ELENA BAKHMUTOVA, Chair of the Board of the Association of Financiers of Kazakhstan:
IT MAY BE FAIR TO APPLY A STANDARD CIT RATE ACROSS ALL BUSINESSES
Kazakhstan’s banking sector is on the brink of significant changes. With new taxation measures and ambitious reforms proposed under the Law on Banks, the industry is preparing for a transformation that could redefine its future. In an exclusive interview with Interfax-Kazakhstan, Elena BAKHMUTOVA, Chair of the Board of the Association of Financiers of Kazakhstan, offers her perspective on how these developments are being received by market participants and what impact they might have on the sector.
- Let’s start by looking at the president’s call for banks to play a more active role in driving economic growth. What key conditions need to be in place for banks to effectively boost investment in the real sector?
- Banks remain actively involved in lending to the economy, reflecting their core business priorities. Data from the first nine months of this year show notable growth in business lending—loans to small businesses rose by 20.5%, to medium-sized businesses by 16%, and to large enterprises by 23.6%. Support for microbusinesses continues to be a focus, as Kazakhstan has over 2 million registered individual entrepreneurs. Together with microfinance organizations (MFOs), banks play a vital role in financing this sector.
In terms of credit balances, business loan portfolios expanded by 7.4% this year, compared to 6.6% last year. Meanwhile, growth in household loans slowed, declining from 18.5% last year to 16.6% this year. This shift highlights banks’ increasing emphasis on business lending.
However, stimulating further credit growth depends on improving macroeconomic conditions. The National Bank’s recent decision to raise the base rate by 1 percentage point to 15.25% has resulted in business loan rates averaging around 20% when bank margins are factored in. This creates profitability challenges for many borrowers.
For instance, profitability varies across sectors—large and medium enterprises average 17.1%, with specific rates of 12.5% in agriculture, 20.1% in trade, 24.3% in manufacturing and construction, 33% in transportation, and 44.3% in mining. Given these figures, many businesses seek lower-rate loans from state development institutions or turn to subsidized market rates to finance operations.
With a moderately tight monetary policy still in place to control inflation and temper demand for new loans, a substantial increase in lending to the real sector remains unlikely in the near term. The National Bank’s November monetary policy review noted that business solvency continues to hover within a moderate range, limiting opportunities for sustainable credit expansion among solvent companies. Approval rates for business loan applications fell to 41.1% in January–September 2024, down from 43.5% during the same period last year.
Credit expansion is expected to pick up as macroeconomic conditions improve. Factors such as stronger financial and operational performance among businesses, inflation returning to the target range, and a gradual easing of monetary policy will play a key role. More pronounced growth is projected for 2026 or 2027, aligning with the National Bank’s forecast of inflation reaching its 5% target.
The primary challenge remains lowering inflation to sustainable levels. Achieving this requires maintaining a tight monetary policy in the short term. Efforts to offset these measures through fiscal interventions could delay the point of equilibrium, potentially undermining the foundation for stable and long-term credit growth.
- What are your thoughts on the proposed tax initiatives, including the introduction of VAT on financial transactions and an increase in corporate income tax (CIT)?
- The draft Tax Code proposes raising the corporate income tax (CIT) rate for banks and casinos to 25%, while lowering it for the agriculture sector. Discussions have also included the possibility of increasing CIT for banks to 30%, with the general 20% rate applying only to income derived from business lending. Other income streams may face higher rates, subject to parliamentary review.
Another notable proposal is the uniform taxation of income from government securities across all sectors. While this change promotes fairness, it could also lead to higher borrowing costs for financing budget deficits. It is expected that the Ministry of Finance has accounted for these risks in its 2025–2027 budget planning.
The introduction of value-added tax (VAT) on certain banking services is also under consideration. In the EU, basic banking services—such as fund transfers and account management—are typically VAT-exempt. Applying VAT in Kazakhstan could pose administrative challenges, especially given the millions of transactions processed daily. Ensuring uninterrupted access to payment services for businesses and individuals will remain a priority.
In 2023, banks paid 322 billion tenge in CIT. Under the proposed reforms, this amount could potentially double, with VAT accounting for roughly one-third of the increase due to higher service charges.
When it comes to evaluating tax fairness, one common approach is to compare the ratio of dividends paid to shareholders with the taxes paid by companies. In 2023, banks distributed 519.7 billion tenge in dividends, but only 8 out of 21 banks chose to pay dividends that year. On average, dividends exceeded the total corporate income tax (CIT) and other taxes paid to the budget by about 9%. However, a more accurate assessment requires looking at trends over several years and considering broader economic factors.
Banks, however, are not the only highly profitable businesses. According to the Bureau of National Statistics, profitability in 2023 stood at 35.6% for administrative and support services, 53.7% for software development and broadcasting, and 75.2% for water transport operations. Given these differences, it may make sense to either apply a uniform CIT rate across all industries or introduce a progressive tax system based on income levels.
As discussions on the draft Tax Code continue in parliament, the hope is that the final approach will strike the right balance—protecting the interests of financial service consumers while keeping the sector attractive and predictable for businesses and foreign investors.
- The president’s call for a new law “On Banks” has opened the door to important discussions about modernizing regulation and promoting growth in the sector. What is your take on these proposed measures, and how do you think they will influence the industry’s future?
- The development of the new Law “On Banks” is still in its early stages, but key proposals under discussion are already receiving broad support from the market. Concepts such as expanding the use of digital assets, strengthening partnerships with fintech companies, and enabling Islamic windows within traditional banks are seen as steps toward a more inclusive and innovative financial system.
Another welcomed initiative is the regulator’s proposal to streamline regulations by eliminating duplicative requirements and outdated standards for major shareholders, subsidiaries, and executives. Globally, banking laws typically establish core principles and approaches, leaving specific rules to financial authorities. This allows regulations to align with international standards while adapting to the sector’s development level.
Ensuring that oversight remains proportionate to the risks financial institutions pose to the system and their clients will be essential. Effective regulation requires clear distinctions between different approaches. Prudential regulation focuses on maintaining the financial stability of credit institutions and protecting depositors' interests. Macroprudential regulation identifies and mitigates systemic risks, such as financial “bubbles,” to preserve broader economic stability. Business conduct regulation promotes responsible service delivery by addressing the complexity of financial products and protecting less financially literate clients. This framework emphasizes shared responsibility between providers and consumers.
Internationally, these principles are reinforced through corporate governance standards, ethical codes, and behavioral supervision, all overseen by financial regulators.
By following these fundamental approaches throughout the drafting process, the new law can create a robust framework for the sustainable growth and modernization of Kazakhstan’s financial sector.
- What other changes do you believe are necessary in the new law?
- The transformation of banks into fintech-driven institutions appears irreversible. The continued presence of traditional banks in Europe and the U.S. increasingly resembles a legacy model. The rapid expansion of fintech companies and their growing overlap with banks highlight critical regulatory considerations.
According to Mastercard, the number of non-bank fintech companies has quadrupled over the past five years, bringing the total number of fintech startups to 200. This underscores the need for risk-based regulation that applies uniformly, regardless of the type of institution conducting the activities. Ensuring regulatory consistency will be essential for maintaining financial stability.
Maintaining a private market also remains a priority. Current legislation prohibits state ownership of banks, except in cases where intervention is required to stabilize an insolvent institution. In practice, such interventions have been temporary, with the government exiting through the sale of stakes to private investors. Preserving this principle is vital to sustaining market confidence.
Equally important is safeguarding against interference in banks’ operational activities and upholding regulatory independence. Regulators must operate professionally, adhere to international standards, and engage with the market based on principles of transparency, predictability, and consistency.
Regulatory consistency is especially critical. Ensuring that identical violations result in identical penalties not only reinforces fairness but also enhances trust in the regulatory framework. With these principles firmly in place, Kazakhstan’s banking sector is well-positioned to adapt to ongoing shifts in the financial landscape.
- What needs to be done to attract foreign players to Kazakhstan's banking sector?
- We’ve already highlighted taxation, but it’s worth asking—will setting corporate income tax rates for banks higher than those for casinos really attract new investors? A predictable and balanced environment is crucial for growth. Sustainable economic expansion, the emergence of promising new businesses, and improved solvency would help create a stronger client base for new credit institutions. This, in turn, could encourage innovation and the development of financial products tailored to local businesses.
However, challenges remain—particularly for small and medium-sized enterprises (SMEs). Loan approval rates for SMEs stood at just 37.4% from January to September 2024, reflecting deteriorating financial health and persistently high credit risks.
According to the National Bank, as of September 2024, only 16.2% of small businesses were classified as financially stable, down from 19.5% at the start of the year. For medium-sized businesses, the share fell to 14.9% from 17.4%. At the same time, SMEs accounted for 72% of total overdue debt on business loans, amounting to 363 billion tenge.
- Do you agree with financier Galim Khusainov’s statement that bank margins remain high due to a lack of competition?
- Let me give you an example. Ten years ago, the average interest margin across the banking system was 5.75%, with 38 banks operating in the market. Today, we have 21 banks, and the margin has increased slightly to 6.56%—less than a 1 percentage point rise. So much for the claim about a lack of competition.
In reality, competition is strong, and the growth in new lending volumes clearly demonstrates this. Among the five largest banks, which account for 75% of total lending, margins are within the same 6.56% range. This puts to rest any notions of banks engaging in “super-high-margin” activities.
- Looking back at this year, how would you describe the key trends and changes in the banking sector? What’s your overall assessment of the developments?
- Kazakhstan faced a challenging year despite solid economic growth. Inflation expectations intensified toward year-end, prompting tighter monetary policy. A weakening exchange rate, expansionary fiscal policies, and reforms in paid services added to inflationary pressures. Structural challenges, including low labor productivity, high production costs, limited economies of scale, and market concentration, further fueled price growth.
With inflation unlikely to return to the 5% target within the next 12 months, tight monetary conditions are expected to persist. Financial market experts forecast the base rate to remain elevated at 14.25% by year-end.
Despite external challenges, Kazakhstan’s banking sector showed steady growth this year. As of November 1, 2024, bank assets rose by 13.6%, up from 8.6% during the same period last year. Capital increased by 23.1% (compared to 22.7%), loan portfolios expanded by 13.1% (down from 15.6%), and client deposits grew by 12.0%, significantly higher than last year’s 4.8%. Deposits from individuals climbed by 11.2% (10.8%), while profits rose 18.2% (21.2%).
Stronger profits boosted sector capitalization and drove a 28.4% increase in corporate income tax payments. Improved financial performance also prompted positive ratings actions. Since the beginning of the year, credit ratings have been upgraded 13 times, and six banks received outlook improvements. Notably, S&P raised its assessment of Kazakhstan’s banking sector risks for the second year in a row. Five banks continue to hold positive outlooks, signaling further potential for ratings growth.
Kazakhstan’s banking sector ends the year in a strong position, backed by ample liquidity, robust funding sources, and stable capitalization. The asset quality review (AQR) conducted last year revealed no significant increase in risks. Instead, banks maintained healthy capitalization and liquidity levels, providing a solid foundation for continued growth and stability.
Innovation remained a key focus, with digitalization driving advancements across the sector. At the same time, rising cyber threats have become a global concern. Safeguarding personal data, preventing cyberattacks, and combating fraud are top priorities as artificial intelligence introduces both new opportunities and vulnerabilities. Addressing fraud will require a holistic approach that incorporates expert insights and coordinated strategies, rather than placing full responsibility on banks.
Looking ahead, the adoption of the new Law on Banks marks both a challenge and an opportunity. This legislation is expected to act as a catalyst for positive changes, enabling banks to better meet client needs while ensuring safety, efficiency, and continued support for economic growth.
With strengthened processes, enhanced expertise, and proven resilience, the sector is well-positioned to navigate future challenges and maintain its role as a key driver of innovation and development.
- What are your forecasts for the banking sector next year?
- The challenges of this year, including global uncertainty, are expected to persist into the next. With the inauguration of a new U.S. president, potential shifts in geopolitical and trade policies could reshape the global landscape. In this context, maintaining stability and strengthening Kazakhstan’s position will remain critical. Fortunately, the country’s multi-vector foreign policy is designed to safeguard national interests while ensuring adaptability in a changing environment.
Kazakhstan’s banks have already demonstrated resilience in managing complex conditions. Operating under sanctions-related restrictions, they have enhanced compliance systems and streamlined internal processes. These adjustments have not only strengthened the sector but also equipped banks with the expertise needed to navigate evolving risks effectively.
Looking ahead, Kazakhstan will enter the new year with a moderately tight monetary policy. While expectations point to gradual easing, any adjustments are likely to be modest—around 100 basis points over the next 12 months. Despite this cautious approach, the broader outlook for 2025 remains positive.
The upcoming year is set to bring continued changes in banking legislation, with the anticipated adoption of the new Law on Banks. This legislation is expected to foster sector development, promote collaboration with fintech companies, and eliminate regulatory arbitrage. It may also pave the way for new products, supported by the entry of innovative players and technologies into the market.
Banking sector growth is likely to mirror economic trends, as banks remain closely tied to the needs of the broader economy. Planned increases in resource production—from 87.8 million tonnes in 2024 to 97.2 million tonnes—along with major infrastructure projects and high budget spending of 33.5 trillion tenge in 2025, could help offset the impact of lower commodity prices and high interest rates.
Economic forecasts remain positive. Financial market experts project GDP growth of 4.4% in 2025, while the IMF offers a slightly higher estimate of 4.6%. However, if banking sector growth were to outpace GDP significantly, it could lead to asset bubbles. Ensuring sustainable development for both the economy and the banking sector will therefore be a shared priority.
Bank lending, particularly to businesses and individuals, is expected to grow in line with GDP and deposit expansion. The current moderately tight monetary policy is already encouraging savings over spending, contributing to economic stability. This sets a solid foundation as we enter the new year
- Thank you for your time!
December, 2024
© 2024 Interfax-Kazakhstan news agency
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