OREANDA-NEWS. October 31, 2008. Since the summer of 2007, the global financial system has been undergoing a severe downturn. Despite a lack of access to external debt markets, the Kazakhstan banking sector has successfully overcome the external challenges and has been able to meet its external and domestic debt redemptions. During this period, the Government and the National Bank have supported the banking sector extensively, reported the Official website http://en.government.kz.

The recent further contraction of liquidity and declines in share prices have caused a steady deterioration in the quality of banking assets (hence the need to build additional loan loss reserves), a reduction in lending to the real economy and ultimately, a decline in economic activity of local enterprises. In these circumstances, the coordinating and supportive role of the government is crucial, as evidenced by the actions taken by governments and regulators around the world.

In the above context, the Government of Kazakhstan, in cooperation with the National Bank of Kazakhstan and the FMSA, announces a set of comprehensive proposals to further strengthen the capitalisation and liquidity of the Kazakhstan banking sector.
 
By supporting the banks, the state expects the banks to be in a position to continue lending to the domestic economy, increase financing to the SME sector, and maintain acceptable rates on mortgages to single property owner-occupied borrowers.
 
In accordance with recommendations from the FMSA, the Government has approached the shareholders of four systemically important banks, namely Alliance Bank, BTA Bank, Halyk Bank and Kazkommertsbank, with a request to provide additional capital needed to further enhance the capital adequacy of those banks. The Government intends to discuss the implementation of similar proposals with the foreign majority shareholders of ATF and Bank CenterCredit.
 
The total amount of capital injected under this plan will take the form of common and preferred shares for up to US5 billion. The right to subscribe to common and preferred stock will be offered initially to the existing shareholders in view of them providing sufficient capital to sustain financial stability of these banking institutions.

To the extent the existing shareholders forego the opportunity to inject adequate capital into the banks, the Government stands ready to become the shareholder of banks. The Government does not intend to own or control a majority of the share capital of any bank. More specifically, it is envisaged that the Government will take an equity stake of 25% in the four aforementioned banking institutions and will provide any additional capital in the form of preferred stock and subordinated debt.
 
The Government has asked the National Well-being Fund SamrukKazyna (“SamrukKazyna”) to represent the Government as a potential new shareholder in the aforementioned banks. To provide the means to purchase these securities, SamrukKazyna will receive as capital US5billion from the National Fund.
 
Finally, the Government does not intend to remain a long term provider of capital to these banks, and will look to exit as a shareholder within medium-term perspective depending on the conditions in the international capital markets. At that time, any shares owned by the Government will be disposed of in a market-conform way
 
The above proposals would provide the banks both with capital as well as liquidity to meet any debt repayments that may come due.
 
The National Fund will provide SamrukKazyna with another US5billion of liquidity by subscribing to a bond which will be issued by SamrukKazyna. These funds are intended to be directed towards lending to the real economy, including to important projects and sectors such as SMEs and infrastructure projects. Initially, these funds will be deposited with selected banks and over time, provide support to the real economy while alleviating the pressure on banks to roll-over existing loans.
 
The proposed plans also include liquidity support measures provided by the National Bank of Kazakhstan, which will be made available to the entire banking system. The National Bank will move to support current and short-term liquidity of banks by offering additional sources, such as lower minimum reserve requirements and expansion of the list of financial instruments acceptable as collateral against repo-based loans.
 
Finally, the Distressed Asset Fund, designed to help improve the average quality of the loan portfolios of banks, will begin operations shortly. The Fund will be capitalized with US1 billion.