Overview (January 2001)

Introduction

The banking sector in Kazakhstan was reorganized in 1995, moving from a single-tier system in which the central bank performed all banking functions to a two-tier system in which the National Bank of Kazakhstan (NBK) occupies the first tier and other banking institutions the second. All banking and credit institutions in the second tier are required to be licensed and regulated by the NBK. Under the Decree of the President on Banks and Banking Activities in the Republic of Kazakhstan, dated August 31 1995 (the Banking Law), and the Decree of the President on the National Bank of the Republic of Kazakhstan, dated March 30 1995 (the NBK Law), the NBK has authority and responsibility to protect the stability of Kazakhstan's monetary and credit systems, and to protect the interests of creditors, depositors and clients of banks.(1) In order to fulfil these responsibilities, the NBK is authorized to oversee and regulate the activities of banks through licensing and monitoring.

Licences

In order to open a bank, it is necessary to receive permission from the NBK. To receive permission to open a bank, an interested party must present the NBK with an application in Kazakh and Russian, together with other information including:

• the foundation documentation for the proposed bank;
  
  
• information about the founders;
  
  
• a business plan;
  
  
• information on internal audit procedures and the structure of bank; and
  
  
• other required documents.

The NBK will consider the application within three months of the date on which all supporting documents are submitted, but no later than six months from the date of the submission of the original application (in the event that any required documents are submitted after the application).

Within one month of the date of receiving permission from the NBK, the founders must apply for state registration of the bank with the Ministry of Justice. After state registration, the bank is entitled to open a temporary correspondent account in an authorized bank for the payment of the stated charter capital, and expenses related to organizational and technical issues and the hiring of employees. Within one year of state registration, the bank must:

• pay the declared charter capital;

• prepare premises for the bank;
  
  
• purchase necessary banking equipment, which must correspond to NBK requirements;
  
  
• hire employees with appropriate qualifications; and
  
  
• apply for a banking licence from the NBK.

Together with the application it is necessary to submit evidence of completion of the above steps. Within one month the NBK must consider an application and issue or refuse to issue a licence. A refusal to issue a licence may be due to a failure to fulfil one of the steps, or because the founders have failed to do so within one year.

Banks that have received a licence are entitled to engage in the following banking operations:

• acceptance of deposits from legal entities;
  
  
• acceptance of deposits from physical persons;
  
  
• opening and maintaining correspondent accounts for banks and non-banking financial institutions, in addition to accounts relating to precious metals;
  
  
• cash transactions;
  
  
• transfer operations (execution of instructions of legal entities and physical persons in relation to transfers of monetary resources);
  
  
• accounting transactions;
  
  
• loan transactions;
  
  
• payments in accordance with instructions of physical or legal persons, including correspondent banks, to and from their bank accounts;
  
  
• trust transactions (management of monetary resources in the interest and in accordance with instructions of the founder of a trust);
  
  
• clearing transactions (collecting, checking, sorting and confirming payments, as well as their offset as against one another, and determining the net positions of clearing participants);
  
  
• safe custody transactions (services associated with the safe custody of securities, documents and valuables of clients, including leasing of safe boxes, cases and premises);
  
  
• pawn-shop transactions (issuing short-term loans secured with deposited liquid securities and movable assets);
  
  
• issuance of payment (debit or credit) cards;
  
  
• collection and shipment of banknotes, coins and valuables;
  
  
• organization of exchange transactions involving foreign currency;
  
  
• receipt of payment documents for collection;
  
  
• issuance of cheque books; and
  
  
• clearing activities on the securities market.

Banks are prohibited from executing operations and transactions which are entrepreneurial activities but which do not relate to banking operations, with the exception of the following professional activities on the securities market:

• brokerage activities involving state securities;
  
  
• dealer activities involving state securities;
  
  
• custodial activities; and
  
  
• clearing activities.

With the consent of the NBK, the authorized body issues licences to banks for the execution of one or several of the above types of professional activity in combination on the securities market.

Supervisory Functions of the National Bank

The NBK implements its supervisory policies through its banking supervision department. This department supervises the observance of the financial requirements applicable to second-tier banks. The requirements include minimum capital reserves, limitations on loans to a single borrower, a minimum liquidity ratio, and limits on a bank's open currency position. Since 1996 the NBK has endeavoured to strengthen the banking sector by closely monitoring compliance with capital adequacy requirements, in order to bring Kazakh banks in line with the international standards set by the Basle Committee. In addition, the NBK has adopted regulations on the classification of assets and contingent obligations and loan loss reserves.

The NBK is also authorized to carry out inspections of banks. There are a number of measures that may be taken by the NBK where it finds non-compliance with NBK rules involving financial requirements. These include the issuance of written instructions, the imposition of fines, the suspension or annulment of a bank's licence, and the revocation of its authorization to carry on business.

Financial and Other Requirements

The financial requirements applicable to second-tier banks operating in Kazakhstan include the following:

• Capital adequacy requirements. The NBK has imposed minimum capital requirements on banks, and has required that the proportion of a bank's adjusted capital to the amount of its assets, evaluated according to risk, must be no less than 0.12.
  
  
• Minimum amount of charter capital. The NBK has determined that the minimum charter capital for banks is Kt300,000.
  
  
• Liquidity requirements. A minimum ratio of liquidity has been established by the NBK.
  
  
• Loan limits. The maximum lending limit with respect to a single borrower is 25% of the financial institution's adjusted capital or 10% if the borrower is a party that is related to the bank.
  
  
• Limit of open currency position. The NBK has established a separate limit with respect to the open currency position applicable to each currency.
  
  
• Proportion of maximum investments to assets and other non-financial assets to capital. The NBK requires that the proportion of a bank's investments to assets and other non-financial assets to its own capital must not exceed 0.5.

In addition to the above financial requirements, banking legislation contains the following requirements:

• International accounting standards. On December 12 1997 the Department of Methodology of the Ministry of Finance issued Order 79. This order approved Standard 21 ("Financial Statements of Banks") and Standard 22 ("Income and Expenses of Banks") of the National Commission of the Republic Of Kazakhstan on Accounting. It required that all banks comply with international accounting standards.
  
  
• International audit requirements. Banks are required to implement strict audit requirements. These are applicable to all major aspects of the banking business. They must then be made available to external auditors from the NBK.
  
  
• Personnel requirements. Banks are required to implement personnel requirements to protect banking operations, including requirements regarding employee educational level and level of experience in bank management.
  
  
• Related party transactions. At no time during the formation or operation of a bank may a single entity directly or indirectly possess, dispose of and/or manage more than 25% of the voting shares of a Kazakh bank, except in instances approved by the NBK. This rule does not apply to state, international and parent banks.

Foreign Investment

There are restrictions on the participation of foreign capital in the banking sector. The Banking Law provides that the total registered charter capital of all banks with foreign participation may not exceed 50% of the aggregate registered charter capital of all banks in Kazakhstan (except in cases permitted by the NBK). A bank with foreign participation is identified as a bank in which more than one-third of the shares are "possessed, owned and/or managed" by:

• non-residents;
  
  
• Kazakh legal entities in which more than 50% of the shares (or contributions) are possessed, owned and/or managed by non-residents; or
  
  
• residents that are managers or trustees of funds owned by non-residents, or of legal entities indicated in the second point above.

There are special requirements for banks with foreign participation. For example, at least one member of the board of a bank with foreign participation must be a Kazakh citizen with at least three years of banking experience in Kazakhstan. Documents must be submitted to the NBK confirming the member's knowledge of Kazakh banking and economic legislation. A bank with foreign participation must also have at least one representative of the board of the bank who speaks Kazakh or "a language officially used in government organizations or organs of local government" (Russian), and who has worked in a bank in Kazakhstan for at least one year. The NBK reserves the right to impose additional requirements on banks with foreign participation with respect to the composition of their management bodies, the banking operations performed, financial requirements, and other requirements and reporting procedures.

Liquidation and Reorganization of Banks

Banks may be liquidated in a number of circumstances:

• With permission of the NBK, shareholders may resolve to liquidate a bank (voluntary liquidation);
  
  
• Following the decision of a court in circumstances provided for by law, a bank may be involuntarily liquidated; and
  
  
• State banks may be liquidated by a decision of the government of the Republic of Kazakhstan.

Involuntary liquidation may be carried out according to a court order in the following circumstances:

• where the bank is bankrupt;
  
  
• where the bank's licence to carry out banking activities has been revoked; and
  
  
• pursuant to an application or claim put forth by an authorized state body or a legal or physical person regarding the termination of the activities of the bank on any other basis provided for by law.

With the permission of the NBK, the general meeting of the shareholders of a bank may resolve to reorganize the bank. However, the NBK must refuse to allow such a reorganization where:

• the highest management body of the bank has not resolved to reorganize the bank;
  
  
• the reorganization would be contrary to the interests of depositors of the bank;
  
  
• the reorganization would lead to a violation of financial or other requirements applicable to the bank; or
  
  
• the reorganization would result in a violation of the requirements of anti-monopoly legislation.

A court may order a bank to be involuntarily reorganized or to undergo a process of financial restructuring, although such an order may only be issued with the consent of the NBK. However, where a bank is to be reorganized or put through financial restructuring, it must return all deposits to its customers within one year of the date on which the decision to restructure or reorganize the bank is taken. If the bank fails to do so, it will be subject to involuntary liquidation.

For further information on this topic please contact Douglas A McPherson or Tatiana Muratova at Coudert Brothers by telephone (+7 3272 51 18 28) or by fax (+7 3272 58 18 80) or by e-mail ([email protected] or [email protected]).

Endnotes

(1) A number of minor amendments to banking legislation may be introduced by a draft law that is currently before the Parliament of Kazakhstan. Thus, under Section 3.1 of the draft law of the Republic of Kazakhstan on Introducing Amendments and Changes to Certain Legal Acts of the Republic of Kazakhstan on Issues Related to Banking Activity, the word 'decree' (as noted above) would be replaced by the word 'law'. A more substantive amendment would be a provision requiring that 70% of all employees of the bank be Kazakh citizens (Section 6.16).