General introduction to the banking regulatory regime in Kazakhstan
All the questions
The events of 2021 forced the Kazakh economy, in particular the financial sector, to face the combined challenge of continuously lowering oil prices and new strains of Covid-19. However, according to the Financial Market Regulatory and Development Agency (AFR), the negative impact of these challenges on the Kazakh banking sector was not as severe as expected, and in 2021 the banking sector began to recover gradually. In 2021, the annual value of loans to the Kazakh economy amounted to 18.5 trillion tenge, which was a 26.5% increase 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%. up to 3.9 percent in 2021.3 The beginning of 2022 brought new challenges, such as the unrest in Almaty in January and the war in Ukraine with subsequent sanctions on Russia, which will certainly have an impact on Kazakhstan due to the close ties between Kazakhstan’s economy and the Russian economy. The local currency has already dropped dramatically. Time will be a test of the stability of the Kazakh banking system in the face of these unprecedented challenges.
The Kazakh banking services market is represented by a variety of players, including banks, organizations that perform certain types of banking operations (banking organizations), payment service providers and microfinance organizations (MTFs). In line with the global trend, fintechs are also becoming key players on the market. Banks operating in Kazakhstan include local banks (conventional and Islamic) and branches of foreign banks operating as Kazakh legal entities under Kazakh law. Following recent changes to the law, foreign banks are now able to conduct banking activities not only through their subsidiaries but also through branches, which was previously prohibited. Currently, 22 banks operate in Kazakhstan; of which 14 banks have foreign participation, including 11 subsidiary banks, and one bank is 100 percent state-owned.4 The top five banks by assets are Halyk Bank, Sberbank, Kaspi Bank, Otbasy Bank and First Heartland Jysan Bank.5
Regulatory regime applicable to banks
There are three financial regulators in Kazakhstan: AFR, the National Bank of Kazakhstan (NBK) and the Astana Financial Services Authority (AFSA). AFR is responsible for the regulation of banks, branches of foreign banks, banking organizations, MTFs, insurance organizations, pension funds and securities market entities. As the central bank of Kazakhstan, the NBK is responsible for monetary policy, the stability of financial and payment systems, currency control and regulation, and the regulation of payment systems, payment system operators and payment organizations. AFSA regulates the financial and payment services provided under the Astana International Financial Center (AIFC); namely, the financial and payment services provided by AIFC Entities to other AIFC Entities.
ii. Key players in banking in Kazakhstan
Banking activities in Kazakhstan are made up of banks, banking organizations, MFOs, and more recently fintechs (without banking licenses) that provide traditional banking services such as payments and money transfers. In addition, some special entities (mostly quasi-state) (eg Kazakhstan Development Bank, national postal operator, KazPost and Agricultural Credit Corporation) may also conduct banking operations without a banking license, provided that they are explicitly authorized by legislation.
Banks and banking organizations
Banks and banking organizations may carry out banking activities under licenses issued by the AFR or the NBK or the AFSA for banks established and operating under the AIFC. The list of banking operations allowed for each bank or banking institution is detailed in its banking license. Banks are generally prohibited from engaging in any activity other than banking, with some exceptions. Banks, banking organizations and their shareholders are also subject to stringent regulatory requirements, including a minimum regulatory capital requirement, prudential benchmarks and other standards, management and premises requirements, and assets in which they can invest.
In Kazakhstan, local Islamic banks and branches of foreign Islamic banks can operate alongside conventional banks. Islamic banks are subject to separate AFR regulations. Generally, they are not allowed to charge interest on loans and pay guaranteed interest on deposits. Islamic banks are prohibited from investing in businesses related to tobacco, alcohol, weapons, games, and certain other activities prohibited by the Council on an Islamic (Islamic Council) financing basis. The Islamic Council is a mandatory corporate body of an Islamic bank that determines the key issues of the bank’s operations, including allowed transactions, rules of conduct and internal credit policy.6
Branches of foreign banks
From December 2020, branches of foreign banks can carry out banking activities in Kazakhstan, subject to strict AFR requirements.
MTFs have a solid position on the Kazakh financial market. According to the recent changes in the law, only MTFs, pawnshops and credit companies are allowed to provide microcredit. Microloan activity by any other legal entity is forbidden.
Fintech companies are becoming key players in the financial services market. Initially, fintechs in Kazakhstan operated in the field of microloans and payments. However, in 2020, the regulator forced online loan companies to re-register as MTFs, which are subject to AFR regulations. As a consequence, most fintech companies currently operate only in the area of payments. As of February 2022, 81 payment organizations were operating in Kazakhstan.7 According to NBK, in 2021 the value of non-cash payments increased by 2.1 times to 73.1 trillion tenge.8
The payment industry in Kazakhstan is represented by both local payment systems such as the interbank payment system operated by NBK, and international payment systems such as Mastercard, Visa and UnionPay. Payment systems provide payment infrastructure and various high-tech payment services for Kazakh banks. Foreign payment system operators must notify the NBK of the start of operations in Kazakhstan and must comply with the general requirements of Kazakh law, such as reporting, personal data and antitrust laws. However, there are no detailed regulations on foreign payment systems and their services so far, which gives them great opportunities on the Kazakh market.
Cross-border loans to Kazakh borrowers by foreign banks
In practice, Kazakh borrowers often obtain funding from foreign banks that are not present in Kazakhstan on a cross-border basis. The granting of a loan or other financial service by a foreign bank located outside Kazakhstan to a Kazakh customer is generally not considered a banking activity under Kazakh law and can therefore 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 the mandatory provisions of Kazakh law, such as advertising restrictions, securities market regulations and currency control regulations.