Banks as the main source of financial capital formation in the context of economic modernization of economy of Kazakhstan

Table of contents: The Kazakh-American Free University Academic Journal №5 - 2013

Author: Nepshina Victoria, Kazakh-American Free University, Kazakhstan

In the context of ongoing transformation of economy of Kazakhstan and establishment of competitive economic system, far-reaching reforms of the country’s mixed economy are in process. However, a significant importance is given to social transformations, i.e. improvement of demographic situation, steady growth of quality and standards of living, narrowing of the income gap between rich and poor social groups, development of contemporary and effective public health service and education system, support of multinational culture.

The key importance in competitiveness growth of national economic systems wins technologic reforms, i.e. overcoming of technologic degradation, implementation and successful use of modern equipment of modern technological mode V and promising mode VI. In Russia there has been set the task of transition to innovative type of economy development while in Kazakhstan – transition to industrial and innovative type that includes strategy of support for high-quality productions, innovative sector and entrepreneurship.

Economy modernization implies use of best practices of Western countries in the field of application of advanced technologies and techniques, know-how inclusive of national scientific capabilities and accumulated experience of the country’s enterprises. The Government of the Republic of Kazakhstan does pay much attention to high technologies development, and due to this fact the necessity of further development of scientific and technological research is obvious.

From the point of view of modernization theory, Kazakhstan has drastic modernization and firm industrial diversification ahead of it; there will be need in establishment of hi tech centers, technological clusters, a center for information processing technologies, biotechnologies, and nuclear engineering. The State’s support in information dissemination and concessional loans arrangement is essential under these conditions. According to Program for Industrial and Innovative Development of the country until 2015 it is planned to increase GDP 3.5 times [3], patent system is improved, different scientific and technical programs are under development and implementation, their financial package being increased. Besides, innovation infrastructure objects are being commissioned, and finance system of innovations is being improved.

Without downgrading the significance of the state’s support and without excluding its reasonable necessity, it is thought that the framework of capital formation can be made of financial capital of private owners in the form of large banks’ stocks. This financial capital is to be used for new economic fields formation and for introduction of innovative technologies.

It is banks that currently own and maintain growing money capital flows, which were accumulated in the pension system. The banks have rather experienced personnel trained in the field of estimation and maintaining financial system of capital investment projects.

Therefore, the companies of Kazakhstan will be able to develop dynamically provided financial support of banks or transnational companies, which can result in takeover of domestic companies by foreign corporations. In such a case, all profits gained either go away from national economic system or are reinvested in securities of these corporations and this does not support modernization of industries. Thus, close integration of domestic industrial enterprises and domestic financial institutions seems to be the most appropriate model for the industry.

Taking into consideration all abovementioned, there appear necessity to protect national infrastructure from its takeover by foreign companies and for this reason, the laws should be added with appropriate limitations.

Kazakhstan is a founder of the Eurasian Bank for Development; its share in charter capital of the Bank is 500 million US dollars, i.e. one thirds of the total charter capital. Currently, 42% of the projects under consideration relate to the projects of our country.

It is a generally admitted that Kazakhstan is one of the leading countries in accordance with its macroeconomic parameters of growth not only among CIS states but also among the countries which are under process of systematic reformation of economic systems. In fact, during the recent years there is industrial recovery in the republic, the economy is on its way to steady and sustained growth. After Asian and Russian financial crises of 1997-1998, which in some definite manner influenced the economic development of Kazakhstan, the republic renewed macroeconomic stabilization. It is well known that this factor is a necessary prerequisite for economic growth.

Structural transformations within economic systems of Kazakhstan and Russia consist in overruling of hypertrophy of energy raw materials sector directed to export, priority development of processing economic sectors (first of all it concerns high technology sectors), increase of a balance and proportion in economies development, based on this insurance of their sustained growth provided modernization of industrial sector, and regarding Kazakhstan – accelerated modernization.

In the long view, external economic transformations are in the following directions: increase of finished products share in the structure of export and services, and decrease of mineral raw materials and fuels share; intensification of integration processes within CIS and EurAsEC; integrating efforts and potentials of the countries for technological breakthrough, increase of economic competitiveness level and joint presentation in the world markets. For this, it is necessary to expand joint projects by increasing feasibility of their results.

Integration into the world economic system is an evaluation of a state’s competitiveness level, so following this path raises necessity for efficient economic growth, determination of strategic priorities reflecting the state’s peculiarities and special features of the economy.

Transformation of economic development, promotion of industrial modernization incompliance with global development tendencies is the correct direction. In this sphere, Kazakhstan achieved good results and this raised the country’s power. According to the Statement of the President of the Republic of Kazakhstan, many large objects which will be constructed will help to develop national economy of Kazakhstan further as well. It should be emphasized that active construction of infrastructural and industrial objects in the Republic of Kazakhstan promote not only expansion of internal demand but also serve as a powerful instrument against world economic crisis.

As the President of the country said, ‘I am an advocate of the following principle: powerful business is a powerful state’ [1]. And powerful business cannot be formed without sufficient financing. For this, it is necessary to get the support of banks which are accumulators of monetary funds. If the banks function consistently, the economy will be provided without failure with money, which are necessary as oxygen.

According to the President, ‘We are making the whole Kazakhstan a giant building area and forming dozens thousand work places’ [1].

Construction industry, metallurgy, processing industry will develop around housing construction and large enterprises construction. There appear numerous possibilities for rise of new, young businesspersons who should not miss the chance. Consequently, any business activity is based in financial capital. Where a young businessperson can obtain the capital? The answer is obvious – in a bank. What a modern Kazakhstani bank can offer its customers? What resources do modern banks possess? Are they ready to grant their money for financing of possibly risky projects? The answer to these questions is in the core of organization of the bank functioning, in its effective management system which is the base of the research.

The status of the banking sector of a modern state is one of the principal factors determining its capability to follow its own economic policy, protect its interests and guarantee respect for rights of the citizens in different fields of their lives. At the same time, banks’ performance of their functions is largely dependent on development of their organizational structure. Therefore, the problem of improvement of the latter seems to be one of the relevant objectives of Kazakhstani state institutions. The whole range of objective and subjective factors characterizes the development process of domestic banks’ organizational structure.

Currently serious structural changes of developed counties’ credit system are becoming obvious, i.e. the role of banks is decreasing and influence of other financial institutions (insurance companies, pension funds, investment companies, etc.) is increasing. This trend is as a rule expressed by both growth of total number of new credit and finance institutions and increase of their proportion in total assets of all financial institutions.

As for now, credit system of the Republic of Kazakhstan is at brand new stage of its development and most reforms aimed at formation of a base for its successful functioning in future have been already realized. Increase of Kazakhstani credit rating up to the global one proves the fact that financial sector of Kazakhstan is developing efficiently, and the measures taken for efficient development of the Republic’s credit system make it a leader among other CIS countries.

However, the topic becomes even more relevant within transition economy in the course of market relations formation. In a view of today’s problems concerning overruling of crisis developments and inflation processes, intensification of investment and credit activities, improvement of payment organization in national economy and stabilization of national currency, an urgent task is to apply functioning bank system capable of ensuring mobilization of financial resources and their concentration in the prioritized directions of economic structural transformation.

During recent years the issues regarding formation and development of credit system of Republic of Kazakhstan gain more relevance as implementation of new mechanisms for optimization of credit system promotes increase of efficiency of credit process and formation of legal and information bases for economic activities of market agents of Kazakhstan which meet contemporary world standards.

Nevertheless, the Government and the National Bank of the Republic of Kazakhstan believe it is correct not to be satisfied with what has already been achieved and start to solve the problems of the following stage, i.e. it is necessary to determine a mid-term and long-term development directions inclusive of macroeconomic tendencies of the next years and estimated correspondent changes in the currency and financial legislation.

The Government and the National Bank foresee further development of the financial sector in bringing all its segments to correspondence with international standards under conditions of forthcoming liberalization of currency relations and possible introduction of unified monetary area with some countries.

Nevertheless, banks form an integral part of contemporary monetary economy; their activities are closely connected with demands of reproduction. Being in the center of economic life and serving the interests of the manufacturers, banks maintain connections between industry and trade, agriculture and population. Banks are feature not of a separate economic region or a country, their field has neither geographical, nor national boundaries, and it is a global phenomenon possessing giant financial power and large money capital.

Under these conditions owners of large money capital could become strategic investors in the new fields formation and new technologies implementation by purchase of stable banks stocks or through the agency of those banks. The advantages of joint stock capital are that corporate capital stock issues allow companies to employ disparate savings and progress and increase their competitiveness by investing them in industry. A significant advantage of resources involved by corporate capital stocks is that dividend rates are set by shareholders of that very company and, besides, stocks rate of return is often much lower than price of credit resources.

In the context of economic upturn, a joint-stock company can completely reinvest profits in production process without dividend payout by resolution of shareholders' general meeting. In such cases, a board of the joint-stock company can have a higher future profit as a reason. High profitability of the company and correspondingly high dividends ensure increase of market rate of its stocks, which makes it possible for the company to re-issue stocks and constantly attract resources.

Kazakhstani economy is largely dependent on supply of energy products to Europe through the Black and the Caspian Seas and energy channels of these seas. It is the reason why in broad sense the country is included into Black Sea region which is closely related to economy of EU countries [2].

In a zeal for diversification of national economy, in 2003 Kazakhstan developed and approved Strategy for Industrial and Innovation Development until 2015. Its base covers formation of national clusters in oil, gas, food and textile industries, engineering, transport and logistics services, metallurgy, construction materials and tourism. The issues on acceleration of some clusters development are widely discussed in public. They became a topic of regular consideration at nearly every government meeting (often with the participation of the President) [3].

Efforts of Kazakhstan to transform its economy in accordance with contemporary needs are worth attention and investigation. Kazakhstan joining 50 most developed countries of the world in the next years became one of the principal priorities of the country. Kazakhstan is gradually getting closer to achievement of the purpose by formation of cluster unions, consolidating industrial potential of scientific and educational centers, entrepreneur structures and other business structures in them. The key for ambitions of Kazakhstan is its oil and gas resources. This became a reason for formation and development of national petrochemical cluster aimed at collaboration with companies of Russia, the USA, China, Indonesia, and Azerbaijan. Away from oil and gas export, the cluster covers production plastic materials, polypropylene and other materials. The growth process of the cluster involves formation and development of free economic zones and international consortiums. Along with establishment of new production systems in oil and gas sector, the country started development of transport and logistics cluster called Zemlya-More-Nebo (Earth-Sea-Sky in literal translation), with expansion of Morport Aktau which is planned to become the central object. By 2015, it is planned to establish several subareas within it and invest approximately 70 billion US dollars. The first subarea is an industrial and production area aimed at formation of high-tech cluster called Aktau Industries. The second subarea is combined transport and logistics cluster – Aktau Free Trade – that will unite trade and exhibition objects with terminals, customs, and banks. Near these objects, Kenderly resort zone is being created; this resort is planned to become a basis of tourists cluster in the Caspian Sea. As Kazakh people believe the new complex will definitely become a large sector of world tourist market in a few years and its estimated turnover will reach several billion dollars per year.

In June 2007, the country’s President Nursultan Nazarbayev suggested construction of ship channel called Eurasia routing from the Caspian Sea to the Black Sea which Kazakhstan and other Central Asia countries will use for transportation of their energy products and other production, thus creating waterway through the Black Sea to the World Ocean. According to the opinion of Kazakh party, this channel will be nearly 1 thousand kilometers shorter than the existing waterway through the Volga and the Danube channel. The channel construction will cost 6 billion US dollars [4].

Significant scope of cluster associations development projects are added by program of coastline restoration of the half dried Aral Sea by means of controlling flows of the Syr Darya river and consequently formation of fish cluster in this region. In this course, it is planned to construct three fish-processing plants in complete accordance with international requirements and modern standards.

The main financial source for financing innovation programs of industrial policy is profits of raw material export. Correspondingly, achievement of structural reconstruction strategic aims requires; firstly, preventing money from going away from the sector and, secondly, formation of effective mechanisms of their transformation into industrial investments. Capitalization of profits gained from traditional raw material export is one of the fundamental problems of industrial policy. Support of competitive economic field should be realized in parallel with a set of innovation development factors. The main instruments of such a policy are as follows: tax reform aimed at increase of budget income primarily by means of expansion of taxation base and emphasis on taxation of natural resource royalty; improvement of credit granting technology in order to prevent it use in speculation activities; differentiation of obligatory bank reserve level depending on banks assets structure and setting increased interests for short-term loans under financing of agencies and decreased interests – for long-term investment loans.

Establishment of competitive bank system sets responsibility of both state governing bodies on macro level and separate banks on macro level due to their financial capability. Possibility of new structures formation (within some bank operations) increases feasibility of unpredicted changes and makes banks design flexible policy for management of their activities. This immediately tightens requirements to bank personnel, its qualification, training and involvement of the employees.

In the meanwhile, as it was stated above, dynamism of social and economic environment sets so strict requirements to any Kazakhstani bank that it has only two options as follows: constant intensive development or decline. It is obvious that most domestic banks are principally being developed due to professional culture of their top managers, their ambitions and assertiveness. This is a good but not sufficient for further improvement of the banks. It is time to ‘switch on’ abilities of every employee at full capacity.

Taking into consideration low interest of banks in implementing credit relations and directing their activities to speculative services, it is necessary to improve regulatory system which form ‘channels’ designated to make banks perform credit activities. Such measures of state influence include as follows:

- motivating long-term bank lending by means of concessional taxation and improvement of pledge laws;

- forming legislative environment aimed at use of asset-backed securitization system and consortium loans by commercial banks; this system is successfully applied in some countries with transforming economies;

- during liberalization of currency regulation, intensification of banks’ credit activity aimed at deeper introduction of banks’ financial capital into real economy sector.

Influence of state regulations is necessary during formation of objects of information and communication lines in the regions which require much capital and have long return period as well. The state should give international grants and long-term loans to regional infrastructure development which, in its turn, will motivate banks to create wide-spread affiliate network, expand electronic payment systems, attract public savings to economic turnover, and intensify lending for enterprises [5].

Strengthening of banks’ role in the course of transformation of the economy is highly dependent on solving the problem of availability of credit resources for real sector of economy.

According to the opinion of the article writer, expansion of bank financing capabilities is feasible due to implementation of the measures as follows:

- establishment of ‘Independent Agency for Banking Services Customers’ aimed at liquidation of financial incompetency of population, public information about banks’ financial status, execution of different agency operations including attraction of people’s savings;

- improvement of banks’ credit policy aimed at decreasing credit risks and operating costs in order to make bank lending more available.

As the President stated, “We must unite all efforts for the benefit of our Motherland!” [1]. All efforts consist not only in the country’s citizens and large enterprises but also, correspondingly, in banking system. Banks should exert every effort to achieve the best results in transformation of economic system of Kazakhstan, timely providing economy and, primarily, business development and functioning of above said enterprises with money.

The crisis influenced the economy of the whole country greatly. Many of the principal industry sectors count losses. In order to finish stagnation of the enterprises it is necessary to provide several conditions, and availability of financial resources should become one of the main conditions.

Of special note is the significance of securities in guaranteeing free capital flow to sunrise industries. Capital directed to the industries with increased profit and dividend rate results in competition increase and profit decrease, thus, influencing stock pricing of these sectors negatively.

As a result of this migration of free capital, effective and sustainable economic structure is formed which is essential for market equilibrium. Despite of said advantages of joint-stock capital, in Kazakhstan corporate stock market functions insufficiently and stays in the background of national economy.

Owing to the growing demand in concentrated, flexible and mobile financial capital, which can circulate as corporate stocks, significance of management and control of its movement, and its proper use is increasing.

In the world practice, it becomes more obvious that methods which are used to manage shareholders’ capital movement and corporation activities, which are also known as system of corporate governance, will predetermine future of national capital. This facts becomes even more obvious in the context of globalization with foreign corporations possessing stocks of strategically important objects of national economy.

Formation of financial capital, which caused sharing of functions of property and control in joint-stock companies, resulted in appearance of new type of relationship between owners of capital, shareholders (investors), and managers who govern the company. In joint-stock companies, top managers and board members are often not owners of the company and, consequently, can make decisions without regard to risk of property and profit loss, tolerate concealment of assets and loss in income under operations with affiliated persons, etc.

Under these conditions, there appear necessity to introduce corporate governance, the basic principles of which are as follows: accountability, responsibility, publicity, and justice. Development of corporate relations based on transparency of information, harmony of interests of the board, shareholders, and partners can form integrating characteristics of capital.

Unfortunately, in some countries many companies and banks treat corporate governance principles as secondary and insignificant rules of economic behavior. As practice shows, in Kazakhstani market there are many companies, which ignore such corporate governance principles as protection of shareholders’ rights, corporate ethics, information disclosure and transparency.

Introduction of corporate governance, which includes actual participation of owners of capital in the shareholders’ board of banks and invested enterprises, will make it possible to perform internal control for designated and effective application of cash investments, and motivate to re-invest the profits gained not only in their own stocks but also in tangible assets and human resources of the enterprise, and in modernization of economic relations.

Financial capital is a substantial economic base for development of corporate strategy. Flexibility and mobility of financial capital instruments allow an integrated association to manage a securities portfolio and direct capital to new fields of economy.

The aim of the corporate strategy is to ensure mutual benefit for every subdivision integrated, i.e. financial, industrial, and infrastructure as well, and, thereby, raise stock exchange price of the corporate stocks.

Therefore, formation of higher-level financial capital can become a promising model of Kazakhstani economy development, the main elements of which are unity of interests of organizations of banking sector and enterprises of real sector of economy.

Nevertheless, banks respond to any change in market conditions immediately and correct their credit policy rapidly. First, it is expressed by rather conservative approach to bank lending, particularly, they perform more thorough financial analysis of customers and estimation of pledge for credit. Credit interest rates for business community are constantly growing herewith.

Based on this theoretic concept it seems to be expedient to assist in strengthening factors, which determine financial capital development. In addition, special attention should be paid to management of second-tier banks for achieving the most effective results both for the bank and for the economy of the whole country.

REFERENCES

1. Послание Президента Республики Казахстан Н.А. Назарбаева народу Казахстана. 27.01.2012 г. «Социально-экономическая модернизация – главный вектор развития Казахстана» | Letter of Nursultan A. Nazarbayev, the President of the Republic of Kazakhstan ‘Social and Economic Modernization as the Main Vector of Kazakhstan Development’ dated January 27, 2012 (in Russian)

2. Айдарбеков Б. Стратегия и приоритет национальных интересов Казахстана, / Б. Айдарбеков // Саясат, 2005, № 2. | B. Aidarbekov Strategy and Focus of National Interests of Kazakhstan (in Russian)

3. Арцишевский Л., Райзберг Б. Проблемы структурной перестройки экономики / Л. Арцишевский, Б. Райзберг //Экономист. - №1. - С. 47-52. | L. Artsishevsky, B. Raizberg Problems of Structural Reorganization of Economics (in Russian)

4. Ахметов И. Системный подход методологическая основа создания эффективной модели национальной экономики / И. Ахметов // Транзитная экономика, 2003. № 1, стр. 11-25. | I. Akhmetov Systematic Approach as a Methodology Base for Effective Model of National Economy (in Russian)

5. Оспанов Б. Инновации как направление государственной стратегии развития в Республике Казахстан // Саясат. - №2, 2005 г., с. 17-21 | B. Ospanov Innovations as a direction of state development strategy in the Republic of Kazakhstan (in Russian)



Table of contents: The Kazakh-American Free University Academic Journal №5 - 2013

  
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