Kazakh banks fight panic with education

By bne IntelliNews March 21, 2014

Naubet Bisenov in Almaty -

When a bank and pollsters planned a nationwide survey to measure the financial literacy of Kazakhstan's population, little did they know how handy the findings would be in helping to explain the financial panic that gripped the nation in February. Apparently a lack of financial awareness worsened the situation, leading to a run on several banks, explains the head of Kaspi Bank, a major Kazakh retail bank that helped organise the survey.

Kazakhstan's National Bank announced on February 11 a devaluation in the tenge which would allow the exchange rate to drop from KZT155 per dollar to KZT185, precipitating a 19% plunge in the value of the national currency. Some owners of tenge-denominated deposits rushed to withdraw their savings or convert them to foreign currency, mostly dollars or euros.

Further panic gripped the nation a week later when rumours started circulating via text message about the imminent bankruptcy of three Kazakh commercial banks - Alliance Bank, Bank CenterCredit and Kaspi. The three banks dismissed the rumours as "provocations aimed at destabilising Kazakhstan's financial system", while Kaspi announced a KZT100m ($540,000) reward for any information leading to the source of the rumours.

The rumours resulted in customers withdrawing about KZT40bn (some $220m), or 10% of total deposits, at Kaspi alone, forcing its controlling shareholder, private equity firm Baring Vostok Capital Partners, to provide the bank with $300m to meet the demand for cash.

Kazakhstan faced the threat of bank run and potentially a systemic failure reminiscent of the country's banking collapse as the subprime crisis unfolded in 2007, which saw BTA nationalised in February 2009 and sovereign wealth fund Samruk-Kazyna taking majority stakes in BTA subsidiary TemirBank and Alliance Bank, as well as minority stakes in Kazkommertsbank and Halyk Bank.

What you need to know

The overreaction by the general public has been blamed on the generally poor level of financial literacy among the Kazakh population, as shown by the survey conducted by the Almaty-based International Centre for Financial Literacy jointly with Kaspi between January 27 and February 12.

The poll of 1,200 people aged between 20 and 80 showed that only 6% of those surveyed knew that the Kazakhstan Deposit Insurance Fund provided 100% coverage on deposits of up to KZT5m ($27,000) held at banks participating in the scheme. "Only every second person knows that the deposits are guaranteed and only 6% know the maximum amount of guaranteed deposits stands at KZT5m," Kaspi's chairman, Mikhail Lomtadze, told a news conference in Kazakhstan's financial capital Almaty on March 13. "This explains why the February 2014 devaluation caused panic among the population. We should put more effort into increasing financial literacy."

For this purpose, under its "Simply about Finances" educational programme, Kaspi announced that it would invest $1m in competitive projects devised by individuals and organisations to help promote financial literacy among the population.

Lomtadze also cited the poll findings that almost half (44%) of Kazakhs with spare money kept it at home "under the mattress" and less than one in 10 (just 8%) deposited it in banks. "We hope that our 'Simply about Finances' educational programme will improve these indicators and people's interest in bank deposits will grow," he said.

Lomtadze's Kaspi is a significant player on the Kazakh consumer loan market, and as a result of the global financial crisis the bank decided in 2009 that it would operate its consumer loan business in tenge only so that the bank's clients would not have "to bear any foreign currency risk because they receive income in tenge, which is why we issue retail loans in tenge".

In an interview with bne, Lomtadze says that because of this the February devaluation of the tenge had no impact on Kaspi's clients. "As a result of the change in the exchange rate in February, the payments on our loans will not increase and our customers continue payments on their loans in tenge as they did in the past," he says.

At the same time, Lomtadze claims that Kaspi's loan portfolio isn't in a worse state than those of other Kazakh banks. The share of non-performing loans is around 5%, well below the industry average, despite the fact that Kazakhstan's legislation doesn't provide adequately for writing off loans. "What should be changed in the Kazakh banking sector is that banks should be allowed to write off non-performing loans. This will considerably clean up banks' balance sheets. Now, when you look at a Kazakh bank and compare it to a Russian bank which is able to write off bad loans, it seems the share of non-performing loans in a Kazakh bank's portfolio is higher than in the portfolio of a Russian bank, but the actual difference is small."

Lomtadze says that even though Kaspi is heavily dependent on deposits as a source of funds, the bank also raised money from bonds on the domestic and international markets. "Last year we were the first Kazakh private, non-state-run bank to issue Eurobonds since the global financial crisis. The sum wasn't large - $200m. We wanted to re-introduce Kazakh banking and Kaspi Bank to international investors," Lomtadze says.

Kaspi is upbeat about its place in Kazakhstan's financial market, and Lomtadze believes his bank has been strengthened by the recent troubles: it now has a loyal customer base and a strong team with tested resilience. As a bank focused on retail banking, Lomtadze says Kaspi places great value in people, both clients and staff: after the bank run, Kaspi decided to reward clients who decided to stay with it with a loyalty bonus of 1% of their tenge-denominated deposits, and each member of staff received a bonus of KZT100,000 ($550) for their dedicated work during the 72-hour-long period of panic. Like workers at many industrial enterprises and public sector organisations, following the February devaluation Kaspi's staff received a 10% pay rise.

Changes within the competitive landscape of the Kazakh banking sector, with Kazkommertsbank acquiring the ailing BTA and HSBC quitting Kazakhstan altogether, don't seem to trouble Lomtadze much, and at the moment Baring Vostok had no plans to reduce its shareholding. "I see a disadvantage in foreign banks leaving the market in that they take together with them international experience. It is good to have them as competitors, as they bring to market new products and practices used in other international markets. It is interesting to compete against them."

While some foreign investors may be considering leaving emerging markets, Baring Vostok is there to stay with Kaspi in Kazakhstan, Lomtadze says.

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