Clare Nuttall in Almaty -

After a seven-year flirtation with an independent regulator, the National Bank of Kazakhstan is to take back control of the regulation of the country's financial services sector. A tougher line is envisaged.

A presidential decree, published by state news agency Kazinform on April 13, abolishes both the country's financial regulator, the AFN (Agency for Regulation and Supervision of the Financial Market and Financial Organizations), and the RFCA (Agency for Regional Financial Centre of the City of Almaty). All functions and powers of both organisations will be transferred to the central bank, according to the decree.

A spokesperson for the central bank declined to comment on the bank's plans after taking over the AFN and RFCA. No-one was answering any of the numbers for the RFCA, perhaps an indication of how fast presidential decrees get acted upon in Kazakhstan.

The decree comes in the context of a government reshuffle following Kazakhstan's April 3 presidential elections, won (a bit too) handsomely by incumbent President Nursultan Nazarbayev. The planned "People's IPO programme" - a series of share sales of around 10% in major state-owned Kazakh companies - is probably the single most important government policy set for this year.

Prime Minister Karim Massimov, who retained his position in the reshuffle, and Nazarbayev's son-in-law Timur Kulibayev, who has been promoted to chairman of state holding company Samruk-Kazyna, are expected to lead the process, and to work with National Bank Governor Grigory Marchenko, who will become responsible for regulation of both the financial sector and the stock exchange.

Meanwhile, Kairat Kelimbetov, who early this year made the unwelcome point that it would be difficult, if not impossible, to carry out the People's IPOs this year, has been moved from Samruk-Kazyna to the Ministry of Economic Development and Trade.

Marchenko was brought back to head the central bank for the second time in January 2009, straight away handling an 18% devaluation of the tenge as the economy descended into crisis and the state was forced to bail out two of the largest banks. Marchenko has a strong reputation as an astute financier, and his popularity among foreign investors in particular has helped to restore confidence in the Kazakh economy.

Tougher line

While the central bank has not yet made any statement about its plans for regulating the financial sector, there is reason to believe it may take a tougher line than the AFN.

As the crisis in Kazakhstan's financial sector escalated between 2007 and early 2009, the AFN was increasingly blamed for allowing the combination of fraud and mismanagement that resulted in alarming levels of non-performing loans at the banks. It is expected to take some years for the banks to work through their portfolios of problem loans. The stricter regulations introduced after the crisis struck were both too late, and in some cases made it harder for the sector to recover. "Kazakhstan's financial market is not as large or as developed as in Europe, so having a regulator which is independent from the National Bank doesn't change a lot," says Jean-Christophe Lermusiaux, head of research at Visor Capital. "Consistency of decisions is more important, and rolling the AFN into the National Bank might achieve this."

The decision to create an independent regulator in Kazakhstan followed the creation of the Financial Services Authority (FSA) in the UK, when the new Labour government stripped the Bank of England of its regulatory powers in 1997. However, the FSA also came in for severe criticism when - as in Kazakhstan - British banks needed a massive bailout during the recent crisis. In June, new Chancellor George Osborne announced plans to abolish the FSA, giving some of its powers back to the Bank of England and some to newly created agencies.

The RFCA was set up three years after the AFN in January 2007, with the task of developing the Kazakhstan Stock Exchange (KASE) and establishing the former capital Almaty as a regional financial hub. Achievements under its chairman, Arken Arystanov, include reforms to the stock market to make listing easier, and the creation of the Eurasian Trade System Commodity Exchange. "RFCA's achievements in terms of better liquidity and higher market capitalisation were limited, but this was more due to the fact that there have been no IPOs in Kazakhstan than a lack of activity on their part," says Lermusiaux.

"In Mongolia the local stock exchange has already signed an agreement with the [London Stock Exhange], and shares are being distributed to the population. If Kazakhstan doesn't soon carry out the People's IPOs and make the long-awaited move away from the T+0 settlement system, there is a danger that the Mongolian Stock Exchange could be the most attractive regional place for international investors and, therefore, overtake Kazakhstan despite the small size of the Mongolian economy," he warns.