World Monitor’s editorial staff spoke with Madina Abylkassymova, the Chairperson of the Agency for Regulation and Development of Financial Market (hereinafter – the “Agency”), on the adopted complex of anti-crisis measures against the backdrop of the coronavirus pandemic, ensuring the stability of the banking sector, on the results of an independent quality review of the banking sector’s assets, on the development of the stock market and transferring part of the people’s pension savings to private management.

What measures have been taken to mend and improve the stability of the banking system? What measures are planned and will be implemented in the coming months?

Ensuring the resilience of the banking sector against the backdrop of the coronavirus pandemic and deteriorating economic conditions has been the main task of financial regulators. The Agency, together with the Government and the National Bank, implemented a set of anti-crisis measures in order to mitigate the impact of shocks on the economy and financial system.

During the implementation of anti-crisis measures in the financial sector, we took into account the experience of foreign financial regulators and the recommendations of the International Monetary Fund. In particular, we considered approaches to support capital and liquidity, to release capital buffers, to expand the types of guarantees recognized as highly marketable collateral, and mitigate requirements for the formation of provisions (reserves) when granting deferred payments. Since March 2020, the Agency has introduced 23 temporary prudential regulation measures to support capital and liquidity. Equity capital and liquidity were released in the amount of more than two trillion tenge, which aimed at absorbing bank losses from the pandemic and increasing lending to the economy.

To preserve the ability to service loans and reduce the debt burden during a pandemic, on behalf of the Head of State K.K. Tokayev we provided individuals and SMEs with a timely deferral of loan payments for a period of three to nine months. The grace period was used by over 1.9 million people and 12.5 thousand SMEs.

In the context of the economic crisis, the priority task was to support the financing of SMEs and ensure access to credit resources. On behalf of the president of the country, in order to prevent a decrease in the availability of loans, the National Bank has developed and implemented a SMEs’ Preferential Loan Program to replenish working capital at a borrower’s rate of 8% since March 2020. In October 2020, the program was extended until the end of 2021 with the expansion of its coverage by including large businesses and bringing the total volume to 800 billion tenge. The program helped to mitigate the negative impact of quarantine measures and support the business activity of SMEs. Thanks to the program, SMEs received 11.1 thousand loans in the amount of 1.1 trillion tenge.

In general, the timeliness of these anti-crisis measures allowed us not only to support the economy during the crisis, but also to minimize the spread of negative influences on the banking sector. As a result, in 2020, the growth of loans to the economy amounted to 5.5%, and in 8 months of 2021 to 12.5%.

In 2020, the Financial Stability Improvement Program, which has been implemented since 2017, was adjusted to reflect the results of the AQR. Coverage of losses were identified following the results of the AQR was carried out at the expense of the banks’ shareholders and the use of a guarantee instrument to cover the credit risks of banks.

Thus, in the context of covering the losses of the banking sector accumulated in previous years, the Agency, in order to prevent an increase in systemic risks in the future, will monitor the implementation of corrective action plans based on the results of the AQR, which will significantly transform the key business processes of banks in accordance with the best international practice and will ensure the sustainability of the development of the banking sector in the long term.

Please tell us about the results of an independent asset quality review of the banking sector. What results were achieved?

For an independent quality review of banking business processes and their compliance with international standards, an independent asset quality review of the largest Kazakh banks (the AQR) was carried out for the first time in 2019, which was completed in March 2020. The AQR methodology was consistent with the methodology of the European Central Bank and minimally adjusted to the specifics of the Kazakhstan market.

The AQR has become the largest project implemented in the financial sector of Kazakhstan. More than 500 employees of audit and consulting companies, more than 60 employees of the National Bank, and more than 70 independent evaluation companies were involved in the AQR process.

More than 87% of banking sector assets were reviewed, 1.9 billion data points on loans were collected, more than 7,000 large collateralized objects were reviewed throughout Kazakhstan.

During the AQR, unique information was collected about the real state of affairs in the country’s banking sector, which became the basis for improving banking business processes in accordance with international best practices.

The results of the banks’ asset independent review showed sufficient capital reserves to cover the losses identified during the AQR. The capital adequacy ratio for the system as a whole was 12.7% with the regulatory minimum, taking into account capital buffers – 7.5%.

In view of the need for a qualitative improvement of banking processes, as a key aspect of the conducted AQR, we have established the minimum terms for their implementation. It is expected that by the beginning of 2023, banks should completely update their business processes in accordance with international best practices and complete their automation.

We believe that the information obtained during the AQR will also contribute to the effective implementation of the risk-oriented supervision system. Since the approaches, procedures, and methods of collecting and analyzing data used during the program will improve the banking supervision toolkit, which will more effectively, efficiently, and objectively monitor the risks in the banking market in the future.

How does the development of the stock market affect the investment attractiveness of Kazakhstan for foreign investors?

The basic principles for building an efficient stock market include liquidity and availability of the range of financial instruments, the state of the exchange and settlement infrastructure, uninterrupted systems, as well as ease of access for any investor. A lot of work has been done in Kazakhstan to ensure that the local market meets the needs of not only consumers of Kazakhstan, but also allows foreign investors to work in their usual conditions.

Several years ago, the Kazakhstan Stock Exchange (the KASE) launched the services of a central counterparty in the foreign exchange market. In 2020, the functions of the central counterparty were already introduced for all transactions with all securities, and subsequently, the guarantees of the central counterparty for the execution of transactions were extended to the money market. The reliability of the execution of transactions in all segments is a very important advance towards the generally accepted world practice of the exchange market.

At the same time, the further development of the central counterparty includes a number of technical, analytical, and even custom tasks that may not be obvious to an ordinary investor, but they provide the development of trust relations between all market participants and also contribute to an increase in the level of market recognition, including by non-residents.

To this end, work is underway to obtain accreditation of the central counterparty from the European Securities and Markets Authority (the ESMA) in the medium term, which will make it possible to classify legislation of Kazakhstan with its functioning infrastructure along with the advanced financial markets of Europe and the United States.

Special attention should be paid to the state of the depository infrastructure. The Central Securities Depository of Kazakhstan complies with key international standards and is currently rated A+ by the Thomas Murray rating agency. In the medium term, it is planned to transform the Central Securities Depository from a local central depository into a regional accounting and settlement hub, as well as, in general, to strengthen inter-depository ties with external markets.

In the international indices of MSCI and FTSE Russel, the stock market of Kazakhstan has been classified as Frontier Markets since 2017. We are working to increase its position in these indices to the Emerging level, but even now foreign institutional investors can expand portfolio investments in public companies of Kazakhstan.

In 2021, a re-evaluation was carried out by these services, according to the results of which it was noted that the stock market of Kazakhstan meets the main quality criteria for the Emerging Markets category of MSCI and meets the quality criteria of the Secondary Emerging Markets category of FTSE Russel.

To further increase the demand from non-residents, as well as the share of market participants in public securities placements, it is necessary to continue working on building the public securities yield curve, as well as to enter the JPMorgan Government Bond Index-Emerging Markets international index. Entry into the index will provide demand from investors who carry out index or passive management of the portfolio of bonds of emerging markets and the inflow of portfolio investments in the countries participating in the index.

Today, one of the main trends in the global financial community is sustainable business development based on the ESG principles, the implementation of which is aimed at the realization of environmental and social obligations under international agreements, such as the Paris Climate Agreement. The financial sector plays a key role in this initiative, providing financing for the green economy and driving the transformation of companies, taking into account the ESG risks for long-term sustainable development.

In the future, in the field of introducing the ESG into financial market regulation, it is planned to carry out stages of developing recommendations for the implementation of the ESG principles by financial organizations, developing legal requirements for financial organizations to implement the ESG principles, as well as introduce monitoring of the ESG risk and their integration into the supervision system.

The Agency for Regulation and Development of Financial Market has implemented the transfer of part of the pension savings of citizens to private management. What was this done for? What benefits will the citizens of Kazakhstan get from it?

At the instruction of the Head of State to grant citizens of Kazakhstan the right to use part of their savings for alternative purposes, the Agency has implemented the possibility of transferring its pension savings under the management of private management companies.

This right can be exercised by citizens who have not reached pension age, who have pension savings that exceed the minimal sufficiency threshold, as well as persons who have entered into pension annuity agreements with insurance companies that provide them with lifelong annuity payments, within the limits of the balance of pension savings in individual pension accounts in the Unified Pension Savings Fund (the UPSF). At the moment, the number of such investors who, in accordance with the conditions, can transfer their savings to the management of private investment companies is about 800 thousand people.

At the same time, the UPSF investor shall have the right to choose one or several management companies that best suit their investment preferences from the list of investment portfolio managers admitted to managing pension assets. The rest of the pension savings will continue to be managed by the National Bank.

Thus, the right to transfer pension savings into trust with private management companies provides investors with the opportunity to participate in the management of their pension savings by choosing an alternative policy for investing their savings and obtaining a return corresponding to their risk appetite. That is, investors of the UPSF are provided with a kind of alternative investment product with more flexible investment conditions.

The investment strategy of pension assets is determined by the management company itself, taking into account the established regulatory requirements for the quality of financial instruments. The investment strategies of private management companies are more aggressive in comparison with the moderately conservative investment policy of the National Bank’s pension assets. Consequently, the portfolio’s returns and risks are expected to be higher. In this case, if the portfolio yield is lower than the nominal yield on pension assets, the management company is obliged to reimburse the difference from its own expense.

The combination of different investment strategies of the National Bank and private management companies contributes to the diversification of depositors’ risks and profitability on pension savings.

To ensure the safety of pension savings, the Agency has established appropriate quantitative and qualitative requirements for companies in the register of investment portfolio managers admitted to the management of pension assets. These requirements include the presence of equity capital, experience in managing client assets, the absence of facts of unprofitable activities, violations of prudential standards, and a number of others.

At the moment, out of six management companies included in this register, four companies have entered into an agreement for the trust management of pension assets with the UPSF .

Since the beginning of the year, 5.4 billion tenge of pension savings has been transferred to the management of these companies.

In 2020, the Agency initiated reforms to develop socially-oriented insurance products. Could you tell us in more detail what they are and how they will work? What innovations have been introduced?

In recent years, there has been dynamic growth in the insurance sector, especially the life insurance industry.
Life insurance companies are, in essence, institutional investors and can offer a wide range of savings instruments to the public. Savings insurance products have received special demand and relevance in the social, educational and pension spheres.

In this regard, the priority areas for the development of the insurance market are ensuring the availability of insurance services for the population, the introduction of new socially important life insurance products and their popularization.

Currently, within the framework of the State Education Savings System (the SESS), the population has the opportunity to open deposits in commercial banks to save funds for the education of their children. State participation is carried out by subsidizing at a remuneration rate of 5-7%.

One of the main novelties proposed for implementation in the insurance market is a new education savings insurance product within the framework of the SESS. This insurance product is an alternative to a bank deposit, but, unlike a deposit, additionally provides insurance coverage. In the event of the death of a parent or loss of the ability to work, under an insurance agreement, the missing part of the amount to pay is provided by the insurance organization itself. In addition, in the event of liquidation of an insurance organization, the Insurance Payments Guarantee Fund guarantees the full amount of payments without restrictions, while for a bank deposit the guarantee covers only an amount not exceeding 15 million tenge.

Another innovation is the introduction of a joint (spousal) pension annuity, which will allow the combination of the pension savings of a married couple or close relatives with redistribution of payments between them under a pension annuity agreement. For example, if one spouse does not have enough pension savings to buy a pension annuity, and the other has a surplus, then a joint pension annuity will allow both of them to receive lifelong payments.

It is expected that such innovations will improve the efficiency of the pension annuity as a pension planning tool, similar to pension plans in countries with a developed pension system. That is, citizens will be able to choose the option of pension payments based on their goals and needs.

In order to increase the availability of insurance services, as well as insurance coverage of the population, one of the most important tasks of the Agency is the digitalization of insurance services. In the Republic of Kazakhstan, since the beginning of 2019, car owners have had the opportunity to conduct a compulsory civil liability insurance agreement in an electronic format. Since 2020, 100% of compulsory auto insurance contracts are conducted online.

The next step aimed at enhancing the achieved effect and simplifying the procedure for obtaining insurance payments without visiting the office of insurance organizations is the introduction of an insured event online settlement.

Thus, the digitalization of the full cycle of insurance services will be ensured, starting from the moment of conducting a compulsory insurance agreement to receiving an insurance payment. This is particularly important during a pandemic.

1 First Heartland Jysan Invest JSC, BCC Invest JSC (SB of Bank CenterCredit JSC), Halyk Global Markets JSC, Centras Securities JSC.