The Subprime Catastrophe Of America

Published Date: 02 Nov 2017

The subprime catastrophe of America had an effect on the Kazakhstani Mortgage market which led to bring under pressure whole banking sector in 2008. The entire Commonwealth of Independent States (CIS) faced main problems due to its immense lending flings in international financial markets and its exposure in mortgage sector. In 2008, Kazakhstan faced first major challenge to its economy since its detachment to Russia. Two of its major banks got defaulted and one common thing that came out was their overexposure in mortgage portfolios. The subprime crisis of America damaged badly to Kazakhstani banking sector. The focus of our study is to know the reason/factors behind these defaults/crashes especially in secured retail loans.

The one shortcoming that we have mentioned in our limitation of study as well is, most of the data gathered was through unstructured interviews with different banks and irony is, secondary data is also not enormously available. We found three original investigations on banking sector of Kazakhstan which have discussed banking sector in general and risk management function specifically. Moreover, we have also found three related articles written on different renowned financial websites. For this specific research we have studied different journals and books in order to find any relevant material.

The paper prepared by JURGEN CONRAD on "Three dimension of banking crisis in Kazakhstan" started with highlighting the success of Kazakhstan economy during period of 2000-2007. The main arguments given by JURGEN CONRAD (2007) are as followed:

"During this period the GDP of Kazakhstan remained over 10% and it stayed 4.5% during 1992-1999. Until subprime crisis in America hadn’t emerged in 2007, economy was on boom during last decade, the Kazakhstani banking system hit by liquidity problems in the US and European banking system. Kazakhstani banks were aggressively using foreign funds to enhance their local economy during the period of 2000-2007. Kazakhstan had issued euro bonds in 1998 and all the leading banks of Kazakhstan had access to international capital market. Foreign liabilities of the banking sector increased from $1.8 billion (or 2% of GDP) in December 2002 to 43.5 billion (or 20% of GDP) in July 2007 (Chart 1). 58% of these liabilities were short and medium term syndicated and bilateral loans (8)."

However, the growth patterns of the banking industry from a development perspective, due to its strong dependence on foreign debt, meant that the increasing profits of export oriented industries were not successfully intermediated through its own financial system into productive investments. The government’s coffers and hard currency piling up in exports oriented sectors in form of rising official reserves and assets of the National Fund were not reaching the banks.

Further, non-tradable were the focus of financial investments of banks, namely residential and commercial property, which prices were substantially growing, and consumption of the middleclass, whose income was rising. Over the 18 months between end 2005 and mid 2007 alone, the share of construction, mortgage, and consumer loans in overall loans increased from 33% to 39%(9).

These issues aligned together with shortcomings in the regulatory environment for the banking sector, namely in the areas of related-party lending, single borrower exposure, risk management, and classification of non-performing loans (NPLs). These shortcomings were well documented through a comprehensive financial sector assessment, which was undertaken in 2004 and fully disclosed. Among Kazakhstani banks credit growth differs and similarly does exposure to foreign borrowing and other risk-factors. All banks were subjected to stress since foreign creditors country limit were reduced almost overnight that resulted in a liquidity crisis at the interbank money market. As a response, banks tried to shore up liquidity and stopped lending. That had a direct negative impact on enterprises in the construction sector and real estate prices, which went steeply down. Annualized 70% private credit sector growth gradually slowed to 4% after July 2007(10).

Credits could be re-written or rolled over to keep NPL ratios low, with or without consent from the regulator. Official ratios of NPLs, which are defined as 60 days overdue or loss in Kazakhstan, had been low during the boom years (1.5% at end-2006). This is typical. While rapid credit growth trends to breed poor loan quality, particularly in a low interest rate environment, quality issues are frequently only exposed during downswings. Since mid-2007, NPL ratios have increased, but not dramatically (to 2.8 in June 2008). This is another surprise. Classified loans ratios, which are all loans with payments areas if only for a day, had been high and rising for years (47% at end-2006) and increased further to very high levels (56% in June 2008). Classified loans are prevented by something or someone from really turning sour. There is apparently some differentiation by sectors: NPL rations for the construction sector, for instance, reportedly increased from 4.6% in June 2007 to 8.5% in January 2008(11). However, from the official figures it is quite obvious that the poor loan quality issues do not exist in Kazakhstan banks, as a matter of fact not a single bank in Kazakhstan has collapsed.

Due to construction boom and immense price increases banks remained exposed to the real estate sector. The real estate industry began to flourish quickly, with the introduction of mortgages in the early 2000s, in most of the urban areas especially. Almaty and Astana residents have been particularly active as they held 32% and 14% of the total outstanding mortgages in June 2008. Commercial and infrastructure development played vital in the boom. Unregulated speculations were seen due to rising real estate prices. By June 2007, real estate prices in Almaty and Astana were reportedly around $4,000 per square meter. This was more or less expensive than those in major cities in the USA.

Real growth in all non-oil sectors slowed due to tighter credit conditions and higher inflation in Kazakhstan economy. Before the crisis in the first quarter of 2008 GDP growth declined from 10% to 6.2%. Also the industrial growth production slowed from 6.9% before the crisis to 3.6% (first half of 2008), growth of agricultural production from 8% to 3.6%, growth of services from 13% to 7%. The fact of a deteriorating economy may further exacerbate the banking crisis are well known to the stakeholders.

The key findings by JURGEN CONRAD

In his paper he discusses various dimensions of banking crisis in Kazakhstan. He begins by highlighting the liquidity problem in the banking system caused due to the massive usage of foreign funding by local banks, in order to enhance their local economy. Euro bonds were issued as all Kazakhstan’s leading banks had approach to the international capital market, which later became the reason for the increase in the foreign liabilities of the banking sector. The US and European capital market crisis had direct impact on Kazakhstan’s banking sector since they could not generate further funds to support their local economy.

Furthermore the increasing revenues of export oriented industries were not managed efficiently for productive investments. Non-tradable were the focus of financial investments of banks, namely residential and commercial properties.

Above mentioned issues aligned together with shortcomings in the regulatory environment for the banking sector rose to stress.

According to the document written by Dr.Osman Sahini (XXXX) on risk management, the phenomena are new to Kazakhstan financial market. He further says until recently the risk management had not been considered in Kazakhstan banking as the interest rates were fixed, the structure of financial instruments was also predetermined, the financial markets were comparatively passive, banks were not allowed to operate with foreign currency, planning was done only at the general level, banks had limited autonomy, and the legislation did not support open information, that would allow to determine profitability of certain entity or the capital availability.

Further added, the situation is remarkably changing, that required strengthening of the financial and risk management in financial institutions. Early precautionary measures should be analyzed in a rightly manner for any kind of unexpected external or internal occasions in order to have a successful business in the longer run. Still Kazakh financial institutions have to further develop their methods of risk management as it is still far behind from that of European or Western risk management systems.

The document discusses the three different bank’s financials and risk management performance (Comparison of Operational and Credit Risks). The banks include ATF Bank, Bank Center Credit and Kazkommerts bank. The financial and comparison of risk management techniques is done in detailed manner. In concluding remarks the researcher stated the importance of risk undertaking aspect in the management of any financial institutions activities, as the courses of corrective actions are easier when there is a time to make demanded adjustments. Profitable operations is the purpose of bank existence, profitability is achieved when the risks undertaken are reasonable, controllable and within the limits of their financial capabilities.

The above document clearly states that poor implementation and lack of modern risk management tools practices in the Kazakhstan banking was its major reason for unsuccessfulness. Risk management department purpose and tasks are usually predetermined by the dynamic economic environment in which bank has to operate. Below is the list of common characteristics of recent Kazakhstan economy:

- High inflation

- World price decrease of Kazakhstani main export goods

- Devaluation of Tenge

- increased number of financial institutions under the threat of insolvency

- New regulations by government

- The overall growth of financial industry of the country

- The introduction of new, non-traditional bank services

- Increasing competition, etc.

As per the above conditions banks having strong strategic foreign shareholders could remain more stable than those who do not have them in the difficult times of local banks.

The main findings by Dr.Osman sahini:

Begins his argument with an astonishing statement, saying that the risk management phenomenon being new to Kazakhstan financial market, assuming it to be the major reason for the crisis. Supporting his arguments he explained fixed interest rates, predetermined structure of financial instruments denote the lack of risk management, further added that the banks were not allowed to trade in foreign currencies. Both of his concepts were new when compared to Jurgen Conrad findings. But their opinion towards the shortcomings in regulatory environment of the banking culture and government sector was found similar. Both emphasized on risk undertaking aspects in the management of the financial institutions.

Another document by Veleriya Anechshenko (XXXX), "The Impact of the Financial Crisis on the Banking System of Kazakhstan", attempts to research the downsides of the banking catastrophe and resolutions of it. It also classifies the causes of financial crisis, the impact of it on banking system. The document elucidates what really happened in Kazakhstan during financial crisis "The financial crisis in Kazakhstan appeared in 2007 and there were a lot of reasons of it. One of them is that banks of the country borrowed a big sum of money from foreign countries such as Netherlands, Great Britain, USA and others in order to repay their other loans. In September, 2007 the size of debt was approximately 50 million of dollars. Moreover the financial sector of Kazakhstan was the biggest borrower in structure of the government external debt. The growth strategy of most Kazakh banks in that time was simple: they raised cheap short-term debt on European capital markets denominated in Euro and dollars, and used the funds to provide credit to the growing customer base in Kazakhstan at a much higher interest rate. Almost all banks of Kazakhstan carried on an aggressive policy. It included the high interest rate on deposits, which attracted a lot of customers. In addition to this a procedure of issuance of loans was very easy: it required a minimum of documents and little time, so the problem of adverse selection and moral hazard was very actual because not all clients had the possibility to pay off a loan (12).

Keeping in view the previous events and the current situation Kazakhstan’s economy in the year 2009 is highly vulnerable to default for almost all banks and in my opinion the market will reach its rock bottom. Banks having issues of current payment service and execution of liabilities due to debt repayment to foreign financial institution have greater possibility of default. Debt became more complicated due to the crisis the burden. Foreign obligation seriously influenced by devaluation of the national currency Tenge. According to the estimation of the rating agency "Moody’s" devaluation enhanced a growth of assets’ riskiness by 54% and increase of debt in fact by 24-31% (Devaluation of Tenge will have a negative impact on economy of Kazakhstan, 2009). Repayment of external owing became more expensive as most of operations with customers in banks are conducted in Tenge. Thus banks had to pay off $12 billion - 1440 billion of Tenge (120 KZT/USD) and now due to devaluation banks must to repay 1800 billion of Tenge (150 KZT/USD).

Kazakhstan people mostly earn their salaries in the local currency, so it is hard for them to pay off loans in the foreign currency because heretofore they have to convert their money. An increasing unemployment rate is another trouble the economy faces these days. Late wage payment as result of reduced production or partial suspension. For example in Almaty JAN 2009 according to the data of Interfax arrears wages were 800 million of Tenge, making the Kazakh economy unfavorable as mostly customers who borrowed money from banks have possibility to pay off the loans. On the other hand presence of several daughter companies of west-European banks concerning to the subsidiaries of foreign banks in Kazakhstan situation is much better. Like in the Kazakh banks a necessity of subsidiaries asset’s optimization and reduction of expenditure is also essential but their financial position is more auspicious then in Kazakhstani banks because of external funding from parent banks. For example UniCredit Group provides to "ATF Bank" approximately 1.2 billion of euro therewith capital will be increased by 150million of euro. Unlikely RBS is in a difficulty therefore it’s important to optimize their assets especially in daughter bank in Kazakhstan. Contrary to the world financial crisis "HSBC Bank Kazakhstan" succeeded in achieving good financial performance. The chairman of the board of HSBC Mr. Myunhen stated that HSBC is not one of the biggest banks in Kazakhstan and bank’s interest rate on deposits isn’t so high like in other Kazakh banks, but due to the individual approach, reliability and security this authoritative bank anyway attracts their customers, conservative policy and risk management are the strongest features of HSBC (Investing in the reliability, 2009)(13). Thereby subsidiaries of foreign banks in Kazakhstan have more conducive position then Kazakh banks. In his concluding remarks the writers further writes: In spite of negative tendency in banking sector of Kazakhstan and close relation with world capital market financial performance of many Kazakhstani banks is satisfactory and there is almost low possibility of default. Thus the situation in banking system is manageable and nearly can be controlled by the government.

Crisis is a consequence of mistakes and shortcoming of the whole economy and current financial crisis analyses showed us that Kazakh banking system is imperfect. Reforms should be brought in as an emergency to the banking strategies in order to improve their effectiveness, so the banks will be forced to get their balance sheets in order. On the other hand while there are no possibilities of external foreign funding the banks will need to orient themselves increasingly towards domestic depositors in order to attract financing. Convince international lenders and rating agencies that they will be reliable partners in the future. Moreover banks should also comply with the currency position i.e. loan which is involved in dollar has to be issued by bank in dollar loan too. Nowadays this rule is significant because of cases of devaluation in the country.

Oversight intensification should be the governmental priority. Concerned Agency of Kazakhstan should supervise the risk management policy of banks more toughly, establish more strict requirements for capital reserves portion, banks have to keep a certain portion of cash in reserve and increase it in order to avoid defaults. The integral component of any bank is their depositors so it is necessary to give a recommendation about keeping the money in banks. In case of inadequacy the bank management should be taken to account.

These days in times of world financial crisis, it is favorable for depositors to keep their money in Yuan(14). Chinese economy is one of the strongest in world and there is forecast that this country will be the first who will drop out of crisis. Furthermore Yuan can be one of the reserve currency but it is moot point.

The main findings by Veleriya Anechshenko:

He begins his argument by accompanying to the opinion of the earlier findings Dr.Osman Sahini and Jurjen Conrad by saying that the banks of the country borrowed a big sum of money from foreign countries to support their local economy. Furthermore he emphasized on reforms in regulation policies of the financial institutions as an emergency.

In his differing argument he stated that almost all banks of Kazakhstan were near to default as the market would touch the bottom in his opinion. Banks which had issues of current payment were more vulnerable to default under the prevailing crisis. The devolution factor of Tenge was also his focus in which he explains the repayment problem of external debts and internal depts. Moreover he also discovered in his findings that the presence of several subsidiaries of international banks in Kazakhstan helped improving the situation, as they were backed by parent organization in terms of foreign aid in the crisis situation. He concluded by suggesting that in the times of world crisis it is favorable for depositors to keep their money in other stable currencies as a reserve.

Bylsabel Gorst (XXXX) initiates his article by showing confidence in Kazakhstan’s ability to generate fund from foreign market. Squeeze to the Global credit was harsh on the banks which gathered cheap foreign loans to finance their consumer boom by country’s soaring oil revenues. He further adds, Kazakh banks, which over the last few years have lapped up cheap foreign loans to finance a consumer boom driven by the country’s soaring oil revenues, have been hit hard by the global credit squeeze.

Credit and liquidity likely to remain tight throughout 2008 and possibly into 2009, the crisis had not yet run its course stated Standard & Poor’s, which earlier shifted to negative, in its outlook for eight Kazakh banks warned last month that with asset quality, liquidity, profitability and business dynamism are areas particularly vulnerable to banking sector turbulence. His assurance that no big bank will be allowed to fail, $40bn accumulated in central bank reserves and national fund.

Kazakhstan’s top banks are against selling strategic stakes while valuations are low, whereas smaller players are thought to be more open to a takeover. Talks between South Korea’s Kookmin Bank with CenterCredit, Kazakhstan’s sixth-largest bank, is a possible acquisition. CenterCredit has said its strategy for several years had been to find a strategic partner to support its business in Kazakhstan where it accounts for 11 per cent of retail lending. There have been rumors that Kazakh subsidiaries of foreign banks may grasp market share from indebted local competitors. Sberbank and VTB, Russia’s two state banks, both have recently opened subsidiaries in Kazakhstan. South Korean banks, including Woori and Shinhan also plan to enter the country. Several Kazakh banks are focusing on collection of loans and encouraging deposits whereas accepting the fact that borrowing terms will be tough meanwhile and avoid higher borrowing percentages. For long term support the government is hoping the stakeholders to introduce their capitals and sell foreign assets where on the other hand the government is providing banks with short term liquidity for the prevention of moral hazards.

Real estate market after enjoying several years of massive growth, real estate prices are falling in some segments, banks have also stopped lending to construction projects. Kazakhstan banks though being rich with petrol reserves yet borrowed handsome money from U.S banks and because of it they are facing two principle issues.

First, the massive role played by the construction sector in their development (which, for example, constitutes 44% of the Alliance Bank’s loan portfolio), and, second, their massive foreign borrowings, which amount to more than 49% of their total borrowings, as compared, for example, with the 18% borrowed by Russian banks. During 2006 alone, Kazakhstani banks received more than US$19 billion in international credits. Kazakhstan’s foreign debt that will have to be repaid by 2009, has reached a level equivalent to 42% of its exports. In 2007, the country had a bill of US$4 billion to pay, increased abruptly to 12 billion as a result of the crisis. Kazakhstani banks, for their part, hold US$40 billion worth of foreign loans, a significant share of which now has to be refinanced at very high rates.

The Kazakhstani authorities quickly moved in to regulate and stabilize the situation by providing aid funds from the Kazakh central bank for small banks, furthermore the authorities decided to invest US$11bn into the Kazakh banks when Standard & Poor’s and Moody’s Investors Services downgraded the credit ratings of banks. It was almost a quarter of the central bank’s reserves and one of the huge emergency investments, in order to halt foreign borrowings and avoid a credit ratings collapse. A Stabilization Fund of US$4 billion to ensure liquidity, but this did not suffice to reassure foreign investors, especially when the Renaissance Capital’s Rencasia Index for Central Asia, which is dominated by Kazakh equities, collapsed in September 2008 after Lehman Brothers’ announced its bankruptcy.

In October (XXXX), leverage for the major national banks was announced that they will be given US$5 billion in aid. Thus, the BTA Bank, the largest in the country, is expecting a state injection of more than US$2 billion, while Kazkommerts bank, the country’s second largest, is awaiting a boost of US$300 million, and the Halyk and Alliance Banks US$500 million each(15). BTA was the most affected because of its high-level involvement in the construction sector, but it was the collapse of the Alliance Bank that mater the most. After becoming the leading retail lender and the fastest growing banking institution in Kazakhstan in only a few years, the Alliance Bank spectacularly collapsed; in the first semester of 2008, its net income fell by almost half. In the short term, this situation is going to facilitate foreign banks to establish themselves in the Kazakhstani market, as their share had previously been a modest 15 percent. Now, for example, Italian UniCredit, South Korean Kookmin, Israeli Hapoalim, Abu Dhabi-based private equity fund Alnair Capital, and the London-based HSBC, all have their sights set on snapping up sections of Kazakhstani banks. Moreover, Raiffeisen International and the Bank of Tokyo Mitsubishi are planning to open offices in Almaty in the first half of 2009, the second to facilitate Japanese firms’ entry into the Kazakhstani raw materials market.

Banking crisis continues to prevail heavily on the Kazakhstani real estate market, estimated at US$30 billion. The banks have massively increased their credit rates, making it difficult to obtain a loan with annual interest repayments of less than 20 percent. As a result, the construction market has collapsed in all the major cities and especially in the two capitals, Almaty and Astana, which have reportedly plummeted by 40 percent in a few months. The building on many construction sites has been blocked, and in Astana itself, financing shortages have halted construction on nearly every second site. The decrease of the price per square meter is making itself felt, especially since the real estate prices had literally shot through the roof, increasing by 900 percent in four years. Tens of thousands of people have been unable to obtain their recently bought apartments, whose construction has been halted. In order to forestall a total market collapse, the government has set up a US$500 million aid program for construction companies unable to get credit terms and has bought thousands of apartments in Astana. Kazakhstani companies that previously invested in national real estate today are now purchasing in foreign markets, while others have decided to stop selling housing altogether and wait for prices to go up again.

In the end, this crisis may come to have positive consequences. It will streamline the Kazakhstani banking sector by getting rid of those companies that placed all their bets on speculation. It will also act as a corrective to the over-evaluation of real estate and encourage investment in more productive sectors. The crisis has demonstrated that the country’s overall financial basis is solid enough to enable Astana to contain a market collapse. Kazakhstan’s central bank still has about US$20 billion in reserves and the country’s oil fund stands at about USS$15 billion. Nevertheless, the long-term social impact remains unclear, and were the "Kazakhstani model" to fail as a result of this crisis, it would have a detrimental impact on the rest of Central Asia.

The main findings by Bylsabel Gorst

Bylsabel Gorst initiated by acknowledging the capability of Kazakhstan banks to generate foreign funds. He proclaimed that credit and liquidity to remain tight in the years 2008 to 2009.However main focus of his study revolves around the healthy speculations being built in the financial market, Where he expects foreign investments in the form of new joint ventures of local banks with international financial institutions and direct investments as a result of formation of new international subsidiaries in the local market. Furthermore he mentions the leverages announced by the central bank to various local banks and how each institution would counter this crisis issues. Different aspects of these state injections directly or indirectly upon the financial situation.

The outcome of his research is dissimilar as compared to result of previous researches. This research stands typical as he discussed new developing situations of Kazakhstan financial sector due to positive change in the policies which result in the formation of new business relations. Mortgage loan defaults are the concerns of Halyk bank and KKB bank, released by wikileaks, information available on the internet. Real estate prices were the biggest risk for banking system and that a correction was expected in 2008. Careful measures are taken in real estate sector, Astana and Almaty market are overpriced but still there is room in other provinces said the CEO of Halyk bank(16).

Auezov KKB, one of the largest bank of Kazakhstan also acknowledged there involvement in the real estate sector. Auezov further said his bank has minimized the risk of market fluctuations as his preference of investments and finances are all construction of government owned buildings or industrial construction. Mukhtar Bubeyev, Department Head at the Financial Supervision Agency (FSA), expressed a similar perspective, stating that Kazakhstan's banking sector is "quite diversified." The real exposure to the real estate market, he said, is shouldered by mortgage companies, which also fall under FSA's purview. There is consensus among observers that a lot of the capital borrowed abroad by Kazakhstani banks ends up flowing into domestic real estate. There appears to be agreement among top Kazakhstani bankers that the real estate markets in Almaty and Astana pose risks. However, the bankers differ in the levels of their concern and their approaches to mortgage lending (17). The National Bank's Aimanbekova said that the real estate market is being driven by "speculative, not real, demand," and that "problems" are expected in 2008. She blamed the excess demand on Kazakhstan's shadow economy, which produces large sums of money in need of laundering. Prof. Dr. Hüseyin Araslic (XXXX) has also studied critically Kazakhstani banking system in his paper "Kazakhstan Banking system restructures (2007-2010)".

Kazakhstan tackled bank restructuring through anti-crisis program which linked bank recapitalization to improvements in the bank’s operating system aiming at increasing efficiency and loan recovery. There are 39 different Financial Institutions (Banks & DFIs) in Kazakhstan. High concentration of assets is in small groups of banks among which five top banks are, Kazkommerts bank, Halyk Bank of Kazakhstan, BTA Bank, Bank Center Credit and ATF Bank that occupy 73% of the total market(18). Kazakhstan was among the first that had the negative impact of the global economy in 2007-2009. The Government of Kazakhstan draw a compressive plan to restructure the banking system and following measure are suggested to streamline the banking system.

Recapitalization of four major banks through the acquisition of common and preferred shares

Establishing funds for stressed assets

Provision of additional sources of liquidity to ensure the timely maintenance of bank liabilities

Improvement of state regulation in the financial sector

The purpose of this paper was to study the steps taken by central bank to confront the current crisis. Firstly in his initial finding he reveals that government created a fund ( "Samryk Kazyna") to acquire 25% of voting shares in four major banks. The "Samryk Kazyna" fund was used to purchase common shares with voting rights and preferred shares without voting rights in order to enhance the reserves of the local banks so as to maintain the economic continuity. Secondly, he observed that through the state fund, stressed assets of four major banks were purchased. The purpose of purchasing of these assets was to remove the low liquid assets from the balance sheets of banks. Thirdly, in order to stabilize the resource based temporary free funds of the national companies, the list of instruments accepted as collateral for repo transaction was expanded by national bank. Lastly, how the state enhanced diversified funding of the four major banks by reforming the state regulations in the financial sector. The considerable efforts were employed to build the model for liquidity risk management. The risk management and internal controls in banks have been further strengthened. This paper too stands different as it elucidates the steps taken to revive the economy after the 2008 financial distress. It has been observed in this article that Shortcomings in the regulations previously highlighted by other researchers were addressed efficiently and positive outcomes were revealed.

The determination behind selection of this topic is to explore the existing assessment methods used by different banks in Kazakhstan. The second motive is to examine if there is any flaw in banks’ risk management methods that led to default of BTA banks twice in five years. The research topic is very rich and informative. Hopefully we would be concluding this research with new findings that none of the earlier studies produced.

All the previous studies are prepared in general form

Earlier study’s focus was on macroeconomic factors

Details analysis on risk management methods was missing in all the prior studies and articles.

None of previous studies touched upon banks’ internal risk evaluation methods.

CHAPTER NO 3

Method

Research design includes the methods that were used to collect data and the rationale for choosing the population, sample, and instruments. Data analysis includes procedures that were used to make meanings that enabled the interpretations with respect to the research questions. The methodology was designed to collect data to answer the questions. Due to the broadness of the subject the study was relied upon both primary and secondary data sources. In fact the secondary data sources were of more value than the primary data as tons of material was found related to the subject.

Data

There are two main types of data

Secondary data

Primary data

What is secondary data?

The secondary data is the data that have been already collected by and readily available from other sources. Such data are inexpensive and quickly obtainable than the primary data and also may be available when primary data cannot be obtained at all. Common sources of secondary data for social science include different census bureaus, organizational records and data collected through qualitative methodologies or qualitative research. Primary data, by contrast, are collected by the investigator conducting the research.

The purpose of secondary data

The main objective of secondary data is to collect all the information for the purposes of the completion of a research project and it is used to gain initial insight into the research problem. It is classified in terms of its source – either internal or external.

ADVANTAGES OF SECONDARY DATA

Ease of Access

There are several advantages to using secondary research. This includes the relative ease of access to many sources of secondary data. Previously the compilation of secondary data required marketers to visit libraries, or wait for reports to be shipped by mail. Now with the availability of online access, secondary research is more openly accessed. Thus offering convenience to standardized methods used for all sources of secondary research.

Economical

The use of secondary data has allowed researchers access to valuable information with little effort and minimum expense. Therefore, this information is much feasible for the researchers in terms of saving time and physical effort.

Clarification of Research Question

The use of secondary research may help the researcher to clarify the research question by providing guidelines to determine the right approach towards the research. Secondary research is often used prior to primary research to help analyze the research focus.

May Answer Research Question

Secondary data collection is often used to help align the focus of large scale primary research. When focusing on secondary research, the researcher may realize that the exact information they were looking to uncover is already available through secondary sources. This would then reduce effectively the need and expense to carry out their primary research.

May Show Difficulties in Conducting Primary Research

In various other situations, the researchers may include details of how the information was collected. This may include information detailing the procedures used in data collection and difficulties encountered in conducting the primary research. Therefore, the detailed difficulties may persuade the researcher to decide that the potential information obtained is not worth the potential difficulties in conducting the research.

Disadvantage of secondary data

Quality of Research

There are some disadvantages to using secondary research, as researchers are usually self-motivated and controlled by the marketer. Therefore, the secondary research used must be analyzed efficiently since the origins of the information may be questionable. Moreover, regarding the authenticity and reliability of the produced information should be critically evaluated closely.

Not Specific to Researcher’s Needs

In other cases, secondary data is not available in a form that exactly meets the researcher’s requirements. Therefore, the researcher needs to rely on secondary data that is presented and classified in a way that is similar to their needs.

Incomplete Information

In many other cases, researchers may find information that appears valuable and promising but may not get the full version of the research to gain the full value of the study. It is because many research suppliers offer free portions of their research and then charge expensive fees for their full reports.

Not Timely: Outdated

While using secondary research, one must take cautious measures using past dated information. As companies competing in fast changing industries, an out dated research report many have no relevance to the current market situation.

Secondary data for the project

The secondary data was collected through different journals, newspapers and publications related the banking industry of Kazakhstan. Several previous research studies were also gathered which were studies extensively to reach a conclusion on the said subject. Financial statements of the major banks of Kazakhstan were also discussed to extensively complete the research on the factors related to the default in the Kazakhstani Banks. Data from the internet was also found useful related to the said subject.

What is Primary Data?

Primary data is the data collected from its original source by the researcher himself, means first-hand information that has been collected specially for the purpose in mind. Data collected this way is called primary data.

As Primary data is unpublished which makes it more reliable, authentic and objective oriented. Its validity remains greater as the data acquired is not manipulated or altered by human any being. Therefore it is highly reliable than secondary data.

People who gather primary data may be an authorized organization, investigator, enumerator or they may be just someone with a clipboard. These people are acting as a witness therefore primary data is only considered authentic as the people who gathered it.

Importance/ priority of the primary data

Importance of Primary data cannot be neglected as research can be conducted without secondary data but a research based on only secondary data is least reliable and may have conflicts because secondary data could be manipulated by human beings. In statistical surveys in order to acquire correct data it is necessary to get information from primary sources. For example, the statistical records of female population in a country cannot be based on newspaper, magazine and other printed sources. One such source is old and secondly they contain limited information as well as they can be misleading and biased.

Advantages of primary data

Targeted Issues are addressed

As far as the objectives and the scope is concerned the organization asking for the research has the complete control on the process. Researching company can be directed to focus their efforts to produce data regarding specific market rather than concentrating on mass market.

Data interpretation is better

Need oriented interpretation is only possible when the collected data is examined directly by the marketers rather than relying on the interpretation made by collectors of secondary data.

Efficient Spending for Information

Secondary research may cause the marketers to spend for the information that is not needed, where as primary data collections’ focus on issues specific to the researcher improves the chances that research funds will be spent efficiently.

Decency of Data

It would also not be wise to depend upon secondary data as it could have lost its worth for simply being an out dated version, it may not be specific to the place or situation marketer is targeting. The researcher can use the irrelevant seeming information for knowing trends or may be able to find some relation with the current scenario. Thus primary data remains a more accurate tool since we can use data which is useful for us.

Disadvantages of primary data

High Cost or uneconomical

Compared to secondary research, primary data may be very expensive since there is a great deal of marketer involvement and the expense in preparing and carrying out research can be high and has to design everything.

Time Consuming and effort demanding

To deliver things correctly primary data collection requires the development and execution of a research plan. Beginning with the decision to undertake a research project to the end-point to having results is often much longer than the time it takes to acquire secondary data, which can be collected in much lesser time duration.

Inaccurate Feed-backs

In case of a research which involves taking feedbacks from the targeted audience, have higher chances of risk as the feedback given could be incorrect. Feedbacks by their basic nature are usually biased or given just for the sake of it.

More number of resources is required

Apart from the disadvantages of cost and time, other resources like human resources and materials too are needed in larger quantity to do surveys and data collection.

Primary data for the project

Primary data was gathered mainly through a questionnaire and interviews. The questionnaire was designed in a way to get the most relevant data out for the respective subject. The questionnaire was distributed to officials of the three major banks which are BTA Bank, Alliance and Halyk Bank. A cover letter was attached explaining the purpose of the study. Primary data was also gathered through different verbal interviews of related officials of the banks. These interviews were mostly unstructured due to the nature of the subject the position of the interviewee. The questionnaire is mentioned in the annexure A of the study, however results of the questionnaire are mentioned below:

Table No 3.1

Question

BTA Bank

Alliance

Halyk Bank

A

Retail   (b)

Retail (b)

Retail (b)

 

B

Purchased off the shelf (d)

 

Purchased and customized (e)

Developed by a consultant (11%)

(c)

C

In testing stage

(b)

In testing stage

(b)

In validation stage

(c)

D

Local (a)

Local (a)

Foreign (b)

E

Local (a)

Local (a)

Foreign (b)

F

For business decisions a major factor (71%)  (b)

 

For business decisions a major factor (71%) (b)

 

For business decisions a major factor (71%) (b)

 

G

Expert judgment model (59%)(c)

 

Expert judgment model (59%) (c)

 

pure statistical model(41%) (a)

 

H

Internal bank data (71%) (a)

 

Internal bank data (71%) (a)

 

Internal bank data (71%) (a)

 

I

5 years (a)

 

5 years (a)

 

5 years (a)

 

J

obligor rating

(a)

obligor rating

(a)

obligor rating

(a)

K

Third party (consultant) (c)

 

Third party (consultant)

(c)

Third party (consultant) (c)

 

L

80% (b)

80%  (b)

80% (b)

Procedure

The questionnaire was designed and structured to address every aspect which could affect the probability of default in the secured retail lending. The questionnaires were distributed to the bank officials who had the knowledge of the said field and were directly or indirectly related to the lending process of the bank.

The questionnaire was filled by the bank officials from the Credit Department, Credit Administration Department and Risk Management Department. The bank officials were very reluctant about giving out information as we were inquiring mostly about non-performing loans and bad assets of the banks. Interviews were also conducted while collecting questionnaire from the interviewees. Almost 6 special interviews were also conducted from several bank officials; still a huge reluctance was experienced on the part of bank employees on giving out information about their non-performing assets.

Questionnaire Findings

The data and finding collected from the questionnaire was properly analyzed and findings of the questionnaire are as follows:

Almost all of the candidates from banks answered in the favor of the choice ‘b’ which is ‘Retail’. In answer to the second question the bank officials from BTA Bank chose choice‘d’ which is ‘purchased off the Shelf’ while Alliance ones answered ‘purchased and customized’. According to Halyk Bank, almost 11 percent of the work was done by an outsourced consultant while rest by developed by the bank itself. In answer to the question number 3 BTA Bank and Alliance Bank disclosed that scoring and rating model is in testing stage while Halyk bank reported that they in validation stage. BTA Bank and Alliance disclosed that they have purchased a ready model locally while the Halyk Bank went for foreign services. Similarly, the BTA Bank and Alliance Bank hired a local consultant for development while Halyk Bank opted for foreign services.

In answer to the question # 4, all of the banks answered in the favor of ‘for business purposes, a major factor’. BTA and Alliance reported that their model expert judgment model while Halyk bank has relied upon pure statistical basis. All the banks have used internal bank data for the development of their models. Moreover, all the banks used data of 5 years in development of their models.

In answer to the question # 10 all of the three banks disclosed that their models are being used for obligor rating. A third party consultant has validated the models of all the three banks under review.

In answer to the last question all the candidates from the three banks answered in the favor of the choice ‘b’ which means that they rely 80 percent on the results of their respective models. This to add here that in comparison the other two banks the Halyk Bank’s officials were much more co-operative in giving out information about the subject.

CHAPTER NO 4

Results and Discussion

On the basis of our research it is established that several factor on macro and micro level were behind the high default ratio in the secured retail portfolio of the banks. After, the financial turmoil of 2008, the banks in Kazakhstan has faced major headwinds since then. The major reasons behind the default in secured retail lending are divided into two main categories which are Macro factors and Micro factors. A graphic overview of Integrated Risk Management framework can be view below.

Table No 4.1