From basket case to poster boy: Kazakhstan has pulled off a remarkable turnround in the past few years. In the midst of a financial storm that swept through eastern Europe in 1998 the central bank, under the leadership of Grigori Marchenko, pushed through some of the most radical reforms yet seen in the former Soviet Union.
Russia's crisis and devaluation hurt all the countries in the CIS (Commonwealth of Independent States) and Kazakhstan was forced to devalue its currency by half in 1999. But remarkably, while Russia's devaluation all but destroyed most of its big banks, those in Kazakhstan escaped largely unscathed. Since then the banks have been growing - indeed, Marchenko reckons, growing "too fast".
"Our financial sector is growing very rapidly," he says. "In the past three years overall deposits in the banking system have tripled in dollar terms and individual deposits have quadrupled. Last year lending growth was 86%, this year it's already over 50% - that's simply too fast."
By international standards Kazakhstan's banking sector is still tiny. Total assets are only $5.5 billion - a fraction of only one big US bank - but in this thinly populated country that's a healthy 24% of GDP, more than double what it was two years ago.
In the same year as the currency was devalued the government was persuaded to liberalize the pension system, creating private pension funds, which added to the reform impetus. Three years later those funds have more than $1 billion under management and are adding about $30 million a month. Hunting hard for returns from this money, commercial bank managers are complaining that competition for good investment opportunities is already running hot.
Bank reforms began in earnest in 1995 but have gathered momentum in the past two years. The mainstay of the reform's progress has been to strip out all the little banks set up in the wild cat days of the early 1990s: the number of banks has fallen from 200 to below 40 today.
At the same time tougher regulation, the universal introduction of international accounting standards and a deposit insurance scheme, introduced early in 2000, have made banks more solid.
Not cricket
"Being tough is not enough. We tell banks that don't follow the rules that this is not cricket and if they don't react we kick their arses," says Marchenko. "But it is not necessary. The people are not stupid. They tend to deposit their money in the 21 banks that are members of the deposit insurance scheme. By the end of this year the banks that are not members of the scheme will not be allowed to take household deposits."
The new-look reliability of Kazakh banks has sparked off a battle to expand their retail base after the population dug out its savings from under the mattress and deposited them in interest-bearing bank accounts. Household deposits have ballooned fourfold over the past two years, handing the banks that emerging-markets golden egg of long-term financial resources.
Marchenko says his goal was to create a three-tier banking sector with a handful of competing large domestic banks, several foreign banks and a bottom tier of small niche players. This has largely been achieved: Kazakhstan boasts three big banks and five medium-size ones; there are 16 foreign banks and another 30 small niche players.
Reforms are best seen in the battle that has broken out between the three biggest banks: the two commercial banks Bank- TuranAlem and Kazkommertsbank (KKZ) as well as reformed Soviet-era savings bank Halyk Bank - which between them account for two-thirds of all the sector's assets.
KKZ is the most western-oriented and was set up shortly after independence. Concentrating mainly on corporate clients and counting most of Kazakhstan's blue clips among its client base, it is moving into retail. But as competition is becoming so fierce at home it also plans to set up branches in Russia, says Eldar Abdrazakov, the bank's managing director.
KKZ's main competitor is Halyk, which enjoys a virtual monopoly on retail banking. Earlier this year the central bank completed the privatization of Halyk, selling off its remaining 33% stake at auction. KKZ was one of the bidders and had it won would have created a super-bank that could squash all rivals. However, the tender was won by a consortium of local banks and the two are going head-to-head. Marchenko welcomes the competition, saying that it can only improve the quality of both banks further.
The central bank is pushing new initiatives but as most of the hard work has been done there are rumours in Almaty that Marchenko is bored and thinking about moving to the private sector.
In the next round of reforms Marchenko wants to develop the credit card and insurance businesses, and recently set up the Kazakh Mortgage Company with a charter capital of KT1 billion ($7 million).
Ownership is split into two 40% stakes by the central bank, and a collection of the top private banks, with the remainder controlled by the IFC and EBRD. The idea is that the KMC will buy banks' mortgages and refinance them by selling mortgage-backed bonds to create fresh money.
The central bank's drive to develop the insurance business is going less well. Marchenko complains that despite the rapid development of the Kazakh financial sector the country still gets passed over by international companies, which want to wet their beaks in Russia before expanding into Kazakhstan. "We want international insurance companies to come to Kazakhstan," says Marchenko. "We are not just asking, but pleading. They all say that they are interested but won't start work here unless their investments in Russia go well first."
All this liquidity within the system is driving heady rates of growth. The economy expanded by 9% in 2001 and grew 13.2% last year. "We have both the fastest-growing banking sector and economy in the world," says Marchenko with a hint of pride.
Inflation has been held at a modest 4.9% over the past 12 months, partly thanks to a strategic national fund - currently holding $296 million - that soaks up excess inflows of petrodollars and facilitates the central bank's control of money supply. A well-developed bond market adds an extra level of monetary control. And almost uniquely in the CIS the central bank's interest rates can be used to fine-tune the economy.