Banking and Finance

Banking and Finance

Restructuring of the state-controlled banking and financial systems that Kazakstan inherited in 1991 has been a long, slow process. As in the Soviet era, the national bank continues to dominate the financial system, including currency management. Other commercial institutions have been established, but they play small roles in the country's financial life.

Banks

Kazakstan's banking industry was created on the basis of a subsequently modified law enacted in April 1993. That law created a central institution, the National Bank of Kazakstan (NBK), which has regulatory authority over a system of state, private, joint-stock, and joint banks. Licensed banks are authorized to perform all of the traditional banking functions.

The introduction of a modern banking system has not progressed smoothly. Scandals have involved swindles by bank employees, questionable loans, and the maintenance of heavy portfolios of nonproductive loans. Several bank failure scares also have occurred. Major modifications of banking regulations have been introduced several times. In June 1994, Kazakstan instituted a fifteen-month program of financial and economic reform, tightening banking and credit laws, liberalizing price policies, and ending the granting of credits to state-owned institutions. Another short-term reform was introduced in March 1995, in part to tighten regulation of capital requirements and to increase the professionalism of the existing bank's operations. To that end, a system of partnership with foreign banks was introduced, pairing domestic banks with experienced foreign partners. Guidance for this bank reform is being provided by the IMF, as well as by international auditing firms such as Ernst and Young and Price Waterhouse.

In 1994 the national bank system included a State Export and Import Bank and a State Bank for Development, both of which functioned under full government control rather than as market institutions. Four large, state-owned banks controlled 80 percent of financial assets. Of the 200 small commercial banks in operation in 1994, the majority were attached to enterprises. About thirty private banks were licensed to deal in foreign exchange.

The aim of the 1995 reform was to create a republic-wide banking system, including ten to fifteen large banks with total capital of at least US$10 million, headquartered in Almaty and with branches throughout Kazakstan; foreign branch banks, most of which would have single representative offices in Almaty; several dozen smaller banks, both in Almaty and in the provinces, with capital in the range of US$2-US$3 million; and savings banks, some with specialized purposes such as the Agricultural and Industrial Bank (Agroprombank).

In 1995 the NBK planned to release 80 percent of the credit funds it granted to an auction market, departing from the previous policy of rationing credit by directing it to designated enterprises. No stock exchange or capital markets existed as of 1995, although a law on securities and stock exchange had been adopted in 1991.

Fiscal Management

State revenue is derived primarily from various taxes, the introduction of which has been somewhat problematic. A fundamental revision of the national tax code in 1995 reduced the number of taxes from forty-five to eleven and the volume of prospective revenue by 17 percent. Five national corporate taxes remained after the reform, which reduced the corporate tax rate to 30 percent. Prior to that revision, the largest contributions to state income were business-profit taxes (15 percent); a uniform, 20 percent value-added tax (see Glossary), a personal income tax (ranging from 12 to 40 percent and accounting for 16 percent of tax income); and special-purpose revenue funds (17 percent). However, the system has suffered from chronic undercollection. The primary long-term goal of the 1995 tax reform was to encourage fuller compliance with tax laws. The 1996 budget called for reducing the deficit to 3.3 percent of GDP.

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