Financial Sector Assessment Program Update : Republic of Kazakhstan - Bank Profitability and Competition

Abstract

The purpose of this note is to explore
 the reasons for a comparatively high interest rate spread in
 Kazakhstan in the context of competition in the banking
 sector. In spite of significant gains in efficiency made in
 recent years, operational costs and provisioning for loan
 losses remain high compared to some other economies.
 Profitability of the aggregate banking system has increased
 in the face of lower interest spreads. A highly concentrated
 banking system could be an indicator of lack of competition,
 but it needs to be assessed with contestability conditions
 (openness to entry of banks). The lack of license
 applications since 2001 raises questions about the
 attractiveness of entry by new banks. Competitive and market
 contestability conditions will be further enhanced with the
 authorities' continuation of strong macroeconomic and
 financial policies, improvements in financial sector
 regulation and enforcement thus continuing the achievements
 during the last five years. Administrative measures to
 control interest rates (for instance, the ceiling on deposit
 rates introduced by the Deposit Insurance Fund and tax
 incentives) only distort financial intermediation, and are
 likely to be counterproductive.