It was a legal system that saved Kazakhstan’s new chief of the central bank from a debt claim back in 2014. Due to a few major loopholes in the system, it was unable to protect the lender from extensive and repeated default crises.
Yerbolat Dossayev, the new chief of Kazkommertsbank and three of his business partners were exonerated from repaying a massive loan of about 1.9 billion Tenge which, according to 2014’s exchange rate, was worth about $13 million. The four individuals personally guaranteed the then biggest bank of Central Asia that they would return the money. To this date, it is still unclear if the debt was repaid or not.
Within the next three years of taking out the loan, Kazkommertsbank, the lender, felt the pressure and faltered due to bad loans and currency devaluation. Bad debts and poor debt recovery sent the industry in recession, which has forced the state to spend about $18 billion as bailout money in the past decade.
Nursultan Nazarbayev, a Kazakh leader, and the country’s now ex-president said that his cabinet was a “coward” for its inability to save the sector from this decade long recession.
Dossayev is one of the richest men in Kazakhstan and was the Economy Minister at the time he took the loan. He somehow managed to escape any debt claims and is now considered one of the reasons for the bank’s existing troubles. The bank now needs about $6.9 billion or 2.6 trillion Tenge to save itself. The regulator which was to be a part of the rescue mission came under Dossayev’s leadership last month.
Prism Political Risk Management Ltd. expert Kate Mallinson said that the current crises facing the banking sector have much deeper roots than Dossayev. She further said that the Central bank does not operate independently and the fixing of Kazakhstan’s banking system will be a massive task.
Dossayev and the partners paid about $20 million as insurance money for their company TOO GasMunayOnim’s credit line which was taken from Kazkommertsbank. The company was sanctioned to pay interest on the debt, which it failed to do. As a result, the bank targeted the borrowers’ assets, which resulted in a law sued by the wives of the borrowers. The lawsuit was filed against the banks and their husbands. The wives claimed they were unaware of the guarantee money. According to the law, an agreement can be nullified if the spouses are not aware of such details. The lawsuit went in favor of the wives and both the bank and GasMunayOnim were rebuked for their “dishonesty”.
Dossayev is now in charge of the central bank, which has been working to prevent inflation that resulted from a massive dip in crude prices that started Kazakhstan’s currency crises. The local currency Tenge’s value reduced by half after its 2015’s free float. However, as of this year’s February, the rate of inflation has decreased to 4.8 percent.
To fix these problems, the banking sector of Kazakhstan has seen some major overhauling. Kazkommertsbank was taken over by Halyk Bank and an investment of over 1 trillion Tenge saved Tsesnabank JSC. The rescue mission was completed this year.
Nazarbayev is asking the policymakers to take serious action and focus on growth before the end of his presidential term. The current government is working on agreements with the country’s central bank to work out a solution.
One of the initiatives is a lending program worth 600 billion Tenge, which aims at uplifting Kazakhstan’s economy. However, despite these steps, the regulation of the banking sector is still not up to the mark. As per S&P Global Rating’s analysis, many of the lenders have still not declared their actual asset quality whereas the regulators are lenient with “underprovisioning”.
According to Irina Velieva, an S&P analyst, Kazakhstan’s banking sector regulators are unable to operate independently and are constantly facing interference from the government or other organizations or bank owners with strong political connections.