions, revise their business strategies and increase competitiveness.         

Until 2020 year, the microcredit market included various entities providing loans to the population, whose activities were not controlled by anyone. As a result, this led to the accumulation of systemic problems, such as a high increase in loan debt, unscrupulous methods of debt collection, and the lack of reliable mechanisms for borrowers to protect their interests. In fact, in parallel with the legal microfinance market, and a shadow market was formed, which negatively affected confidence in the entire sector.              

In this regard, since 2020 year, all non-bank credit organizations have been included in the Agency regulatory perimeter, and since 2021 year, licensing of microfinance activities has been introduced. Since this period, we have observed a number of positive trends in the development of the microfinance market.       

Firstly, it is increasing the transparency and sustainability of market entities. As a result of the introduction of regulation and licensing, we increased the financial stability of market entities, established capital standards, qualification requirements for the business reputation of management and owners, automation of accounting and financial reporting. In addition, standards for proper compliance controls were introduced to combat money laundering and terrorist financing.      

The second important trend is the increase in the volume of the microfinance market and the strengthening of its role in the development of entrepreneurship. Since 2020 year, the total assets of MFOs have increased 3 times and amounted to 1.07 trillion tenge. And since 2020 year, the volume of microloans issued for business purposes has increased 1.5 times, to 1.1 trillion tenge, which accounts for 51.4% of the microloan portfolio of MFOs and CTs (an increase of 18.2% over 9 months of this year).        

Since the beginning of this year, the Agency has taken measures to ease the burden on the capital of MFOs to stimulate lending to business entities, prudential requirements for MFOs have been revised, and risk-weighting coefficients for SME microloans have been reduced from 100% to 50%. Expanding the lending by the credit partnerships to their own participants, the requirements to calculate the debt burden ratio of borrowers was canceled.         

The third positive trend is increasing investment attractiveness and expanding sources of funding for MFOs. Historically, the basis of the funding base of MFOs was loans from commercial banks and expensive foreign currency loans from foreign lenders.      

In this regard, as one of the main measures to expand sources of funding for microfinance market entities, the Agency has simplified the procedures for attracting debt capital by MFOs on the stock market.      

As a result, MFOs have now become more active in raising financing through the issuance of debt securities. As of today, 46 issues of MFO bonds are registered in the KASE listing.       

Therefore, taking into account international experience, the Agency, together with Baiterek National Holding Company and the Association of Credit Partnerships, has worked out the issue of creating an apex organization, and it will attract wholesale funding and redirect it to market entities.       

As a result of the work carried out, the apex fund APEX FUND I LP was registered in November of this year in the AIFC. This will allow microfinance sector entities to attract funds from international financial organizations, banks and other institutional investors through the placement of debt securities and the issuance of other financial instruments.

Taking into account positive trends, the Agency’s further work will be aimed at increasing the accessibility of microfinance services for micro and small businesses, as well as increasing confidence in the sector on the part of potential investors.       

In order to ensure financing for the activities of regional entrepreneurs, especially in rural areas, measures will be taken to stimulate the development of the institution of credit partnerships, and as well as to expand the participation of the system of MFOs in business development programs.      

To meet consumer demand for financial services, local measures will be taken to expand the list and improve the quality of financial services provided. And the development of online services will continue, approaches to providing services will be improved using the new technological solutions, the Internet and mobile applications.       

As part of increasing the level of confidence in the market, the principles of responsible lending in the microfinance market, business and risk management standards will be introduced to ensure increased responsibility of market entities and their sustainable development.