NIS Economics 2014
– The role of Banks, Part 2
A focus on Kazakhstan
Retail banking in Kazakhstan
Early in 2014 the financial markets were supprised
by a sudden 20% devaluation of the tenge. This
devaluation was implemented by the Central Bank,
in line with its key objective of maintaining and
expanding Kazakhstan’s booming export markets.
Kazakhstan had 38 banks in January 2014, however many of them are small and
subject to possible consolidation as larger banks look for expansion
opportunities.
In 2008 Kazakhstan, was impacted by the global
financial crises and the government continues to
focus on the banking sector and banking reform to
improve market confidence and stability in the
financial sector.
Retail banking in Kazakhstan
The Republic of Kazakhstan’s economy has been
described as the Dubia of Central Asia and she has
experienced unprecedented economic growth and
development since her independence in 1992.
Retail banking in Kazakhstan
Kazakhstan’s economy has grown at a very fast
pace and a stable financial sector is vital for
continued investor confidence.
The effects of the global financial crisis
(2008) were felt worldwide
Banks and risk:
In the wake of the 2008 global financial crisis, there
has been, understandable, some skepticism
amongst the public in relation to what is seen as
excessive risk taking and recklessness on the part
of finance sector as a whole. The question of risk
taking has been debated extensively in view of the
need for substancial and ongoing financial sector
reform.
Banks and risk:
The concept of risk taking, however, should not be
seen merely in terms of the greed and
mismanagement we associate with the global
financial crisis, but rather as an essential
component of an effective financial services sector
and a prosperous economy.
Banks must take risks in order to bring savers and
borrowers together and thus encourage investment
and economic growth in the economy.
Reasonable Risk taking is a key feature of an
advanced economy
The characteristics of retail banks:
Retail banks are financial intermediaries. The term
intermediary means to deal between other parties,
in this case, between savers and borrowers, those
who have excess money and those who need
additional money.
Receiving money from savers is known as the
passive function retail bank, where as offering
credit services and products to individuals and
investors is know as the active function of banks
(We will look at other types of financial intermediaries in the
next class)
The characteristics of retail banks:
Characteristics of commercial banks:
•they exist to make a profit
•They are privately owned by investors, either individuals or
groups of share holder.
•They offer savings facilities to individuals
•They offer finance to investors, households, governments
and foreign entities in the form of debt instruments, for
example loans.
•regulated by the government and monitored by the central
bank.
The characteristics of retail banks:
Retail Banks hold money and lend money. This is reflected on their balance
sheet:
A simple example of a commercial bank balance sheet:
Tenge Liabilities:
Customer Deposits.
50 billion
Tenge Assets:
Notes and coins: 2 billion
Time deposits.
60 billion
Loans:
35 billion
Bill of exchange: 3 billion
Total Tenge Liabilities:
110 billion
Investments:
8 billion
Advances:
62 billion
Total Tenge assets:
110 billion
The characteristics of retail banks:
Retail Banks hold money and lend money.
On the left:
Liabilities:
On the right
Assets:
Liabilities are funds held by
the bank but owed to other parties.
Assets belong to the
bank.
Customer Deposits are monies placed
In the bank as savings
Notes and coins are actual currency
Loans are monies lend to investors/
individual
Bills of exchange represent monies receivable
Investments are holdings of financial assets
Advances are short term loans from the bank.
In the next lesson we will discuss all these terms in detail in
the topic “Types of financial investments”
Retail banks and the National Bank:
The national bank, together with the retail banks, are
described as the two-tier banking system
•The National Bank is the central bank of Kazakhstan and
presents the upper (first) tier of the banking system of
Kazakhstan.
•All other banks make up the lower (second) tier of the banking
system. These are called retail banks.
•However, there is also a third type of bank that is not part of the
two-tier system: the Kazakhstan Development Bank. This bank has
the ability to lend money for special projects which help develop Kazakhstan’s
economy. It is not strictly a private bank. It provides finance for projects
considered to be worthwhile for the benefit of Kazakhstan, but not commercially
attractive to private finance. It is supported by the Kazakhstan Government and
the Central Bank.
The role of the National Bank:
The Kazakhstan Central Bank was established to:
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To be the bank of banks
Supervise other financial institutions
Regulate and control currency system
To be a financial advisor and a financial agent of the Government
organization the payment system
To implement monetary policy
Manage the gold exchange
Set refinance rate according to monetary policy objectives
To influence retail bank interest rates through monetary policy
In rare cases they can force restrictions on the credit limits interest rates
offered by financial institutions.
Regulate bank lending limits
To issue bank notes and coins
Control currency supply
Issue government bonds
Set foreign exchange rates.
Monetary Policy (MP) involves the National Bank
acting on behalf of the Government to influence
the cost and availability of money and credit in the
economy.
MP is a macroeconomic policy.
MP in Kazakhstan is conducted by the National Bank.
It’s objectives, principles of activity, legal status and
authority are determined by the Law of the Republic
of Kazakhstan. It is the primary financial regulator in
the economy, and the only organization allowed to
print money.
Kazakhstans National Bank sets the value for
the Tenge at a relatively low level in order to
expand the export sector. However while this
promotes exports, it also increases the price of
imports in Kazakhstan.
In January of 2014 the Tenge was valued at
about 150 T = $1 USD
After the devaluation the Tenge was valued at
180 T = $1 USD
Kazakhstan’s economy is integrated with the
world economy and it depends on many
countries who export to Kazakhstan. A
devalued currency means that import reliant
industries will suffer higher costs of
production. They will pass on these higher
costs to their customers and causing
inflationary pressure in the economy.
This is know as a “trade off”. The currency
devaluation promotes economic growth and
employment, but increases inflationary
pressures and reduces the purchasing power
of the Tenge
A currency devaluation benefits local
companies who produce import substitutes.
For example a cars made in Kazakhstan will
become relatively inexpensive compared to
imported cars after a currency devaluation.
This will lead to an increase in damand for
local cars, increased domestic economic
growth, investment and employment
Currency devaluation “trade off”:
Currency devaluation upside:
Expanded exports and wealth creation in
Kazakhstan, increased investment, economic
growth and a reduction in the level of
unemployment.
Currency devaluation downside:
Higher inflation, and a reduction in the
purchasing power of the Tengi domestically,
but an increase in the demand for import
substitutes.
On the one hand, the fixed currency policy promotes economic
growth throughout the economy, but it increases inflation and
reduces the purchasing power of the Tenge.
The opportunity cost, of not devaluing the Tenge: a
weaker export sector, slower economic growth and
increased unemployment.
The opportunity cost, of devaluing the Tenge: inflation
due to an increase in the price of imports, and a
reduction in the purchasing power of money.
To be an economically rational policy it is necessary
that, overall, the upside of central bank policy
outweighs the downside; the benefits must are greater
than the associated costs.
So today we looked at the following with a focus on Kazakhstan:
The nature and role of retail banks
The importance of risk taking in the financial sector, which
includes banks
Banks as an intermediary between savers and borrowers (The
passive and active functions) and how this is important for
increased access to investment.
The relationship between retail banks and the National Bank.
National bank and the difficulty in achieving both a devalued
currency and low inflation. The benefits and costs of devaluing vs.
not devaluing.