Following the financial crisis, the Government of Kazakhstan together with AFN (a financial regulator, recently replaced in its role by the National Bank) has introduced amendments to legislation designed to address issues which arose during the crisis and to enhance financial legislation and the financial market of Kazakhstan. Two main laws have been developed (one of which has already come into effect, while the other is yet to be passed).
Law on Financial Services Consumers and Investors Protection (effective from 15 February 2011) contains, inter alia, the following new provisions:
The purpose of this measure is to prevent borrowers from being misled, since unsophisticated borrowers, while making decision to receive a loan, tend to consider only interest rates, and neglect any other payments associated with a loan, such as a bank’s various commissions. The amendment establishes the maximum annual rate which the financial institutions can apply to their borrowers, so in any case the borrowers are protected by the certain limited rate which cannot be increased due to changes in banks’ commissions etc.
The measure is aimed at reducing costs for the borrowers, since the banks tend to specify high requirements to insurers and appraisers which creates substantial additional expenditure for the borrower. The concern of the banks here is that the quality of the insurance or appraisal will not be adequate to cover the banks’ risks. The banks, therefore, invented a way to address this concern by establishing criteria for insurance/appraisal themselves (and not insurers or appraisers). Such insurance/appraisal criteria are scheduled to the loan agreement or the security agreements and are developed in such a manner, that only high quality insurers/appraisers can meet such criteria.
This measure has been introduced in order to prevent the situation, common during the crisis period, when the banks unilaterally raised interest rates in order to cover the cost of their own funding, jeopardising the borrowers already hurt by the crisis. The exceptions for when the bank is allowed to increase interest rates unilaterally are limited (e.g. where the borrower breaches its obligation under a loan agreement to provide relevant information to the bank; or if the borrower no longer holds a 10% (or more) stake in the shares of its capital and doesn’t give prior written notification to the bank under the loan agreement) and can be applied by the bank only in case of relevant provisions in the loan agreement. Thus, the bank shall make sure that the loan agreement clearly states, for example, that if there is a change in the 10 per cent shareholding of the borrower and no prior written notification of this has been given to the bank, the bank is entitled to increase the interest rate. Without such a provision, the bank will not be entitled to do so, even if the borrower has not notified it of the shareholder’s change.
This measure is considered by market participants as potentially deterring the management of JSCs from making decisions and, consequently, deterring development of a JSC’s business.
Draft Law on Minimisation of Risk in Financial Sector (not in effect, but being considered by Parliament) proposes, amongst others, the following crucial amendments:
It is unclear what happens when a shareholder who owns more than 25 per cent of a bank’s shares cannot find a purchaser for the excess shares, as he attempts to comply with the limitation stipulated by the newly proposed law.
This is expected to develop trading on KASE (Kazakhstan Stock Exchange), however, it is not clear whether such a measure will lead to overall development of the financial market since OTC deals will be prohibited to banks.
The measures proposed by the Draft Law on Minimisation of Risk in Financial Sector, when introduced, will further strengthen the regulation of the financial market and, as a result, reduce the risks for investors. However, it is not always clear how the requirements of the newly proposed law will be implemented in practice.
Shaimerden ChikanayevPartner (Almaty), Head of Finance and Securities DepartmentGRATA Law Firm
Marina KahianiAssociate (Almaty)GRATA Law Firm
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