Clare Nuttall in Astana -

Kazakhstan entered 2014 with a banking sector that has edged closer to shuffling off the legacy left from the 2008 financial crisis, with deals to sell off the state's holdings in three nationalised banks close to completion and targets set to bring down the heavy burden of non-performing loans. However, problem loans are still by far the highest in the Commonwealth of Independent States and a recent skewing of growth towards consumer lending means the sector still has a lot of issues to work through this year and beyond.

Sovereign wealth fund Samruk-Kazyna's announcement in December 2013 that it had finally found a buyer for BTA Bank, Kazakhstan's largest bank before the crisis, was a major milestone for the sector. Previous attempts to sell off the troubled bank first to Russia's Sberbank then to Kazakhstan's Halyk Bank fell through. However, on December 23 Samruk-Kazyna announced a non-binding agreement to sell BTA to Kazkommertsbank and Kazakhstani investor Kenes Rakishev, with the fund retaining a minority stake.

The deal was announced just days before the end of 2013 - the deadline set by President Nursultan Nazarbayev to sell off the three banks that were taken over as the crisis financial crisis swept through Kazakhstan.

Of the three - BTA, Alliance Bank and Temirbank - the former looked to be the most difficult to shift, as 80% of its total loan book is composed of 90-day overdue loans, according to Visor Capital, and many of these are unlikely ever to be recovered. Earlier in December, Samruk-Kazyna had already announced another deal to sell stakes in Alliance Bank and Temirbank to Verniy Capital owner Bulat Utemuratov. The fund has sold a majority stake in Temirbank while keeping a controlling stake in Alliance Bank, in a deal that is expected to receive regulatory approval in 2014.

While Samruk-Kazyna met the deadline, this is not the end of the story for the three banks, as Agris Preimanis, senior economist for Central Asia at the European Bank for Reconstruction and Development (EBRD) , points out. "While the consolidation and sale of state stakes in banks can be positive, what's really key is that after the sale the banks have enough capital and are viable in the long term, and that the new shareholders are really committed and ready to provide capital when and if needed," he says.

In addition, Kazakhstan's government and central bank are still struggling with the legacy of non-performing loans (NPL). At 35.8% of Kazakhstan's loan portfolio, or $30.7bn, the proportion of NPL is among the highest in the world.

In November, Kazakhstan's newly appointed central bank governor, Kairat Kelimbetov, announced that the bank's main target would be to bring down NPLs. The bank is currently in talks with banks with the aim of lowering the proportion of NPLS to 15% by January 1, 2015 and 10% by January 1, 2016. New legislation to make it easier for banks to write off bad debts and for companies to declare bankruptcy is due to be prepared by June 2014. "Kazakhstan's banking sector is in a very difficult situation with significant structural problems and a level of NPL seen in very few countries. Against that backdrop, I am quite positive about the re-energised efforts to tackle NPL since the appointment of the new central bank governor," Preimanis tells bne. "Overall, we expect to see some progress on tackling structural problems in the sector within the next year, but this will be the start rather than the end of the process."

Meanwhile, a potential new problem has arisen, namely that consumer lending grew at an alarming pace over the last two years. The International Monetary Fund (IMF) warned in June that the volume of consumer loans was rising at around 40% a year, albeit from a relatively low base figure.

This is a lucrative business for Kazakhstan's banks, which typically charge interest rates in the range of 25% to 40% a year on consumer loans, and a growing number of Kazakhstanis are keen to take out loans for anything from a new washing machine to a lavish wedding party.

However, concerns within the government mounted steadily during 2013. Preimanis agrees that there are "some early signs of overheating" within the sector. However, he notes that, "This has been picked up by the central bank, which has already issued some new regulations. While growth in consumer loans may not be a problem per se, continued growth could increase the banks' sensitivity to slowdowns in the economy."

While no formal cap has yet been introduced, at a press conference in Almaty on February 3 Kelimbetov said the bank had agreed with commercial banks not to allow consumer lending to rise by more than 30%. "We have agreed with second-tier banks to reduce the overheating in the consumer loan segment. Consumer lending shouldn't grow by more than 30%... it's early to be talking of some precise timing or some precise rate," Kelimbetov said, according to Tengrinews.

In the meantime, although there are wide variations from bank to bank, as a whole the banking sector is not able to contribute substantially to the growth of the economy while so many are still working through their pre-crisis legacy of bad loans. "To develop the non-extractive sector, a functioning financial sector is needed. While consumer loans are rising, corporate loans are down and [small business] lending is meagre," Preimanis says.

This is less problematic for the oil and gas and mining sectors, which do not typically rely on bank finance, but for the non-extractive sectors that the Kazakhstani government is actively trying to encourage, it is still very hard to obtain finance.