Front Matter Page

European II Department

Authorized for distribution by Leif Hansen

Contents

• Summary

• I. Introduction.

• II. Best Practices of Banking System Restructuring

  • A. Program Design and Implementation

  • B. Individual Bank Restructuring

  • C. Banking System Restructuring

• III. Sequencing of Banking System Restructuring in Kazakhstan

• IV. First Phase: Financial Restructuring, 1992–95

  • A. Initial Conditions

  • B. Bank Licensing

  • C. Nonperforming Loans

  • D. Prudential Regulations

  • E. Financial Conditions of the Banking System

• V. Second Phase: Operational Restructuring, 1995–97

  • A. Legal Reform

  • B. Accounting Reform

  • C. Prudential Standards

  • D. Bank Supervision

• VI. Banks “Too Big To Fail”

• VII. Impact of the Restructuring Program.

  • A. Microeconomic Impact

  • B. Macroeconomic Impact

• VIII. Lessons from Kazakhstan’s Restructuring Program

• References

• Text Tables

• 1. Number of Commercial Banks and Branches

• 2. Loan Classification and Provisioning: 1995–96

• Figures

• 1. Bank Deposits and Credits, 1994–97

• 2. Selected Monetary Indicators, 1993–97

• 3. Real Interest Rates, 1995–97

Summary

Kazakhstan began restructuring its financial system immediately following independence in 1992. The government’s first concern was to restructure the large state banks and tighten entry requirements for new banks. Once a degree of stability was achieved, the government sought to modernize banking operations and the legal and regulatory environment. Between 1995 and 1997, wide-ranging regulatory and accounting changes were introduced, and the prudential and supervisory capabilities of the National Bank of Kazakhstan (NBK) were improved. By the end of 1997, an internationally acceptable regulatory and prudential environment was largely in place.

The experience of Kazakhstan offers a number of lessons. First, the phased implementation of the restructuring permitted many undercapitalized and nonviable banks to continue to operate, posing some threat to the stability of the banking system. While arguably unavoidable, an earlier commitment to restructuring and enforcement of prudential norms could have led to a more streamlined banking sector and improved private sector confidence. Second, banking and enterprise sector reform should be closely coordinated to strengthen both activities and boost the banking system’s role in financial intermediation. Third, the weak information base and poor accounting standards led to a considerable period of supervisory forbearance. The Kazakh experience suggests that such forbearance is viable when combined with enhanced monitoring and adequate enforcement rules. Fourth, the asset management companies (AMCs), formed to manage the stock of nonperforming loans removed from the state banks, gave priority to restructuring enterprises rather than rapid closure and liquidation of nonviable enterprises. Finally, the NBK succeeded in preventing a generalized collapse of the banking system, since it followed consistent and coherent restructuring policies.