Regulatory Arbitrage, Part Two

In February of this year, I described the situation in the banking sector in considerable detail and showed that a significant share of the sector's net profit comes from arbitrage income created by the ban on paying interest on current accounts and the cap on interest rates on foreign-currency deposits. Last year, out of total net profit of KZT 2.5 trillion, banks earned KZT 0.9 trillion (36%) from this arbitrage. From the introduction of the bans in 2019 through the end of 2024, the cumulative amount reached KZT 3 trillion.

I have finally got round to this year and made a detailed calculation of how much banks have earned in 2025 from current accounts and foreign-currency deposits. By my calculations, out of KZT 1.64 trillion in net profit over eight months, banks earned KZT 0.63 trillion, or 38%, thanks to the bans and restrictions. I estimate that by the end of the year the amount of arbitrage will be roughly KZT 950 billion.

In other words, through these restrictions and bans the state hands banks roughly a trillion tenge every year, and this year it has already given banks and their shareholders about KZT 630 billion.

In my previous post I described how second-tier banks make money on these funds: free balances on card accounts, free balances held by public-sector organizations, free balances of trading and other companies, and our foreign-currency deposits with their capped 1% rate, which the banks then reinvest at market rates.

The key beneficiaries of these bans and restrictions are the large banks, which hold the bulk of the free balances and foreign-currency deposits. It is easy to verify that the return on equity of the top five banks is far higher than that of all the others, as I have also written before. This leads to concentration in the banking sector and to less competition and less lending to the real sector of the economy.

But there is another huge problem: capital outflow. I have also written that artificially suppressing returns pushes our money abroad, where it works for other countries' economies. In chasing a mythical de-dollarization, we lose dollars that leave the country and thereby put pressure on the tenge exchange rate, which leads to imported inflation.

Banks are reluctant to lend to the economy, because the high returns from current accounts and foreign-currency deposits remove any incentive for large banks to do so. Only consumer lending offers more or less adequate incentives, thanks to its high returns. But it also puts pressure on prices: when demand is stimulated without growth in the supply of goods, the imbalance is resolved through prices, which is exactly what we are seeing in our country.

The introduction of the MRT (the instrument intended to withdraw part of second-tier banks' income by absorbing excess liquidity) will not in fact improve the picture much. I have also calculated its effect: the annual impact on second-tier banks' profitability will be about KZT 115 billion, and for this year it will be within KZT 40 billion. Moreover, while arbitrage income accrues mainly to large banks, the MRT will hit all banks, which means greater concentration in the sector.

Abolishing the regulatory arbitrage created by the bans on current accounts and foreign-currency deposits would:

• Reduce second-tier banks' returns. As a result, banks would start taking on risk and increase lending to the economy: shareholders are already accustomed to high returns, and this would put pressure on management to expand lending.

• Reduce the concentration of assets in the banking sector. Small and mid-sized banks would begin to grow, which would increase competition and, in turn, affect lending to the real sector.

• Increase the incomes of individuals, public-sector organizations and ordinary companies, since competition would force banks to share returns.

• Reduce capital outflow from the country, since deposits would begin to compete on yield with stock market instruments.

But to increase lending to the real sector, a number of other measures are also needed:

• First and foremost, allow banks to lend in foreign currency (I will write a separate post on this later).

• Strengthen creditors' rights in the recovery of problem debt and collateral, so that banks take on more risk, confident that problem assets can be recovered and quickly sold in the future.

• Continue integrating banks with tax authority data in order to assess clients' solvency.

• Reduce barriers to entry for new banks in the Kazakhstan market in order to create competition.