>Kazakh Central Bank remedies are unlikely to tackle fundamental supervision problems in Kazakhstan’s banking sector. Political influence will still trump formal oversight, writes Camilla Hagelund.

SEPT. 15 2017 (The Conway Bulletin) — After bailing out Kazakhstan’s biggest lender, Kazkommertsbank (KKB), the National Bank of Kazakhstan (NBK) is now attempting to “reset” the country’s financial sector through a new financial support package and by boosting its own regulatory powers.

The measures introduced by the NBK are designed to improve reporting on and auditing of banks. They will also strengthen the NBK’s ability to act on its own accord. Political interference and past tendencies to bury bad news mean dramatic changes are unlikely to materialise though.

Kazakhstan’s banking troubles began with a build-up of toxic debt during the 2007-2009 crisis. These remain a burden for many Kazakh banks.

The NBK now readily admits that official statistics do not reflect the full scale of the problem. The NBK estimates that the share of non-performing loans could be as high as 25%, contrasting dramatically with the official figure of 12.8%. One of the limitations the regulator seeks to address with further regulatory powers is its current reliance on bank-reported data.

But because of the political connections of major bank shareholders, further regulatory powers are unlikely to improve the effectiveness of supervision. The biggest, KKB and Halyk Bank, are now controlled by President Nursultan Nazarbayev’s immediate family, while Tsesna Bank, the country’s third largest, is owned by the head of the Presidential Administration, Adilbek Zhaksybekov.
KKB provides an apt illustration of the restrictions on the regulator and auditors alike. According to our sources, the NBK unofficially acknowledged that KKB was bankrupt at the end of 2015 but, despite knowledge of this, the auditor approved the bank’s accounts.

Auditors likely fear that too much honesty will hurt their lucrative contracts with the government, and though the NBK may not have felt empowered to initiate a restructuring of KKB, its total lack of action indicates that political influence was exerted over the regulator.

As control over important banks remains in the hands of elite insiders, it is implausible that additional regulatory powers will overcome the ineffective oversight and moral hazards characterising the banking sector. It appears the country’s institutions unfortunately remain subject to the informal rules of the game in Kazakhstan.

Camilla Hagelund, Principal Central Asia Analyst at risk consultancy Verisk Maplecroft

.ENDS

— This story was first published in issue 343 of The Conway Bulletin on Sept. 15 2017