Small and medium-sized businesses account for 29.5% of the country’s total production volume, while about 3.4 million people are employed in this area. In the context of the crisis caused by the coronavirus pandemic, it is important for the Government to prevent subsidence of this sector and minimize the effects of restrictive measures on SMEs. However, obviously, the business is already experiencing difficulties due to a lack of financial resources. Development banks and investment banks that already operate in Kazakhstan can help enterprises increase their own capital, and with the opening of the AIFC, the Kazakhstani market can attract new players.
Kazakhstan purposefully goes to increase the role of the private sector in the country’s economy. For example, ten years ago, the share of SMEs in the structure of GDP was 21%, and already at the end of 2019, the indicator grew to 29.5%.
The development of SMEs is a priority for the Government, as the sector forms the middle class, provides 37% of the economically active part of the population with work, creates a “healthy” competitive environment, which ultimately has a positive effect on the living standards of citizens. To stimulate the population to do business in the country, the state program “Business Roadmap 2020”, launched back in 2010, is operating. Over the years of its implementation, 457.1 billion tenge has been allocated to support SMEs.
But, obviously, these funds are not enough. As before, in the structure of SMEs, more than 60% of subjects are represented in the form of individual entrepreneurs who do not actually form market mechanisms. Every year they produce about 8% of the total sector. The main issue volume, namely 87%, is provided by legal entities of small and medium enterprises. It is these enterprises that make up one fifth of the number of SMEs that form more than 60% of the sector’s profit.
Private investment, in particular those that can be attracted through development banks and investment banks, can help strengthen the contribution of SMEs to economic growth. Such financial institutions not only invest in new projects, but also help existing companies enter the capital markets in order to raise funds for their development.
How do they differ from ordinary banks and what is their significance for the economy?
In the traditional sense of the people, a bank is a structure that works with deposits, fund transfers, lending and other financial services. But the activities of banks are not limited to this. In countries with a high economic level, there are so-called development banks. They mainly specialize in preferential financing of investment projects. Their main task is to create conditions for economic growth and stimulate investment.
To this end, development banks provide support in national projects, build economic communication with other countries, and “earn money” for the state. Such banks are divided into two types: national and multilateral.
National banks are created internally by governments themselves to achieve specific goals. In our country, such a bank is the Development Bank of Kazakhstan.
Multilateral development banks include financial institutions created by several shareholders to operate in the interests of all participating countries. There are more than 13 such banks in the world. The largest of them are the Eurasian Development Bank, the European Bank for Reconstruction and Development, the China Development Bank, the Asian Development Bank, and the International Bank for Reconstruction and Development.
Another institution to attract investment in the country’s economy are investment banks. These financial structures are a bridge between large enterprises and their potential investors. They organize capital raising in global financial markets, as well as provide consulting and brokerage services, acting as an intermediary in operations with securities, commodity assets, and currency. The most famous examples are J.P. Morgan, Goldman Sachs, Credit Suisse.
The activities of development banks and investment banks in Kazakhstan
The Development Bank of Kazakhstan has existed in the country since the beginning of the 2000s. Over the years, the bank approved financing of 144 projects in the amount of 9.8 trillion tenge. These are mainly projects in the manufacturing sector. Their launch allowed the creation of 28.2 thousand new jobs in the country.
As for multilateral development banks, several are working in Kazakhstan at once. For example, the Eurasian Development Bank, established by Kazakhstan and Russia in 2006. It primarily finances enterprises in the industrial sector and, since its inception, has already invested 3.4 billion US dollars in 79 Kazakhstani projects.
The Asian Development Bank, of which Kazakhstan became a member back in 1994, funded 128 projects worth 5.2 billion US dollars. About 90% of these funds go to transport infrastructure, government and the financial sector.
The European Bank for Reconstruction and Development is participating in an even larger number of projects – 273 projects worth more than 9 billion US dollars. These are mainly projects in the areas of agribusiness, infrastructure, energy, finance and housing.
There are also several investment banks in the country. These include, for example, Kazkom Securities, Halyk Finance, BCC Invest.
Kazkom Securities, part of the Halyk Group, was recognized as the best investment bank in the border markets in 2019 according to a study by the international publication Global Finance. Among his last transactions, one can single out the issue of 9.5-year bonds of Agrarian Credit Corporation JSC for 32.9 billion tenge or five issues of bonds of JSC Development Bank of Kazakhstan for a total amount of 212.5 billion tenge.
Another investment bank, Halyk Finance, was one of the organizers of the secondary public offering of Halyk Bank and the Kazatamprom nuclear company on the AIX. Also, with the help of Halyk Finance in 2020, the Development Bank of Kazakhstan issued 5-year eurobonds in the amount of 62.5 billion tenge.
Nevertheless, these funds are not enough for the business
The need to attract private investment in SMEs is discussed annually, however, simplifying this process is quite difficult. All that remains for SMEs is venture capital funds, bonds, and private equity. But finding a fund or an investor who would like to invest in a small business is difficult – applicants usually require high financial results and excessive guarantees for a young company.
Therefore, business has traditionally raised funds through banks through loans. As of June 1, 2020, the total volume of such loans reached almost 14 trillion tenge. These funds, as a rule, are used by enterprises to replenish working capital, that is, to the current activities of the company, and not to the development of production.
In turn, investments in fixed assets that enterprises invest to increase production capacities are formed by 80% from their own funds. Moreover, bank loans make up only 2%.
Obviously, the low popularity of bank loans among enterprises is due to their unfavorable conditions. Therefore, while the business uses state subsidy programs for subsidizing interest rates. For example, from the beginning of April 2020, banks began lending to SMEs at 8% per annum. The National Bank allocated 600 billion tenge for the implementation of such preferential lending. As of June 1, 116 SMEs have already received preferential loans in the amount of about 160 billion tenge.
Nevertheless, the state needs to reduce its share in the economy. Development banks and investment banks can help the country in this matter.
Moreover, a new opportunity has opened up for them to attract new players to the market
We are talking about the Astana International Financial Centre opened in 2018. The financial centre provides several opportunities for development banks and investment banks.
Firstly, it is a jurisdiction based on the principles of English law, which is familiar and convenient for investors.
Secondly, the modern AIX stock exchange for raising capital, on which 62 securities have already been listed, and the trading volume for two years of operation has exceeded 84 million US dollars.
Thirdly, an independent court and an international arbitration centre for the settlement of disputes. The main advantages of the AIFC judicial system are independence from the country’s judicial and political system and the obligatory execution of decisions of the court and the arbitration centre both in Kazakhstan and in other countries with which we have agreements. Among them, for example, the CIS countries.
Investment banks are already opening in Kazakhstan through the AIFC, including the European WOOD & Co and the Chinese China International Capital Corporation. They are trading members of AIX, which provides additional access for international investors to the securities of the exchange. This means that Kazakhstani companies can attract large volumes of investments through securities.
The AIFC also registered international development banks, such as the world’s largest – China Development Bank. He has been working in Kazakhstan since 2005, but first opened his representative office in 2018 with the creation of the AIFC.
The opportunities and financial instruments that the AIFC offers can be an impetus for the arrival of new development banks and investment banks. The economic effect of their activities is to develop the real sector of the economy and increase the role of the private sector in the economic growth of the country.
However, it is important to note that the results from attracted investments are observed only after a few years. Thus, the contribution of investment flows to the country’s economy is that an investment growth of 1 pp in a year can lead to an increase in GDP of 0.07 pp, and in two years the cumulative effect can reach 0.1 pp.