• ANALYTICAL REPORT«FINANCIAL SECTOR: STATUS, PROBLEMS AND PROSPECTS» IV FINANCIAL INSTITUTIONS’ CONGRESS OF KAZAKHSTAN.
• Presentation: Financial Sector:status, problems and prospects.
• The Paper Issue. ("exclusive" № 12, december 2004)

• World Bank President Mr. James Wolfensohn Address to The Congress of Financiers

I Congress

• Presidents Speech

Dear Guests!

I would like to thank the sponsors of this forum for their patriotic initiative on unifying intellectual efforts to discuss burning issues regarding the domestic economy. I admit that it is very pleasant to see the financial elite of Kazakhstan gathered here together and I hope that a joint brainstorm” will help us find the best solutions for complicated issues. I would especially like to mention the composition of the participants in the First Congress of Financiers. In addition to bankers who are traditionally associated with cash flow, it is also being attended by insurance company representatives, pension fund representatives, representatives from pension asset management companies, and from the association of professional participants of the securities market. The input from these financial markets in the revival of the national economy can be, and must be, way more substantial than it is at the present stage.

The world financial crisis, the nature of which’s origin you, above anyone else, are aware of due to your professional specifics, is presenting the Kazakhstani economy new challenges all the time. We, of course, have not wasted our time and have continued to learn from the process of transition to a market economy. We have made progress in measuring our expenses against our profits, we have begun to borrow money in the external market in a wiser and a more critical manner, and we have realized the benefit of direct investment. Several examples can serve as proof of our professional growth in this regard.

Kazakhstan was one of the first countries in the CIS to receive a sovereign rating, and it has kept this rating at a positive level for some time. The national currency, the tenge, has stood out for its fairly stable behavior over the last three years. The country’s banking and financial system is currently demonstrating its reliability, although we know from the example of other neighboring and distant states that is precisely this system which is the first to fall prey to the modern world crisis.

It is very important for us to preserve these positive trends.

As you know, in April of this year we introduced a free floating rate of exchange for the tenge. A finally evaluation of this measure will be possible after the third uarter, when it becomes clear how tax proceeds from export businesses (including tax proceeds recalculated in the freely convertible currency) have increased and what level of inflation has been reached, that is to say, what impact has the free floating tenge exchange rate had on the population’s standard of living. The most important thing is that today, having created the possibility of enhancing the cost effectiveness of the exporting industries’ work, we have not sacrificed the stability of the financial system.

We understand that introducing a free floating exchange rate for the tenge is not only an economic step, but also a political one, above all for its nation. Therefore, partly in the face of recommendations from international financial institutions, we have taken the maximum amount of measures possible aimed at protecting corporate and individual savings.  We have granted bank customers the right to convert their deposits at the rate of exchange which existed prior to the tenge’s devaluation.

Above all, I would like to stress the importance of preserving pension assets. Kazakhstan was the first country in the CIS and Eastern Europe to undertake pension reform and to introduce a pension accumulation system. The long-term prospects of this step are so great that we have no right to cause even the slightest doubts on the part of our co-citizens in the degree of security for their pension accumulations. For this very reason the Government and the National Bank have provided accumulation pension funds with the option of converting their assets that are denominated in tenge government securities to new securities that are denominated in a foreign currency. 22 billion tenge has been converted in this way, reliably protecting pension assets against devaluation until the maturity of newly issued foreign exchange securities  i.e. for a the coming five years.

The increase in the share of private pension funds in overall pension assets should be viewed as the most important indication of the population’s trust in pension reform, and it is very comforting to observe a continuous growth in this area. As of the first of May of this year, the share of pension savings in private pension funds amounted to 27.6 percent of the total volume of pension savings and it was continuing to grow. This amount, however, can still not be considered as satisfactory.

People will not believe in pension reform until state executives publicly demonstrate their own confidence in it. Therefore, in the nearest possible future, it will be strongly recommended that government executives sign up for private pension fund services.

Let us go back to the subject of financial crisis. One of the lessons learnt was a common realization of the fact that major speculative players, who very often own money exceeding the budget of any developing country, can shatter the financial market in their own interests. On the other hand, in the event of any slightly negative trend, panic-stricken international ‘bulls’ rush to withdraw their capital, causing the collapse of the foreign exchange and stock markets of emerging states.

Is it possible to protect oneself against such problems? Of course we can screen’ foreign investors way before they are admitted into our market. We can think of ways to avoid the rapid and uncontrolled outflow of investments in the event of market fluctuation. I entrust the development of proposals on these issues to the Government, the National Bank and state agencies that are directly accountable to me.

However, there is another source of financial resources that is well-known in world practice and which helped such states as USA, Japan, Germany and many other advanced states to overcome crises. The Polish economy is rising at a good rate thanks to this source. This source is called domestic savings.

I will not engage myself in a liuidation of illiteracy and go into a detailed narration of where and how the population was encouraged to save its savings in domestic commercial banks, from which the capital would be allocated to the development of industry. I will give just one example: in highly industrialized Japan private savings have exceeded investment demand. The savings program itself was launched at a time when the state, having been destroyed by war, was in desperate need of money. I would also like to emphasize that these savings programs had social implications in nearly every country and carried a colossal patriotic charge. To overcome the most tremendous investment crisis of the seventies within the world economy, Ronald Reagan initiated his personal savings program and breathed new life into the famous national image by putting forward the slogan “The American dream has always been efficient!”.

One could continue to cite interesting facts about the favorable influence domestic savings have had on the rise and stabilization of various countries, but let us return to our motherland. Nobody knows for sure how much money the population has accumulated in Kazakhstan. Approximately 30 billion tenge of individual deposits are concentrated in second-tier banks. About 40 billion tenge has been collected in the accumulation pension system in just under the year and a half that it has been in existence. How much money is being kept in people’s stockings? There are different expert assessments. Some experts say one billion US dollars, others  three billion. Even taking into account the fact that cash dollars are not only used as the means for savings, but that they also fully service the automobile and housing markets, as well as the shuttle” business, we can state that the Kazakhstani population has accumulated over one billion US dollars that does not originate from business turnover. This figure does not include funds taken out of Kazakhstan and invested in bank accounts abroad. The conclusion that our citizens still have unaccounted for savings can be made on the basis that the ever recurring scandals involving financial pyramids” have all featured the same facts  that the very retirees who are economizing by living on bread and milk are nevertheless entrusting conmen with sums estimated to be hundred of thousands of tenge and thousands of dollars.

How can we draw these billions into the economic turnover and convince our co-citizens that by keeping their savings in stockings they will lose them to inflation, something they have even in the United States of America, when they could be getting an income from investment in Kazakhstan? To my mind it is necessary to develop the following set of measures in order to increase trust in the national financial system.

The first measure. Ensure the protection of household and corporate deposits in second-tier banks against the risk of bank default. Financial institutions operating on the principle of profit and risk sharing must ensure the disclosure of information on potential market dangers to their clients. I am charging the National Bank with the design and launch of a group insurance system for household deposits within the shortest deadlines, in cooperation with the leading second-tier banks.

The second measure. To ensure the strict observation of bank confidentiality. Law-abiding economic entities and individuals must be confident that the privacy of their deposits will be preserved. This is a prioritized regulation in the law. Meanwhile, banks today are preoccupied with delivering answers to insuiries on the cash availability and transactions in customer accounts. In 1998 the four largest banks alone received over 1200 various insuiries from state bodies. Furthermore, an overwhelming portion (more than 70%) of inquiries came from the tax authorities. According to the current legislation, tax authorities have the right to make inuiries regarding the disclosure of bank confidentiality. However, a great stream of correspondence of this kind attests to the fact that the tax authorities take advantage of this right for any possible excuse, very often violating the limitations established by the law.

For instance, in his letter of April 15, Mr. Kirtaev, the Chairman of the Tax Committee for the Medeuski district of Almaty, asked the Eurasian Bank to provide a list of its corporate and consumer customers who had received cash funds from the bank and transferred currency abroad . A similar insuiry going beyond the scope of the law was submitted by Mr. Zhamanbaev, the chairman of the Tax Committee for the Bostandykski district of Almaty, to the Narodny Bank.

Mr. Azbergenov, the chief of the Main Office of the Tax Police Committee for Almaty, has literally flooded Kazkommertsbank OJSC with his instructions since the beginning of 1999. One of the instructions reuested the disclosure of new settlement, currency, and other accounts for the period of December 1, 1998 to January 15, 1999.

It is high time that these officials who are so fond of handing in tax service instructions by hiding behind a mask and a Kalashnikov gun learned how to work in a civilized manner, arming themselves with a pen, a calculator and a set of laws.

Critical changes need to be made to the legislative provisions which permit state bodies to obtain data constituting confidential material from the banks, the procedure for such data delivery needs to be made more rigorous, and the responsibility of state executives for offences committed needs to be increased.

The third measure. To put an end to the tyranny of power structures with regard to their much loved pastime - “freezing” accounts. Entrepreneurs will not entrust their savings to a financial system in which their funds can be detained for any little reason. It is high time that the gentlemen in epaulets mastered a civilized way of working without interrupting the normal activities of the subjects of the economy. There is a world practice in existence which keeps the wolves well-fed and the sheep intact, that is, the state gets its taxes and the business develops. Unless we solve this problem, Kazakh entrepreneurs will keep on trying to hide their profits in every possible way, leaving only the minimum amount of cash necessary for payments in their accounts. This issue also calls for an improvement in the legislation. Moreover, it should be studied in the context of state bodies and entrepreneurs having equal responsibility.

At the moment the state is incurring multimillion losses through the unsound actions of the tax authorities, and certain tax inspectors and policemen are not called to account.

The fourth measure. Insurance companies deserve particular attention. No matter how many years have passed since the enactment of my decree regulating their activities and no matter how many companies have been established, people still do not have a place to apply to should they want to have their lives or property insured. The only wide-spread type of insurance is that of the civil legal liability of owners of motor vehicles which was also enforced upon the initiative of the state. As for the insurance companies themselves, they have become so carried away with granting discounts in this type of insurance, striving to attract as many insurance premiums as possible, that they have placed their ability to pay out for the risks that they have taken on under serious doubt. It is time to get rid of the idea that the insurance business is a common service that does not require special regulation. Insurance companies are the same financial intermediaries as banks, brokerage companies, and pension asset management companies, and, therefore, they must be subject to strict state regulation in the same manner. The issue regarding the inadequate capitalization of insurance companies must be resolved in the shortest possible time. New types of mandatory insurance (that which covers the risks associated with the loss of the main wage-earner, disability, and the damage or loss of housing as a result of natural disasters) must be introduced. In addition to the accumulation pension system, an annuity system that covers the risks of so-called “survival” for the period when pension benefits are paid out must be launched. Insurance companies should concurrently develop into fully-fledged institutional investors, using pension asset management companies as an example.

The fifth measure. It is essential to give all citizens and organizations in Kazakhstan equal opportunities for accessing the financial system, irrespective of their place of residence or their physical location. Even in Almaty or Astana, the search for a financial intermediary is not an easy task, not to mention in our provincial towns and villages. Kazakhstan occupies a vast territory, but is scarcely populated. It is understandable that not every financial institution is able to build an branch network on its own due to a lack of finance and human resources. In my opinion, establishing a national independent agent network would be a way out of this situation. There should be a place in every individual community to which any interested person could apply and receive any service they might need from any financial intermediary, whether it may be depositing cash, buying or selling securities, re-registering the ownership rights of securities, etc. To this end the post-office system may have to be reconstructed so that it may be transformed into a universal transfer-agent. In this case the corresponding technical objectives aimed at providing an acceptable speed for data transfer and security must be taken care of. This issue must be studied in detail and adequate solutions must be prepared.

The sixth measure.  Broad opportunities need to be established on account of the savings involved in the financial system. In addition to the traditional government securities of the Ministry of Finance and the National Bank, bank loans, foreign currency and affined precious metals, new instruments have to be introduced into the financial market to a sufficient extent. These, first and foremost, are corporate and municipal bonds. And again, the state should play a pioneering role in accomplishing this objective by, for example, moving national companies away from bank loans and instead directing them towards borrowing through bond issuance in the stock market. This forces them to ensure “transparency” of their operations for potential investors. The potential development of the municipal securities market was recently foreseen in the law “On the Budget System”.

The corporate securities market needs to be activated. Today the volume of transactions in this market is three times as low as the turnover of the government securities market. This demonstrates its undeveloped condition. In order to expand the supply of such securities, it would be reasonable to carry out an auction of the remaining blocks of state owned shares on the stock exchange in a step-by-step manner, with the exception of those already designated to be sold to strategic investors. This process will spur the pension funds on to develop as they will have more opportunities for pension investment. Measures aimed at enhancing the control over the payment of dividends, the accuracy of published information on issuers’ activities, and an improvement in the institutional framework will lead to a greater demand for securities and increased trust in them.

And the last measure.

A program aimed at involving the population’s cash assets in bank turnoverwill not be implemented until the people of the country believes in the economic policy being pursued by the Government. To this end, we still have a lot more to do in addition to the measures highlighted in this speech. First of all, we should turn our attention to the real economy sector and finally start seriously tackling problems regarding the functioning of industry, agriculture, and the services sector, and also bring clarity to taxation system and tax legislation. The Government has a lot of work to do in this area. Banks and financial institutions should revise their lending policy, predominantly focusing on manufacturer finance. People will take their money to banks and invest it in corporate securities only at that time when they start to believe that “fictitious” paper capital has a real basis - the growth of a pure product.

Simply relying on foreign investment is not enough in this day and age when reviving the economy. It is a paradox when foreigners support the reforms being carried out in the country by investing their capital, and the locals themselves are still waiting for something to happen. Citizens need to finally realize what their involvement in the destiny of the country is, and just how important it is to support the financial system during this difficult transition period.

Today we still have the chance to drag the country out of the crisis using world forces. All citizens possessing the skills, professionalism, experience, and desire to establish an industrial, financial, or commercial business, or those preferring to be the employee rather than the employer, should contribute however they can towards the revitalization of the economy. All of these categories must have the opportunity to effectively conserve their savings. Each tenge that is temporarily free must work for the reproduction of the country’s national wealth in the form of accumulated investment resources instead of being kept as idle capital in the notorious “stocking where it doesn’t promote the growth of the country’s national revenue on the whole and, as a result, the earnings of each individual citizen.

We need to launch a large-scale publicity campaign, aimed at clarifying the savings policy goals, objectives, and mechanisms to the population, and we need to employ the use of powerful resources such as the activation of patriotic feelings in order to concentrate the people’s financial resources in boosting the economy of the country.

All this must first and foremost be supported by measures which ensure the reliability, profitability, transparency, and stability of financial institutions. Banks must enhance their supervisory, controlling, and regulatory functions through the licensing system. It is possible that stricter measures will be called for regarding an increase in the levels of liability for investor interests on the behalf of executive officials, including criminal liability. These measures may have to be taken in order to rule out types such as “Smagulov & K” and other similar cases. Lawyers must work very hard on this.

At the beginning of my discourse I pointed out the pleasure in seeing representatives from completely different financial domains gathered under one roof. Perhaps the reason for the slow development of the stock, insurance, and other markets lies in the fact that we have attempted to solve their problems separately, from the different spheres of the economy. I subsequently believe that it would be advisable to consider unifying all financial institutions into one single, voluntary, and non-commercial structure, based on the experience derived from today’s forum. This will enable the development of legal mechanisms for the functioning of the financial markets, the evolution of civilized relations between the legislative and executive divisions of power, and the resolution of common problems. Based on the image of today’s Congress, this amalgamation could be named “The Association of Financiers of Kazakhstan”.

By joining forces it will be easier for us to tackle the task I was talking about – the Savings Program. By stirring up the population, by convincing it of the need, the correctness, and the advantageousness of using savings to develop the domestic economy, we will be able to walk out of the crisis. Only by making efforts jointly with our people will we be able to draw in the huge sums of financial turnover that will serve for the common good by boosting the country’s economy, increasing the population’s earnings, and consolidating the state’s financial system.

Thank you for your attention.