Approved by the Coordination Center
on Strategic Management of the Kyrgyz Republic
on December 30, 2008 and ratified
by the NBKR Board Resolution No.4/4
dated January 28, 2009
Strategy for the banking sector development for the period till the end of 2011
Introduction
Strategy for the banking sector development for the period till the end of 2011 (hereinafter referred to as Strategy) reflects purposes and objectives of the banking system for the following medium-term (3 years) period 2009-2011.
When developing the present Strategy, such documents and plans of strategic measures as the Strategy for development of the country for 2007-2010, provisions of new economic policy in accordance with the statement of the President of the Kyrgyz Republic, Bakiev K.S., Strategic orientation of the NBKR activity for the period 2008-2011 as well as other strategic documents were used.
The Strategy is aimed at further growth of the financial intermediation level, strengthening of the banking sector role in the economy of the Kyrgyz Republic, maintenance of effectiveness, security and reliability of the banking activity.
Development of the present Strategy is based on plans of commercial banks for medium-term perspective.
In the framework of general strategy for strengthening of the banking sector and creation of favorable conditions for further development of the financial sector of the Kyrgyz Republic, starting from 2003 the National Bank of the Kyrgyz Republic has performed the work on further development of payment system by means of implementation of the State program and introduction of the project on modernization of payment and banking systems to provide population with free access to banking services, not only in cities, but also in distant rural rayons of the Kyrgyz Republic as well as to provide commercial banks with a wide range of banking services for attraction of population’s contributions and investing them into the real sector of economy.
I. Short description of the banking system development in the Kyrgyz Republic 2006-2008
In 2006 the Strategy of the banking sector development for the period till the end of 2008 has been developed and approved by the NBKR Board resolution No.16/4 dated May 31, 2006 and by the Coordination Council on macro-economic and investment policy of the Kyrgyz Republic Government on August 16, 2006.
The forecast indices of financial intermediation are provided below:
|
|
December 31, 2006 |
December 31, 2007 |
December 31, 2008 |
|
Assets to GDP |
24,8% |
28,3% |
30,6% |
|
Credits to GDP |
9,9% |
11,8% |
13,1% |
|
Deposits to GDP |
13,7% |
15,7% |
17,4% |
Forecasted indices of financial intermediation as of the end of 2006 in the Strategy for the banking sector development were achieved on the index “assets to GDP” and “credits to GDP”, whereas the index “deposits to GDP” even exceeded the forecast one. As of the end of 2007, these forecast indices were achieved and on all indices there was an excess of factual data over target one.
As of the end of September 2008, the forecast index of financial intermediation specified for the end of 2008, was already exceeded on the index “credits to GDP” (herewith by the end of 2008, this index may be decreased), but the indices “assets to GDP” and “deposits to GDP” were behind the forecast ones. This fact provokes concern and claims attention. Factual indices were as follows:
|
|
December 31, 2006 |
December 31, 2007 |
September 30, 2008 |
|
Assets to GDP |
24,8% |
30,1% |
29,9% |
|
Credits to GDP |
9,9% |
14,9% |
14,9% |
|
Deposits to GDP |
14,5% |
16,3% |
14,4% |
In general all purposes and objectives, specified in the Strategy for the banking sector development for the period till the end of 2008, were achieved. In particular, that document included a set of important tasks, aimed at:
· Improvement of internal management system in commercial banks, formation of adequate system of banking risks management;
· Improvement of investments security, enhancement of trust to commercial banks of the republic on the part of the population and other creditors, creation of conditions for healthy competition development;
· Improvement of the banking system transparency, development of corporate governance in commercial banks;
· Prevention of transaction on income legalization (money laundering), received by illegal actions;
· Creation of favourable conditions for further development of the financial sector of the Kyrgyz Republic;
· Provision of macro-economic stability;
· Further development of the payment system;
· Development of legal framework for banking activity and supervision;
· Development of new types of financial services.
Activity performed in 2006-2008 was mainly aimed at carrying out of the above mentions measures, which as a whole contributed to further development of the banking sector and improvement of the financial intermediation level.
II. Assessment of the banking sector current state
Major development trends. Current state
As of the end of 2007, 22 commercial banks were operating on the territory of the Kyrgyz Republic, including the Bishkek branch of the National Bank of Pakistan (as of December 31, 2005 – 19 commercial banks).
Within two year, the total assets of the banking system increased almost in two times and constituted 42.1 billion soms as of the end of 2007.
The total deposits balance of enterprises, population and government authorities in commercial banks within two years increased by 75.4 percent and constituted 22.8 billion soms as of the end of 2007.
The volume of credits, issued to clients (balance of debt), as of the end of 2007 constituted 20.8 billion soms having increased by more than 2.7 times within two years (as of the end of 2005 – 7.6 billion soms).
Interest rate on newly issued credits in the national currency as of the end of 2007 (average weighted rate for the last month of the year) constituted 25.83 %, in a foreign currency – 18.30 % (as of the end of 2005 – 16.22 %).
Interest rate on newly accepted fixed deposits in the national currency as of the end of 2007 (average weighted rate for the last month of the year) constituted 5.28 % (as of the end of 2005 – 9.65 %), in a foreign currency – 5.66 % (as of the end of 2005 – 5.87 %). Thus, as per results of 2 years (from the end of 2005 till the end of 2007), there was a certain increase of interest rates on newly issued credits both in the national and foreign currencies, at the same time there was s decrease of interest rates on newly accepted fixed deposits both in the national and foreign currencies, which provided the increase of interest rates spread.
The total regulatory capital of the banking system also continued growing and as of the end of 2007 it constituted 9.0 billion soms, having increased in more than 2.5 times within last 2 years.
As per results of the latest years, there was a continuing growth of the banking activity profitability. In 2007, banks received the current profit in the amount of 1 553.2 million soms (in 2005 – 429.8 million soms). In other words within 2 years there was an increase of the current profit, received by banks, in more than 3.5 times. Herewith, the banking system’s return on assets (hereinafter referred to as ROA) on an annualized basis constituted 4.3 % as of the end of 2007, whereas return on equity (hereinafter referred to as ROE) – 26.4 % (for comparison, as per results of 2005 – 2.3 % and 17.6 % correspondingly).
As of September 30, 2008, 22 commercial banks (including the Bishkek branch of the National Bank of Pakistan) were operating in the Kyrgyz Republic.
For the period of January-September 2008, the banking system total assets increased by 22.2 % and constituted 51.51 billion soms (having increased by 9.4 billion soms).
As of September 30, 2008, the overall deposit base of the banking system constituted 29.91 billion soms (having increased by 13.1 % from the beginning of 2008), including:
1) deposits of enterprises and population constituted 20.51 billion soms, having increased by 7.7 % from the beginning of 2008;
2) deposits of banks and other financial-and-credit institutions constituted 5.01 billions soms, having increased by 38.5 % from the beginning of 2008;
3) deposits and credits of government authorities constituted 4.39 billion soms, having increased by 16.1 % from the beginning of 2008.
As of September 30, 2008, the deposits of enterprises and population (hereinafter this category excludes deposits of banks and other financial-and-credit institutions as well as deposits and credits of government authorities) are presented in the following way:
- deposits of legal entities – 13.41 billion soms or 65.4 % out of the total deposits volume (as of the beginning of 2008 – 12.81 billion soms or 67.3 %);
- deposits of individuals – 7.10 billion soms or 34.6 % out of the total deposits volume (as of the beginning of 2008 – 6.24 billion soms or 32.7 %).
As of September 30, 2008, the increment of legal entities deposits constituted 4.7 % from the beginning of 2008 and the increment of individuals’ deposits volume constituted 13.8 %.
In September 2008, the weighted average interest rates on newly accepted fixed deposits in the national currency constituted 8.6 % (in the corresponding period of 2007 – 8.3 %), in a foreign – 4.7 % (in the corresponding period of 2007 – 6.7 %).
As of September 30, 2008, the total credit portfolio of the banking system constituted 25.75 billion soms, herewith the sum of its discount constituted 36.6 million soms.
As of September 30, 2008, the volume of credits, issued to clients (excluding credits to banks and other financial-and-credit institutions as well as discount on issued credits) constituted 25.72 billion soms, having increased by 23.6 % in comparison with the beginning of 2008 (as of December 31, 2007 – 20.80 billion soms).
As of September 30, 2008 the share of classified credits in the credit portfolio constituted 4.1 % or 1.04 billion soms (as of the beginning of 2008 – 3.5 % or 0.74 billion soms).
In September 2008, the weighted average interest rates on newly issued credits in the national currency constituted 26.7 % (in the corresponding period of 2007 – 23.3 %), in a foreign currency – 20.7 % (in the corresponding period of 2007 – 18.1 %).
As of September 30, 2008, the index of net total capital of the banking system, used for settlement of prudential regulations, established by the National Bank of the Kyrgyz Republic, constituted 11.06 billions soms, having increased by 2 167.0 million soms or 24.4 % from the beginning of 2008 (as of the beginning of 2008 – 8.90 billion soms).
As of September 30, 2008, the general index of the banking system capital adequacy constituted 30.8 % (as per results of 2007 – 31.1 %).
In balance capital the growth tendency was also noted – for the period of January-September 2008 it increased by 2 716.5 million soms (increment by 30.2 %) and constituted 11.71 billion soms.
Net profit of the banking system for the period of January-September 2008 constituted 1 316.9 million soms (in the corresponding period of 2007 this index constituted 1 116.2 million soms).
The total income of commercial banks for the period of January-September 2008 constituted 9.9 billion soms and total expenditures constituted 8.59 billion soms (in comparison with the corresponding period of 2007, the increment constituted 103.2 % and 128.4 % correspondingly).
For the period of January-September 2008, the banking system ROA constituted 3.8 % (as per results of 2007 – 4.3 %), and the banking system ROE constituted 20.4 % (as per results of 2007 – 26.4 %).
Deposits protection system
A significant factor for improvement of confidence to the banking sector is availability of the deposits protection system, implementation of which will guarantee repayment of a certain sum of money to depositors (individuals) in case of bank bankruptcy.
After entry of the Kyrgyz Republic Law “On Protection of the Banking Deposits” into effect on August 13, 2008, the priority of further development in the sphere of baking activity regulation has still remained realization of measures related to implementation of the deposits protection system in the Kyrgyz Republic.
The National Bank of the Kyrgyz Republic has developed regulatory documents, regulating the procedure for entry of commercial banks to the deposits protection system. The Kyrgyz Republic Government Resolution No.387, dated July 18, 2008 approved creation of the Agency for Deposits Protection. To provide effective implementation of the Law on Protection of the Banking Deposits, the National Bank of the Kyrgyz Republic has performed work to adjust acting legislation norms of the Kyrgyz Republic with the Law on Protection of the Banking Deposits (draft Law on Introduction of Changes and Additions to the Law on Banks and Banking Activity in the Kyrgyz Republic and draft Law on Introduction of Changes to the Tax Code of the Kyrgyz Republic dated October 10, 2008 were approved by the Kyrgyz Republic Jogorku Kenesh).
Islamic principles of banking management and financing
Implementation of the Islamic principles of banking management and financing in the Kyrgyz Republic along with traditional banking management is regarded as the measure contributing to improvement of economic legal relations and development of competitive financing system. It is realized as a pilot project on the basis of the Memorandum of Understanding between the Kyrgyz Republic, Islamic Development Bank and pilot bank (OJSC “EcoBank”).
The National Bank of the Kyrgyz Republic within the framework of authorities, determined by the Kyrgyz Republic legislation, has developed normative and legal acts, establishing the procedure for performance of certain (certifies) types of activity in accordance with the Islamic financing principles and determining the regulative requirements for activity of OJSC “EcoBank” within realization of the pilot project on implementation of the Islamic financing principles.
Within realization of the state policy on development of competitive financing systems as well as for the purpose of banking services range expansion, the National Bank of the Kyrgyz Republic will continue the activity on creation of favorable conditions for development of the Islamic principles of banking management and financing.
Availability of banking services for enterprises and population in regions
As of the end of 2007, and in comparison with the end of 2005, the total number of commercial banks branches increased by 47 entities or by 28.0 % and constituted 215 entities, and the number of commercial banks savings departments increased by 173 entities or by 105.5 % and constituted 337 entities. This contributed to the banking services availability enhancement for enterprises and population. Information on the number of branches and savings departments in the view of regions as of the end of 2005, 2006, 2007 is provided below:
|
Oblast |
December 31, 2005 |
December 31, 2006 |
December 31, .2007 |
|||
|
branches |
savings departments |
branches |
savings departments |
branches |
savings departments |
|
|
Bishkek |
30 |
82 |
30 |
103 |
38 |
136 |
|
Batken |
10 |
6 |
11 |
16 |
13 |
20 |
|
Jalalabat |
30 |
23 |
30 |
38 |
37 |
54 |
|
Issyk-Kul |
23 |
5 |
24 |
10 |
32 |
19 |
|
Naryn |
13 |
1 |
13 |
4 |
17 |
4 |
|
Osh |
27 |
33 |
29 |
49 |
36 |
68 |
|
Talas |
8 |
0 |
8 |
2 |
9 |
2 |
|
Chui |
27 |
14 |
27 |
25 |
33 |
34 |
|
Total: |
168 |
164 |
172 |
247 |
215 |
337 |
Payment system
The major components of the State program, implemented in 2006-2008 are:
1. The system of Package clearing was put into operation on October 13, 2006 for processing of retail and regular payments of the population with the use of various payment instruments, user-friendly for population and effective for monetary circulation management in the Kyrgyz Republic. This system enables population to choose any commercial bank for conducting regular payments, which contribute to competition development in the banking sector.
2. The Single Inter-Bank Processing Center for processing of payments with the use of banking payment cards was put into operation on December 22, 2006. The major objective of this center is to provide people at large with the possibility to manage their accounts. Thus, the population has the possibility to perform payments for goods and services, as well as to receive cash by means of payment cards in any place of the country no matter in which commercial bank a holder of the card is served.
To develop infrastructure on acceptance and maintenance of payments with the use of the card, the National Bank of the Kyrgyz Republic together with commercial banks created an independent legal entity LLP “Inter-bank processing center”. Establishment and operation of this center will enable to expand the payment system infrastructure. This will also enable commercial banks to use general reserves for development as well as general standards and to decrease expenses of each individual bank for creation and maintenance of the system. Commercial banks will compete with each other in relation to terms and conditions, proposed by them to companies, trade centers and individual clients (civil employees, pensioners etc.).
3. Gross settlement system in on a real-time basis – the system for processing of large payments settled in the financial markets as well as due payments, was put into operation of June 20, 2008. One of the major objectives of the system is decrease of risks of the financial markets participants and increase of monetary assets turnover in settlement. This will contribute to intensification of financial markets, improvement of the banking system security and stability with the use of effective management over operation, system, credit and liquidity risks in the payment system of the Kyrgyz Republic. In future the gross settlement system will enable to integrate the payment system of the Kyrgyz Republic into the general payment-settlement system of the CIS and non-CIS countries.
Implementation of the state program is aimed at solution of high-priority objectives of the Kyrgyz Republic Government in the sphere of the country economy reformation. That’s why successful and high-quality realization of this program depends on joint operation of enterprises and organizations, commercial banks and the National Bank of the Kyrgyz Republic as well as governmental structures, which are responsible for economic development of the country with the whole support of the Kyrgyz Republic Government. Therefore on December 30, 2005, the resolution of the Kyrgyz Republic Government and the National Bank of the Kyrgyz Republic approved the interagency committee on implementation of the major trends of the state program. One of the major objectives of the interagency committee is provision of control and coordination over activities on implementation of the state program.
As of October 1, 2008, participants of inter-bank settlement systems were presented by the National Bank of the Kyrgyz Republic, all 22 commercial banks, including 227 commercial banks branches, the Inter-state Bank and the Central Treasury.
Nowadays in the Kyrgyz Republic cards of the international system Visa&Master card Int., as well as of local systems Alay Card, Demir 24 and the national system Elcart are used. As of October 1, 2008, 100 thousand cards were issued.
One of priority trends of the development strategy for banks, leading at the card market of Kyrgyzstan, is realization of “salary” projects on the basis of international and local systems cards. Due to these projects, banks gain a considerable growth of cards issuance and transactions volume that contributes to strengthening of banks position in this market.
Weak development of the commercial banks’ branch network is one of the deterrent factors for non-cash settlements development. Thus the National Bank of the Kyrgyz Republic in cooperation with commercial banks perform measures on expansion of the network of automated teller machines and terminals to provide people at large with the access to a full range of banking services in the republic.
Micro-financing sector
Due to a rapid growth of the micro-financing sector, the National Bank of the Kyrgyz Republic in 2005, launched development of the “Medium-term strategy for micro-financing activity development in the Kyrgyz Republic for 2006-2010”. This strategy was approved by the joint resolution of the Kyrgyz Republic Government and the National Bank of the Kyrgyz Republic No.637/37/7 dated December 30, 2005.
The strategy is aimed at integration of efforts of state bodies, financial sector and in particular micro-financing institutions as well as other parties concerned to development of dynamic and stable micro-financing branch, because stable branch of micro-financing with well-developed potential for provision a wide range of services to urban and rural population will lead to economic level increase and poverty reduction.
Expansion of the access for the population to financial services is one of the key factors influencing the economic growth.
As a result of measures related to the strategy as well as liberal requirements for creation of micro-financial enterprises, the following indices were achieved: the total credit portfolio in the system of micro-financing, including the volume of micro-credits, issued by commercial banks and non-banking financial-and-credit institutions constituted 10.4 billion soms as of the end of 2007 whereas the number of borrowers constituted 232 thousand entities.
Micro-credit portfolio of commercial banks as of the end of 2007 constituted 5.5 billion soms and the number of borrowers – 71 thousand entities.
Nowadays within the framework of the above-mentioned strategy, in a part of the banking system, the following measures have already been implemented:
§ Functions of savings departments of commercial banks were expanded by transactions on credit financing. As a result the number of savings departments in the Kyrgyz Republic increased from 247 (as of the end of 2006) to 337 (as of the end of 2007).
§ Financial-and-credit institutions in cooperation with international donors develop new products for micro-financing. European Bank for Reconstruction and Development proposed the product “Agrocredit” for commercial banks, working on the project “EBRD Small and Micro Financing Programs”. “Aiyl Bank” has successfully developed the project “Chakan credit”, establishing representative offices for group credit financing in villages. This bank also deals with the credit means of the World Bank on the project “Agribusiness and marketing”.
§ The NBKR Board resolution dated December 20, 2007 approved the issuance of full banking license to OJSC “Raschetno-Sberegatelnaya Kompania” for performance of micro-crediting transactions; also the NBKR Board resolution dated December 27, 2006 approved reorganization of the Kyrgyz Agricultural Financial Corporation (performing micro-credits issuance) into “Aiyl Bank”.
III. BASIC PROBLEMS, RISKS AND THREATS IN THE BANKING SECTOR.
There are following problems in the banking sector:
1. Relatively low level of the financial intermediation in the Kyrgyz economy, in spite of positive development of the index shown in the table below.
Basic index development of the financial intermediation in the banking system of the Kyrgyz Republic (by the end of period):
(in percent)
|
Indexes |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
September 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets to GDP |
7,2 |
6,8 |
10,4 |
13,6 |
18,8 |
21,7 |
24,8 |
30,1 |
29,9 |
|
Credits to GDP |
2,2 |
2,1 |
2,7 |
3,5 |
6,2 |
7,6 |
9,9 |
14,9 |
14,9 |
|
Deposits to GDP |
4,2 |
3,4 |
4,8 |
6,0 |
8,7 |
12,9 |
14,5 |
16,3 |
14,4 |
|
|
|
|
|
|
|
|
|
|
|
Mentioned indexes of the financial intermediation (assets, credits and deposits’ ratio to GDP) remain at a low level in comparison with the similar indexes of other countries with transition economy. That testifies considerable extension of influence of the banking system on the economic development in general.
2. Possible negative influence of external shocks on the banking sector of the Kyrgyz Republic.
Today, recessionary events in the global economy and economy of countries – main foreign trade partners, can implicitly affect banking system of the Kyrgyz Republic. Therefore, it is of a high priority to make all efforts for development of risk management system in commercial banks and implementation of risk-oriented supervision elements in the National Bank of the Kyrgyz Republic.
3. Relatively low level of resources obtained from population.
Low interest rates on deposits, high inflationary expectations, inability to get insurance compensation, in the nearest time, using deposit protection system, rise in the cost of living and decrease of personal savings amount with regard to price increase on food products, petroleum, oil and lubricants, electric power and other substantial risks affect population deposit level which remains low.
4. High level of interest rates for issued credits and large spread of interest rates.
Level of current interest rates in the commercial banks remains high and has a tendency for increase that negatively affects the level of financial intermediary and economy growth in general. Average interest rate level on credits by the end of 2007 constituted 25 % in national currency and 18 % in foreign currency. Besides, interest rate spread remains high and by the end of 2007 it amounted to 20.5 percentage points in national currency and 12.6 percentage points in foreign currency. High spread of interest rates on credits and deposits in the Kyrgyz Republic caused by the influence of the following factors:
ь High demand on credit means;
ь Remaining high level of risks;
ь Insufficient level of competition in the banking system;
ь Relatively low interest rates for obtained deposits.
SWOT-analysis of commercial banks activity.
Commercial banks activity assessment, presented in this section, is based on self-assessment results, which was performed by banks, as well as on the analysis, conducted by Banking Supervision Department in the NBKR.
SWOT-analysis allows identify strong and weak sides of the commercial banks; evaluate possibility of further business development and threats of the potential risks for banks.
Advantages and disadvantages of the commercial banks
|
Advantages of the commercial banks |
Disadvantages of the commercial banks |
|
Ш Capitalization growth of the commercial banks allows increasing of financing of major projects and coverage of substantial risks Ш Growth of the banking system credit portfolio increases financing of population and businesses, and allows increase of banking operation profitability Ш High level of the current liquidity Ш Availability of the developed and productive network of the correspondence relations Ш International audit of number of commercial banks operational activity Ш Implementation of new bank products and services Ш Effective and various sales outlets Ш Quality improvement of customer service and continuous perfection of this direction Ш Availability of regular customers Ш Personnel, having long-term experience and high qualification in the banking system Ш Ongoing professional improvement of the personnel and availability of training centers Ш Smooth-running operation Ш Implementation of deposit system protection Ш Longstanding experience on the market of banking and financial services Ш Availability of risk management system Ш Material and technical equipment Ш Access of some banks to the inexpensive resources of the parent companies Ш Performance of the existing activities for the credit portfolio quality improvement Ш Conservative policy of crediting |
Ш Still low level of capitalization in the sphere of competition with the foreign banks Ш Most of commercial banks do not have developed branch network and savings banks, particularly in the remote areas Ш Low level of funds attraction from businesses and population, especially in the local market Ш Utilization of old-fashioned information technologies and automated systems by many commercial banks Ш Undeveloped franchising of the bank retail services Ш Low level of consumer awareness about bank products Ш Limited capacity for mobilization of substantial capital Ш Unbalanced structure of funding sources in some commercial banks Ш Undifferentiated credit products Ш Shortage of long-term financial resources Ш Lack of funds for the institutional and infrastructural development Ш Absence of adequate risk management in some banks |
Feasibilities and threats for commercial banks activity
|
Current feasibilities of commercial banks activity |
Current threats to the commercial banks activity |
|
Ш Increase of assets and credit portfolio as well as improvement of its quality Ш Personnel proficiency Ш Improvement of the applied information technologies Ш Stretching of services and product line (checking cards, retail credits, new deposits, Internet Banking, Master Card, American Express etc.), may lead to the bank services demand increase and successful development of the retail activity Ш Diversification of the sales outlets including the branch network, particularly in the regions Ш Research and adaptation of the financial institution international experience on the local market Ш Prime cost decrease due to dynamic utilization of the modern technologies in the sphere of automation of the bank processes and application of network servers for the clients self-service Ш International audit proceedings as an independent audit will increase trust among clients and allow to change the bank strategy with regard to target groups Ш Access to the new markets; provision of services Ш List of services oriented to the clients requirement Ш Resource base expansion Ш Authorized capital increase Ш Participation in implementation of the government programs for economy financing for long and medium terms Ш Optimization of the bank structure |
Ш Expansion of crisis situation in the world economy and in the economies of countries – foreign trade partners of the Kyrgyz Republic through the bank-subsidiaries in the Kyrgyzstan Ш Deterioration of the macroeconomic situation may negatively affect bank activity Ш Inflation growth Ш Sudden change of the local exchange rate Ш Raising operation expenditures Ш Deterioration of the external trade conditions Ш Deposits outflow due to the political or economical instability; moreover, exchange rate fluctuations in the international markets may promote transfer of savings to other sectors of economy or to the real estate market Ш Inadequate financial data reporting of the potential borrowers; non-transparency of their activity restrains the possibility of the adequate financial analysis of the potential borrowers Ш Legislation is in the development stage and as a result it is a subject to changes Ш High fluctuation of the personal Ш Endowment capital volume decrease in the economy Ш Circumstances of insuperable force (force majeure) |
Assessment of banks activity shows that banks today have the advantages that facilitate further growth of the financial sector. On the other hand, there are number of factors, negatively influencing or may negatively affect the financial stability of the financial institutions in future.
IV. GOALS AND OBJECTIVES
Strategy is aimed to the further growth of financial intermediary, increase of the banking sector status in the economy of the Kyrgyz Republic, maintenance of the efficiency, safety and reliability of the banking business.
For the Strategy implementation and objectives achievement, the following tasks should be fulfilled: (Annex 1 - Tree of objectives for the development of banking sector till the end of 2011):
1. Increase in volume and accessibility of crediting and financial cervices for the businesses and population, primarily in regions.
1.1. Creation of favorable conditions for the attraction of investments (including foreign) to the banking sector for encouraging of further development of the financial sector of the Kyrgyz Republic as well as maintenance of the competition level.
1.2. Introduction of Islamic principles of financing in the Kyrgyz Republic and further development of Islamic banking and financing in the Kyrgyz Republic.
1.3. Banking sector infrastructure development.
1.4. Development of the Microfinancing sector and the system of non-banking financial institutions.
2. Confidence-building of the population to the banking system and level increase of the attracted savings (mobilization of domestic resources).
2.1. Improvement of the NBKR supervisory function and internal management system in the commercial banks.
2.1.1. Further maintenance of the banking supervision harmonization in the Kyrgyz Republic in accordance with the Basel Committee banking supervision principles. Gradual system formation of the consolidated supervision as well as implementation of elements of risk-oriented supervision.
2.1.2. Further improvement and implementation of the adequate risk management system, related to the banking business; Improvement of evaluation system, analysis, rapid response and risks prevention; further improvement of the internal management system in commercial banks, including corporate governance.
2.1.3. Increase of minimum requirements to the commercial banks owned capital for the amount of 200 million som till the end of 2010.
2.2. Implementation of effective deposits protection system.
Creation of favorable conditions for development:
3. Macroeconomic stability.
3.1. Maintenance of inflation at the following levels: 2009 – 12-15 %, 2010 – about 10,0 %, 2011 – less then 10,0 %.
3.2. Carrying out of financial stability analysis and performance of corresponding activities for the purpose of its strengthening.
3.3. Protection against external shocks.
4. Development and updating of the legislation.
4.1. Development and updating of the legislation in the area of Islam banking and financing.
4.2. Development and updating of the legislation in the area of Microfinancing and regulation of non-banking financial institutions.
4.3. Development and updating of the legislation in the area of payment system.
4.4. Development of sub legislative normative acts that regulate risk management system in commercial banks.
5. Further development of the payment system.
5.1. Non-cash payments and monetary funds increase.
5.2. Range expansion of retail payment services provided by financial institutions.
5.3. Creation of favourable conditions for integration of the NBKR gross payment system with trading systems and operators of trading sites.
5.4. Creation of favourable conditions for integration of the Kyrgyz Republic payment systems with local and international payment and money transfer systems.
V. BASIC TRENDS IN FURTHER DEVELOPMENT AND IMPLEMENTATION ARRANGEMENTS.
Development of the banking sector
Further development of the banking sector closely related to the following factors: macroeconomic situation stability in the Republic; lack of misbalances in economy and implementation of monetary policy; influence of external shocks on the economy and banking sector of the Kyrgyz Republic. In this respect, for the preparation of the further development program, the following assumptions were used:
а) Growth rate of actual GDP in the expectational horizon (2009-2011) will change within the range of 7-8 percent on an annualized basis, whereas consumer price index will change from 10 to 15 percent on an annualized basis;
b) Production growth positive trend in key branches of economy will continue. This will form the basis for the economic growth;
c) Annual growth of real incomes of population will constitute about 10 percent of the last year level;
d) Corruption level will reduce. Legalization of the black sector of economy will occur;
e) Situation on the financial market and in the economy will not make banks to reduce their business activity;
f) significant influence of external shocks on the commercial banks activity and banking services market is not expected, as well as on the economic situation and business activity of population and enterprises.
Banking system in the next three years will continue its growth. It should be noted that in accordance with the forecast of commercial banks, the capital increase will continue its considerably high growth till the end of 2011. This shows banks’ intention to improve their financial stability. Capital growth will be supported with the current profit.
Hereby, the following quantitative benchmarks are forecasted till the end of 2011: by the end of 2011 asset ratio to GDP will constitute 32 percent; by the end of 2011 growth of assets, credits and deposits in comparison with the end of 2008 will constitute 60, 73 and 60 percent correspondingly (Amendment 2 – Forecast growth rates of the banking sector basic indexes and level of financial intermediary for 2009-2011). It should be mentioned that significant influence of external shocks may result substantial changes of the projected indexes.
The NBKR resolution No. 18/6, dated April 25, 2008 approved “Strategic trends of the NBKR activity for 2008-2011” and prepared consistent Implementation Plan, approved by the NBKR decree No. 156-O, dated August 19, 2008. Within the framework of these documents, specific list of activities was provided, as well as procedures for their implementation and achievement of objectives under the present Strategic plan, particularly for the purpose of further harmonization of the banking supervision in the Kyrgyz Republic in accordance with Basel Committee Banking Supervision guidelines. Mentioned objectives also include the following: gradual formation of consolidated supervision system and implementation of elements of risk-oriented supervision; further improvement and implementation of appropriate risk management system, related to the banking activity; improvement of evaluation system, analysis, rapid response and prevention of risks; further improvement of internal management system in commercial banks including corporate governance etc. In this respect, on the basis of the mentioned Implementation Plan, another plan for implementation of the present Strategy was developed (Annex 4 – Plan of measures on implementation of the banking sector development Strategy till the end of 2011). Also corresponding measures and mechanisms of realization and achievement of many aims and goals, specified in the present Strategy, are provided in business-plans, medium-term development strategies and other documents and plans of commercial banks, non-banking financial and credit institutions, enterprises and organizations, governmental departments and offices.
The KR Government Resolution No.387 dated July 18, 2008 approved creation of the Agency on deposits protections, which will form the Deposits Protection Fund (hereinafter referred to as DPF). This fund is financial provision of deposits protection system up to target level, specified in the Law on Protection of Deposits (hereinafter referred to as Law). The Law is effective from August 13, 2008. According to the Law, a target value of DPF should be calculated as of the date of the Law’s entry into effect. The target value of DPF was approved by the Board of Directors of the Agency on Deposits Protection in the amount of 132.7 million soms. According to the Law, the target value of FDP will be forming within 2 years since the Law’s entry into effect, thus it will be achieved no later than in August 2010.
Within the framework of implementation of the KR President decree, dated April 22, 2008, on further measures for introduction of Islamic financial services industry in the Kyrgyz Republic, the NBKR Board resolution No.20/1 dated May 14, 2008 approved the NBKR proposals to the plan of measures for 2008-2010. The plan includes measures on formation and establishment of Bishkek city as the centre of Islamic financial services industry in the Central Asia. Later on those proposals were approved by the KF Government resolution No.361, dated July 2, 2008, “On introduction of Islamic financial services industry in the Kyrgyz Republic”.
Development of non-banking financial institutions
For the purpose of development of non-banking financial institutions, the following procedures were proposed:
Continue in future realization of medium-term development strategy till 2010.
In 2011, it is planned to carry out activities for the future improvement of legal and regulatory environment in order to improve quality of Microfinancing services. With this regard, it was scheduled analysis of legislation, regulating Microfinancing sector (including the Law “On Credit Unions”, “On Microfinancing institutions”, regulatory legal acts of the Banking Law), as well as Microfinancing market analysis in order to identify the following activities:
ь Increase the number of financial services and increase access availability for the population (diversification);
ь Strengthening of Microfinancing institutions (financial stability).
With regard to development trend of Microfinancing sector in the frame of the present strategy, it was assumed that the following targets on the volume of crediting and population coverage will be fulfilled: total volume of the credit portfolio of non-banking financial institutions will constituted 8-9 billion soms (in accordance with the Medium term strategy for Microfinancing activity development, the present target value is 6-7 billion soms till 2010). Scope of lending will increase to 250 000 borrowers (till 2010, present target value is 220 000 borrowers).
Proposed target values were calculated on the basis of current trends on the Microfinancing market in the Kyrgyz Republic, on the analysis of Microcrediting project realization (projects are financed by international sponsors), and on the assessment of the current demand in credit resources. Thus, average annual growth rate of the Non-financial Credit Institution assets (for the last 3 years) constituted 61 percent, and credit portfolio – 58.6 percent. Micro credit portfolio for the last reporting date amounted to 10.4 billion soms. However, it should be noted, that almost 5 billion soms were received from the development projects (World Bank, EBRD, ADB). The end of contracts with these projects means the start of debt payout to donors. Another words, it is outflow of funds allocated to the credit portfolio. Hereby, target values are estimated with regard to projected outflows and trends of lending increase by the Microfinancing companies.
Herewith, the specific activities and implementation procedures are presented in “Medium term Strategy for Microfinancing Activity Development in the Kyrgyz Republic for 2006-2010” and in the attached Implementation Plan.
Payment System
In future, the NBKR plans to continue implementing procedures for the reforming of the payment system in the Kyrgyz Republic.
Long-term strategic objectives for the reformation of the Kyrgyz Republic payment system consist in maintenance of reliable and safe operation of the payment system in all sectors of economy for effective administration of money flows. The NBKR will continue to develop new, effective, reliable and inexpensive methods for the provision of payment and financial services to customers.
For the achievement of strategic goals in reformation of the Kyrgyz Republic payment system, the NBKR intends facilitate expanding range of the retail payment services, provided by the financial institutions. For this purpose, the NBKR will develop batch clearing system tools for handling of retail and regular payments using bank payment cards. Within the framework of further development of the financial markets in 2008-2010, the NBKR will continue increase efficiency of payments in financial markets, mostly related to integration of the NBKR gross payment system with the trade systems and trade platforms operators. In 2008-2011, the NBKR also intends to support preparation and perform activities for the integration of the Kyrgyz Republic payment systems with the local and international payment systems as well as with money transfer systems.
With the object to provide continuous operation of the payment system of the Kyrgyz Republic, the NBKR will be supervising the payment system by means of monitoring, control and system evaluation of gross and retail payments in compliance with the Monitoring Policy Over the Payment System of the Kyrgyz Republic, approved by the Decree No.7/8 of the NBKR Board, dated March 23, 2006.
Mentioned above procedures will facilitate decision making regarding development of some payment systems that cover the requirements in calculations in various sectors of economy. Monitoring of the Kyrgyz Republic payment system by the NBKR will be focused on the performance of tasks of the national policy for the development of payment system, as well as on the bringing of the KR payment system to the international standards.
Herewith, specific procedures and implementation arrangements are provided in “Basic trends of payment system development in the Kyrgyz Republic for 2009-2011” and in the attached Implementation Plan.
Tree of objectives for the development of banking sector till the end of 2011.
Forecast growth rates of the banking sector basic indexes and level of financial intermediary for 2009-2011 are estimated on the basis of information, provided by commercial banks. In this regard, against the backdrop of the potential significant influence of outer shocks on economy and banking sector of the Kyrgyz Republic, assumed growth rates of the basic indexes of the banking sector and level of financial intermediary may be subject to substantial adjustment.
Trend of basic indexes volume of commercial banks activity (assets, credits and deposits) and their growth rates, as well as ratio of the banking system assets to GDP (in 2005-2007).
