KDIF Annual Report 2014

8/17/2019 KDIF Annual Report 2014

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MESSAGE OF THE CHAIRMAN OF THE BOARD OF DIRECTORS ....................................................................................3

MESSAGE FROM THE CHAIRMAN OF THE KDIF ..........................................................................................................5

ABOUT KDIF ............................................................................................................................................................8

THE MAJOR DEVELOPMENTS, AND FACILITATING THE DEPOSIT INSURANCE SYSTEM ................................................14

CONSUMER DEPOSIT MARKET OVERVIEW ..............................................................................................................18

DEVELOPMENT STRATEGY 2014 – 2016 ..................................................................................................................22

CORPORATE GOVERNANCE ....................................................................................................................................28

OPERATING RESULTS .............................................................................................................................................35

DIFFERENTIAL PREMIUM SYSTEM ...................................................................................................................36

SPECIAL RESERVE FOR PAYOUTS .....................................................................................................................38

INVESTMENT MANAGEMENT ...........................................................................................................................40

DEPOSITOR REIMBURSEMENT PROCEDURES ...................................................................................................42

LIQUIDATION COMMISSIONS OPERATIONS .....................................................................................................43

MAINTAINING PUBLIC AWARENESS OF DEPOSIT INSURANCE SYSTEM ..............................................................44

INTERNATIONAL COOPERATION .....................................................................................................................45

FINANCIAL REPORTING AND REPORT OF INDEPENDENT ASSURANCE FIRM ...............................................................48

GLOSSARY OF TERMS ............................................................................................................................................53

ABBREVIATIONS ....................................................................................................................................................54

CONTENTS


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KUAT KOZHAKHMETOV

Chairman of the Board of Directors, Deputy Governor

of the National Bank of the Republic of Kazakhstan


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Ladies and gentlemen!

This has been a year of complex challenges and threats

to stability of Kazakhstani nancial system. Such external

factors as global economic slowdown, strengthening of US

dollar and falling prices for oil, metals and commodities

have a great impact on economic conditions in our country.

Nonetheless, in 2014 domestic economy grew by 4.3%.

We could also see a positive trend to growth in domestic

consumer bank deposit market. Over the year, consumer

bank deposit market grew by 12.5%. To-date, aggregate

consumer deposit balance in Kazakhstani banks comprises

4.5 trillion tenge.

Reporting these results demonstrates condence

of people with the banking sector. Despite the spillover

in consumer depositor base in three largest Kazakhstani

banks, the long-term trend in aggregate deposit balances

over 2014 remained. The people’s condence is largely a

historical factor. Back in the crisis years, the Government

bailed in the three systemic banks, and the conditions of

restructuring of liabilities and conversion of liabilities into

shareholders’ capital were agreed with the banks’ creditors.

As of the end of 2014, all banks successfully continue

operations, the strategic investors for acquiring the share

held by the National Wealth Fund “Samruk Kazyna” have

been found.

During the next year, the public policy in sustaining

economic stability will be focused on reconciliation of

developments related to negative external factors, and

capacity building of the Kazakhstani economy through

State Programme of Infrastructure Development “Nurly

Zhol” for 2015 – 2019, as well as safeguarding nancial

stability through strengthening of the nancial system

and enhancing the banking sector, particularly, in parallel

with the effort to reduce the share of problem debt, new

requirements in capital adequacy according to Basel III will

be introduced in a phased manner. Another crucial factor in safeguarding nancial stability

for the National Bank is increasing the role of the national

currency in economy. Particularly, in the context of increased

expectations of possible national currency adjustment, by

the end of 2014 the extent of the consumer bank deposit

market dollarization reached 67%. For comparison, the

share of deposits in national currency as of the end of past

year comprised 44%.

Therefore, for giving a rationale for people to make

savings in national currency, the Government of the

Republic of Kazakhstan and the National Bank announced

the perspective plan to increase the government guarantee

coverage for deposits in national currency from 5 to 10

million tenge and increase in the maximum recommended

interest rates for deposits in national currency from 9% up

to 10%, and decreased recommended maximum interest

rate for deposits in foreign currency from 4% to 3%.

One of the major events in 2014 was development and

ratication approval of the public policy document Financial

Sector Development Concept 2030. This policy paper

establishes the grounds for further developing deposit

insurance system, revising the mandates of authorities,

and, in a broader sense, facilitating the bank recovery

processes according to the international standards.

Particularly, in the Financial Sector Development

Concept 2030, this best practice is incorporated to the

initiative to transfer the functions in bank insolvency

resolution to the KDIF and to provide for allocation of

the KDIF’s funds in resolution should the KDIF be directly

involved in the bank resolution processes. Apart of that,

further improvement of legislation in part of establishing the

preconditions and criteria for bank insolvency resolution and

bail-in, particularly conducting purchase and assumption

transaction, establishing a bridge bank and restructuring of

liabilities. We plan to commence these tasks in 2016 – 2018.

In any case, all these provisions shall be aimed

at safeguarding the rights and lawful interests of bank

depositors, providing for prompt access to their deposits

with banks, and, in a general sense, facilitating the bank

insolvency resolution provisions in best interests of all

concerned, which fully complies with the Core Principles for

Effective Deposit Insurance System.

Let me please extend my acknowledgments to the

Government of the Republic of Kazakhstan for the support

in many matters. Let me also extend appreciation for very

productive fulllment of these crucial initiatives to the Board

of Directors and the senior management of Kazakhstan

Deposit Insurance Fund.

Kind regards,

Kuat Kozhakhmetov,

Chairman of the Board of Directors,

Deputy Governor of the National Bank of the Republic

of Kazakhstan

MESSAGE OF THE CHAIRMAN OF THE BOARD OF DIRECTORS


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Bakyt Kogulov

Chairman, Kazakhstan Deposit Insurance Fund


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Dear Colleagues and Partners!

Now, in 2014, it has been 15 years of deposit

insurance system operation in the Republic of Kazakhstan.This is a very important moment for us to take stock ofour continuous work. Particularly, undoubtedly, over

these 15 years we were able to develop an effectivesystem for protection of rights and lawful interests of bankdepositors in nancial services market, which is advanced

in terms of mandate and powers and which builds upon

implementation of Global best practice. During these years,we were able to make membership compulsory for all banks

accepting deposits of individuals as a legislation provision,to implement the practice to regularly reassess thecoverage limit in accordance with Internationally recognized

standards, and to set forth operations related to differentialpremium system which is regularly updated with a view

to reect the market conditions and address the systemicissues which appear to be in ways linked to the bankingsector. It is also to be noted that the key principles of

deposit insurance are clearly simple and comprehensible tothe Kazakhstani nancial services consumers with differenteducational background and general awareness of retail

banking products.Having passed the 15-years threshold, apart fromconsidering the results, the nancial regulatory authority

and the KDIF also revised the strategic developmentobjectives and the perspective longer term developmentopportunities.

The reporting year might be deemed crucial for furtherdevelopment of deposit insurance system since qualityinstitutional developments were launched this year. In

August, 2014 Government of the Republic of Kazakhstanapproved the long-term policy document named FinancialSector Development Concept till 2030, while the medium-

term objectives for further development were given in detailin the KDIF’s Strategic Development Plan 2014 – 2016

which covers each of the KDIF’s functions.During 2014, the KDIF was working to elaborate the

strategic initiatives and the perspective objectives aimed atoptimization of KDIF’s internal procedures, as well as the

procedures of bank insolvency resolution stipulated in thelegal framework.

First, in the framework of the USAID complex

macroeconomic development project in the Republic ofKazakhstan, an International advisory rm conducted

assessment and delivered concept suggestions in this eld.To allow fulllment of these concept suggestions, the KDIFarranged consultations with the expert staff of Federal

Deposit Insurance Corporation and Deposit Insurance

Agency of Russian Federation. The obtained results wereduly reected in the Financial Sector Development Concept

till 2030 in part of deposit insurance. Therefore, the Concept2030 establishes grounds for developments in distributionof mandate and powers in bank insolvency resolution and

ensures that Global best practices are integrated. Another important event during 2014 was joint

statement of the National Bank and Government of the

Republic of Kazakhstan on increasing the maximumcoverage limit for deposits in national currency from 5 up to10 million tenge within a comprehensive set of provisions

aimed at reducing dollarization of the Kazakhstani economy.

Whether these amendments to be adopted, 99.7% of bankdeposits and bank accounts of individuals will be fully

covered, in current values.Furthermore, in the framework of fulllment of the

KDIF’s Strategic Development Plan for the years 2014

– 2016, the KDIF has accomplished a large-scale taskin development of its risk management system in thisreporting year. Particularly, since December, 2014 the Risk

Management Committee was established under the Boardof Directors, a risk manager function and internal auditof ce were provided for in the KDIF structure, and regular

managerial reporting submission practice was introduced. Apart from that, the KDIF elaborated and approved a

number of very important internal procedures governingthe risk management and information security issues.Summarizing the nancial results of the KDIF’s

operations, as of the end of 2014 special reserve for

payouts comprised 215.4 billion tenge, out which 145 billionare represented by the regular member banks premiums.

The KDIF reported investment income of 31.3 billion tenge,which is for 64.7% higher comparing to the same period ofthe past year. Present value of the asset portfolio increased

by 73.7 billion tenge, or 22.5%. The liquidation commissionsof the banks in liquidation settled their liabilities to the KDIFin the amount of 9.4 billion tenge.

In future, we are planning to utilize the cooperationopportunities with the National Bank in the eld of

fulllment of the strategic development objectives criticalto deposit insurance system development and to optimizingand streamlining the procedures and processes.

I believe that fulllment of these objectives along with

continuing accomplishment of the tasks in our daily agendawill contribute to nancial sector stability and furtherdevelopment of deposit insurance system in line with Global

best practice.

Kind regards,Bakyt Kogulov

Chairman, Kazakhstan Deposit Insurance Fund

MESSAGE FROM THE CHAIRMAN OF THE KDIF


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After the nancial crisis of 1998 burst in the Russian Federation, establishing legal provisions to ensure protection

of people’s bank deposits became a priority for the Republic of Kazakhstan. At 1 Congress of nanciers of Kazakhstan,

President Nursultan Nazarbayev recommended to elaborate and implement a comprehensive set of system-wide measures,

one being establishment of deposit insurance system.

The KDIF was established by Resolution of the National Bank of the Republic of Kazakhstan Management Board No.

393 dated 15 November, 1999 “On incorporation of ZAO “Kazakhstan Individuals Deposit Guarantee (Insurance) Fund”.

Mission

To contribute to the nancial system stability and protection of rights of the second-tier banks’ depositors in the

Republic of Kazakhstan.

Vision

The KDIF strives to be:

• A highly ef cient party in the nancial market which contributes to stability of the domestic nancial system

• An organization which adheres the Globally recognized principles for effective deposit insurance systems and

employs Global best practices in its operations

• The agent of the Government for the people ensuring protection of their rights and lawful interests

Strategic objectives

• To fulll the Financial Sector Development Concept 2030 via advancement of legislation governing deposit

insurance, including assigning the mandate and powers in bank liquidation and insolvency resolution to the KDIF;

• To ensure capacity to fulll its critical functions, i.e. to reimburse depositors in a timely and orderly manner in the

event of a member bank failure;

• To further develop the provisions for replenishment of the special reserve for payouts, and strengthening nancial

position of the KDIF;

• To envisage implementation of integrated protection scheme which extends the Government guarantee to

consumers in certain insurance types;

• To extend the deposit insurance coverage to certain types of legal entities (socially meaningful small businesses);

• To strengthen the risk assessment practices and controls over the KDIF’s operations;

• To take intensied effort in maintaining public awareness of deposit insurance and improving general understanding

by people of the deposit insurance system provisions.

ABOUT KDIF


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The core functions

• Reimbursement of depositors in the event of a member bank failure;

• Accumulation of special reserve for payouts on ax-ante basis;

• Investment management;

• Establishing requirements applied to the DIS member banks in part of administration of insured deposit automated

reporting databases, and to conduct on-site compliance verication against the requirements set forth in the Contract

of Adhesion;

• Participation in temporary administration during a member bank conservatorship;

• Participation in temporary administration during the period of withdrawal of a member bank’s general bankinglicense;

• Participation in liquidation commission and creditor committee of a member bank in forced liquidation;

• Keeping the register of the deposit insurance system member banks;

• Assigning the agent bank for processing payouts on the basis of competitive bidding.

The Core Principles of Deposit Insurance System

• Membership of all banks which are licensed for accepting deposits and opening and maintenance of bank accounts

of individuals being compulsory;

• Transparency in operations;

• Mitigation of operations specic risks;• Ex-ante accumulation of the special reserve for reimbursing depositors.

Coverage

• Maximum coverage limit is 5 million tenge

• Deposits of individuals placed with second-tier banks of the Republic of Kazakhstan are insured, excluding for

non-interest bearing demand deposits and investment deposits placed with Islamic banks

Relations with the International professional community

Since 2003, the KDIF has been a member organization of the International Association of Deposit Insurers (IADI).

At the moment, the KDIF participates in 2 regional committees (the Eurasian and Asia-Pacic Regional Committees),

and in a number of standing committees, namely Data and Survey Committee, Research and Guidance Committee, RGC

Subcommittee on the Recoveries from Assets of Failed Banks, Subcommittee on Bail-In Implications for Deposit Insurance

and Funding.


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THE KDIF’S 15 YEARS AT A GLANCE

1999 Upon an order by President Nursultan Nazarbayev that a system-wide deposit insurance system should be

established, Kazakhstan Individuals Deposits Guarantee (Insurance) Fund was incorporated.

16 largest banks attained membership in deposit insurance system. Coverage was limited to the amount

of 400 thousand tenge.

2002 Following the court’s ruling on forced liquidation of OJCS “Komirbank” the KDIF reimbursed 20 bank’s

depositors at total amount of 1.7 million tenge.

2003 Novelty in legislation provide for compulsory membership in deposit insurance system for the bankslicensed for accepting deposits and opening and maintenance of bank accounts of individuals.

Following amendments to legislation, deposit insurance coverage extended to all bank deposits ofindividuals, excluding for term and conditional deposits exceeding 50 000 US dollars, or the applicablecurrency equivalent.

The KDIF became a member organization of International Association of Deposit Insurers (IADI).

2005 Following court’s ruling on forced liquidation of JSC “Nauryz Bank Kazakhstan”, the KDIF reimbursed 3.6thousand depositors at total amount of 680 million tenge.

2006 7 July, 2006 the President signed Law of the Republic of Kazakhstan “On compulsory insurance of deposits

placed with second-tier banks of the Republic of Kazakhstan”.

The maximum coverage limit was raised up to 700 thousand tenge.

2007 The KDIF implemented differential premium system.

The court ruled that JSC “Valut-Tranzit Bank” should be forcibly liquidated. As of the end of 2014, the

liquidation is still in progress and so far the bank’s depositors keep ling orders for reimbursement.

To-date, the KDIF has reimbursed 63 thousand bank’s depositors at total amount of 13.9 billion tenge.

The liquidation commission of JSC “Valut-Tranzit Bank” has reimbursed 61.5% of the total KDIF’s claim.

2009 The KDIF successfully held 7 Annual Meeting and International Conference of the IADI Asia-PacicRegional Committee in Almaty. The event gathered over 70 representatives of the deposit insuranceorganizations from 20 countries.

The KDIF commenced the work related to the member banks’ automated insured deposits reportingdatabases compliance verication against the requirements set forth in the Contract of Adhesion.

Since deposit insurance system was established in the Republic of Kazakhstan, 3 member banks have undergoneforced liquidation, namely OJSC “Komirbank” (2001), JSC “Nauryz Bank Kazakhstan” (2005), and JSC “Valut-Tranzit

Bank”.

The KDIF reimbursed depositors of JSC “Komirbank” at total amount of 1.7 million tenge. Liquidation proceedings and

reimbursement of depositors of JSC “Nauryz Bank Kazakhstan” and JSC “Valut-Tranzit Bank” is currently in progress.


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2011 The KDIF successfully held 4 Annual Meeting of the IADI Eurasian Regional Committee in Almaty.

The KDIF accomplished completion and putting in test operation of ad-hoc “SalT Inspect” InformationSystem dedicated to streamline the processes related to compliance verication of the member banks’automated insured deposits reporting databases against the requirements set forth in the Contract of Adhesion.

2012 To ensure maintaining the people’s condence in the banking system, the National Bank provided for a10% annual increase in the KDIF’s authorized capital, what was documented in the Strategic Plan of the

National Bank.

2013 “SalT Payout” Information System dedicated to streamline the operations in the insured event was putinto test operation.

The KDIF was honored by IADI with award in nomination “Deposit Insurance System Improvements”

2014 Government of the Republic of Kazakhstan approved the 2030 Financial Sector Development Concept.The 2030 Concept envisions developing of legislation in part of bank insolvency resolution and liquidationin a manner that benets all concerned parties in the nancial market and the banks’ depositors as well,and also assigning additional mandate and powers to the KDIF and increasing the maximum coveragelimit in compliance with Global best practice.

The Government and the National Bank of the Republic of Kazakhstan made joint statement regarding

increasing the maximum coverage limit up to 10 million tenge within a comprehensive set of provisionsaimed at reducing dollarization of domestic economy. The other related decision was to reduce themaximum recommended interest rate offered by the member banks on newly accepted deposits inforeign currency.

JSC "Kazakhstan Deposit Insurance Fund" senior management and staff


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Major events in the Kazakhstani banking sector

• In February, 2014 national currency adjustment for 19% was conducted.• Fraudulent mass SMS dispatch happened, namely fraudulent messages regarding probable failure of three largestdomestic banks being distributed among the WhatsApp subscribers. Following the 1 quarter results, net depositwithdrawal among the three banks amounted to 160 billion tenge, or 19% of total value of deposits of individualsplaced with these banks. No substantial outow over the banking system was recorded.

Development of the compulsory deposit insurance system and the domestic

banking sector in a broader sense• The KDIF within its mandate was taking part in elaboration of the 2030 Financial Sector Development Concept. The2030 Concept addresses the issues related to segregation of mandate and powers related to control and supervisionand bank insolvency resolution as going concern, as well as further increase in the maximum coverage limit, facilitationof procedures and introduction of novelty in institutional mandate related to bank insolvency resolution and liquidation.• In December, 2014 the National Bank and Government of the Republic of Kazakhstan made joint statement thatas a provision to reduce dollarization of domestic economy, the maximum coverage limit would be extended from 5million tenge up to 10 million tenge for deposits in national currency.• In order to put into practice the concept proposals on bank insolvency resolution and liquidation, which wereproduced by the Deloitte North American of ce within the USAID complex macroeconomic task in the Republic ofKazakhstan, in July 2014 the National Bank of Kazakhstan and the KDIF arranged a series of consultations withFederal Deposit Insurance System (FDIC).

Strategic planning and fulllment of strategic initiatives

• In the forthcoming period, the KDIF is planning to fulll a series of initiatives, including those outlined in theKDIF Strategic Development Plan 2014 – 2016 as approved by the KDIF Board of Directors. Among the perspectivedevelopment priorities are: 1) to fulll the 2030 Financial Sector Development Concept within the mandate and powersof the KDIF, 2) to provide for operational capacity to fulll the KDIF’s mission-critical function to reimburse depositorsin timely and orderly manner, 3) to facilitate the provisions for replenishment of special reserve for payouts andstrengthen the nancial position, 4) to envisage implementation of integrated protection scheme, 5) to strengthen therisk assessment practices and controls over the KDIF’s operations,6) to intensify the effort in increasing public awarenessof deposit insurance system and understanding of the core principles of deposit insurance in general, 7) to facilitatethe rules, policies and internal procedures specic to the KDIF’s key operations, 8) to cooperate with the Internationalprofessional community on the IADI platform, (9) to maintain high professional standards, skills and expertise of theKDIF’s employees.

Risk management

• The Board of Directors established ad-hoc Risk Management Committee.• Organizational structure was improved in terms of risk management and internal audit function.• Regular managerial reporting practice was set forth.• The Board of Directors elaborated and approved the Risk Management Procedures which establish the riskmanagement system (i.e. the system to handle the risks related to operations, nance, reputation, and compliance) asa comprehensive approach to handle the risks being inherent to the KDIF’s operations.• Controls over software security was substantially revised.

THE MAJOR DEVELOPMENTS, AND

FACILITATING THE DEPOSIT INSURANCE SYSTEM

The KDIF is staffed with specialists holding the academic degrees as candidate of science or master degree in law,economics and nance, applied mathematics and IT.The employees adhere to the standards of professional conduct and ethics as generally applied in public service.


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Development of the differential premium system

• In September, 2014 the KDIF continued revising the guidelines for determination of differential premium rates.The KDIF established a joint working group which gathered representatives of the KDIF Advisory Council memberbanks, as well as the representatives of the KDIF and the National Bank of Kazakhstan, including the experts fromthe Banking Sector Supervision Department, Financial Stability and Risk Management Department, and Research andStrategic Analysis Department. The objective of this working group is to comprehensively revise the methodology fordetermination of differential premium rates.• Under this assignment, in 2014 the KDIF commenced processing of datasets and testing the statistical data. Allquantitative indicators of the BATA DPS were assessed against their economic signicance.

Ensuring capacity to reimburse depositors

• The KDIF updated the “SalT Inspect” Information System and accomplished compliance verication checks of theinsured deposits reporting database to the KDIF’s requirements with 1 member bank. The KDIF is planning to put “SalT Inspect” Information System into commercial operation during the 1 semester of 2015.• In the end of 2014, the KDIF accomplished operational testing of “SalT Inspect” Information System in coordinationwith the ad-hoc commission dedicated to putting the property and equipment and intangible assets into operation.• The KDIF accomplished compliance verication checks of the banks’ insured deposits reporting databases to therequirements set forth in the Contract of Adhesion with 6 banks, 1 being follow-up repeated examination.

Enhancing International relations

• During series of bilateral meetings with the representatives of Deposit Insurance Agency of Russian Federation,the KDIF’s senior management and expert staff obtained consultations regarding bank liquidation, particularlythe liquidation procedures administration, legal and judicial claim administration in banks in liquidation, as well asdevelopment of ad-hoc software.• The KDIF signed memoranda on mutual understanding and cooperation with the Deposit Insurance Agency ofRussian Federation, Azerbaijan Deposit Insurance Fund and Savings Deposit Insurance Fund of Turkey.

• In the course of sharing best practices and expertise in deposit insurance, the representatives of the KDIFwere taking part in numerous International conferences and seminars covering industry specic issues, includingbank nancial position assessment (supported by Asian Development Bank program for the nancial regulators’staff, in Manila city, Philippines), bail-in implications for bank insolvency resolution (25 – 26 June, Warsaw, Poland),investment management applied to reserve assets (12 – 14 November, in Bogota, Columbia), target fund reserveratio and investment management strategies (9 – 11 December, Tirana, Albania), International capacity buildingopportunities for the developing deposit insurance organizations (2 – 4 December, Seoul, South Korea).• The KDIF’s representatives were taking part as speakers or moderators at Technical Seminar concerningestablishment and enhancement of differential premium system hosted by Azerbaijan Deposit Insurance Fund, and atthe Asia Pacic Regional Committee Conference on bail-in implications in bank insolvency resolution.• 7 – 10 December, 2014, senior management and experts of Azerbaijan Deposit Insurance Fund visited Almaty toparticipate in Technical Seminar “Risk-Based Funding of Deposit Insurance System”. In the course of the seminar, seniormanagement and expert staff of the KDIF and the ADIF discussed practical issues of development and implementationof differential premium system. In parallel, the participants discussed the issues of development and administrationof ad-hoc information systems and software dedicated to streamlining the calculations.

• The representatives of the KDIF were taking part in numerous online seminars hosted by Azerbaijan DepositInsurance Fund (the chairing organization of the IADI Eurasia Regional Committee) on various issues in bankliquidation, development of differential premium system, and maintaining public awareness of deposit insurance.• The senior experts of the KDIF were taking part in Joint Working Group for revision of the IADI Core Principlesfor Effective Deposit Insurance Systems. The Joint Working Group gathered the representatives of Basel Committeeon Banking Supervision, the European Commission and European Forum of Deposit Insurers. The revised documentreplaced the previous version in the Financial Stability Forum Compendium of Standards.


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Distribution of customer deposits by categories(as of 01 January, 2015)

According to the reporting data of the DIS member banks, as at 1 January, 2015, term deposits take major share in

aggregate customer deposit balances. Term customer deposits comprised 3.9 trillion tenge, or 89.2% share in aggregate

deposit balances, with 512.6 billion tenge, or 15.0%, gain being reported over the year. Deposit balances on current and

card accounts take a lesser share of 10.4%, with 3.8 billion tenge decrease being reported over the year. Customer call

deposits take a share of 0.4% of the aggregate deposit balances, with 16.6 billion decrease being reported over the year.

Gain in aggregate customer deposit balances mainly derives from 841.4 billion tenge (77.0%) increase in large term

deposits in foreign currency over 15 million tenge in equivalent. In the meantime, net increase in large term deposits

over 15 million tenge in equivalent comprised 405.2 billion tenge, or 23.6%, resulting from decrease in these deposits in

national currency by 436.2 billion tenge (-70.4%). Customer term deposits under 5 million tenge increased by 84.0 billion

tenge, or 6.9%, while customer term deposits over 5 million tenge and under 10 million tenge increased by 23.4 billion

tenge (6.6%).

Changes in the deposit insurance system membership

The active legislation of the Republic of Kazakhstan states that all banks which are licensed for accepting deposits

and opening and maintenance of bank accounts of individuals shall attain membership in deposit insurance system on

compulsory basis, excluding for Islamic banks. As of 31 December, 2014 37 banks out of total 38 banks were members of

the deposit insurance system.

During the reporting year, two banks attained membership in deposit insurance system. JSC “Eximbank Kazakhstan”

and JSC “Bank Astana-nance” received a Deposit Insurance System Member Bank Certicate No. 43 and 44,dated 26

February and 2 April, 2014, respectively.

Furthermore, after state re-registration following changes in ownership the names of certain banks changed. In

February, 2014, JSC SB “TAIB Kazakh Bank” was re-named as JSC “Capital Bank Kazakhstan”, while in November, 2014

JSC SB “HSBC Bank Kazakhstan” was re-named as JSC “Altyn Bank” (subsidiary bank of JSC “Halyk Bank of Kazakhstan”).

47,8%

0,4%

10,4%29,5%

8,5%

3,4%

Term customer deposits under 5 million tenge

Term customer deposits 5 – 10 million tenge

Term customer deposits 10 – 15 million tenge

Term customer deposits over 15 million tenge

Demand deposits

Current and card accounts


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25 September, 2014 the Board of Directors approved the KDIF Strategic Development Plan 2014 – 2016. The Strategic

Development Plan is aimed at establishing the goals and objectives of top priority for further development of deposit

insurance system in the Republic of Kazakhstan for the three forthcoming years.

The strategic development objectives are established on the basis of comprehensive approach to strategic planning

which considers major risks attributable to the KDIF’s operations as well as the effective risk mitigation measures and

the outlook of further enhancement of the core operations of the KDIF to ensure transition of the Kazakhstani deposit

insurance system to the next quality stage in its development.

Among the major strategic development objectives of the KDIF being provided for in the Strategic Development Plan

are the following:

• to implement the provisions of the 2030 Financial Sector Development Concept of the Republic of Kazakhstan

through enhancement of legislation that governs deposit insurance, including assigning the liquidation and insolvency

resolution functions to the KDIF at the legislation level, providing for use of the deposit insurance system’s funds

in those operations (provided that the KDIF is directly involved in bank insolvency resolution as going concern, and

cost of insolvency resolution does not exceed the liquidation cost, which is duly documented), further increasing the

maximum coverage limit, considering the issue of extension of deposit insurance coverage to current accounts of legal

entities;

• to ensure operational capacity to fulll the KDIF’s mission critical responsibilities to reimburse depositors in the

event of a member bank failure in timely and orderly manner;

• to develop the provisions for sustainable accumulation of the special reserve for payouts, and ensure solvency;

• to consider implementation of integrated protection scheme which extends the Government guarantee to

consumers in certain types of insurance;

• to strengthen the risk assessment and analysis practices and controls over the KDIF’s operations;• to take intensied effort in maintaining public awareness of deposit insurance and improving general understanding

by people of the deposit insurance principles.

Furthermore, in the forthcoming year the KDIF is planning to continue active cooperation with its foreign partner

organizations on the platform of International Association of Deposit Insurers (IADI) through participating in various

standing and ad-hoc committees, working groups, research studies and technical surveys, as well as seminars and

conferences held by IADI and its member organizations.

Moreover, the KDIF is planning to continue its efforts toward enhancement of rules and procedures, as well as internal

procedures related to the core operations of the KDIF, such as ensuring timely and orderly reimbursement of depositors,

participating in temporary administration, liquidation commission and creditor committee, assessment of banks’ nancial

position for further processing regular premiums, accumulation of special reserve for payouts via effective investment

management operations.

In the forthcoming period, raising the competence and professionalization of staff is also an important issue for theKDIF’s capacity building being critical for the KDIF in fullling its responsibilities.

Enhancement of risk management system

In view of the need in ef cient risk management system, in 2014 the KDIF made revision of, and approved a revised

version of the Risk Management Administration Rules.

The critical objective for the risk management system is to provide for ensuring effective fulllment by the KDIF of

its operations related to reimbursing depositors in the event of a member bank failure, accumulation of special reserve for

payouts, commitments to sustaining the nancial system stability according to the effective legislation via mitigation of

negative developments related to the insured event.

The risk management system is aimed at identifying, assigning the relevance level and managing (mitigating) the

major risks attributable to operations, nance, reputation and compliance.

DEVELOPMENT STRATEGY 2014 – 2016


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The KDIF’s risk management system implies a comprehensive approach to continuous and iterative process of

receiving to-date and unbiased data regarding the potential and occurred risks, as well as the processes of assigning

the level and the extent of effect on KDIF’s current operations, regular managerial reporting on risks, development and

implementation of the risk mitigation measures, coordination of risk management operations of the KDIF’s units, and

streamlining and improving the risk management processes.

One of the core functions performed by the KDIF according to the effective legislation is to ensure the adequate level

of special reserve for payouts dedicated to reimbursing depositors in the event of a member bank failure, thus assessment

of relevance of risks, particularly the most critical nancial risk, shall be made on the basis of Internationally recognized

principles and implementation of global best practices.

Risk management system implies ongoing monitoring of risks attributable to compliance and reputation on the basis

of external legal and media environment, as well as having in place the relevant action plans, including those ensuring

prompt response.

In 2014, following the resolution of the National Bank, a position of risk manager was provided for in the KDIF staf ng.

By the same resolution, Internal Audit Of ce was established. These restructuring and additional staf ng is primarily aimed

at ensuring continuity of the KDIF’s operations, risk management and risk prevention.

With a view to ensure effective implementation of the risk management provisions, in the end of 2014 the KDIF

Board of Directors established the Risk Management Committee within its structure. This measure will ensure the Board of

Directors being continuously aware of the risk management system developments and the KDIF senior management being

able to take prompt action to address the risk management related issues.

Apart of that, the Risk Management Administration Rules provide for direct participation of the Board of Directors

in decision making regarding the risk management via prompt information delivery and managerial reporting on the

risks inherent to the KDIF operations for the Risk Management Committee, which is supposed to become an effectivecommunication platform in the risk management areas.

Information security

The ah-hoc KDIF proprietary software, namely the information systems “SalT Inspect”, “SalT Payout”, “BATA” are

used with a view to ensure streamlined and optimized operations. Furthermore, within the forthcoming periods the KDIF

is planning to launch additional information systems to streamline internal operations processes.

In this sense, in order to ensure information security, as well as to allow classication and mitigation of risks

attributable to software development and implementation, the National Bank took the decision to establish the IT Of ce

within the KDIF structure and to develop the respective regulations and guidelines in information security. Following this

resolution, the KDIF introduced, and obtained approval of Information Security Guidelines and Rules for InformationSystems Development, Updating, Completion, Implementation and Administration.

Particularly, the Information Security Guidelines outline the objectives related to ensuring secure information systems

functioning, as well as the core objectives in implementation of the security systems, including organizational and technical

security measures. The Rules also outline general safekeeping and record-keeping requirements applied to software, as

well as the reserve and archive administration procedures, reserving method selection, reserve copying and archiving

administration processes, data recovery, assignment of user rights, anti-virus software requirements. The Rules also

outline the working order for Internet and e-mail users.

In its turn, the Rules for Information Systems Development, Updating, Completion, Implementation and Administration

outline the key areas of work to ensure organizational and technological processes for development of automated

information systems. The Rules provide for the technology and order of record-keeping applied in information systems

development, establish the order for delivery of requests for development, updating, completion and implementation of

information systems (i.e. the life-cycle of information systems), as well as the administration and support operations for

information systems.


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Novelty in the documents governing deposit insurance system

Contract of Adhesion

Rules for determining and establishing the order of payment of compulsory regular, additional andextraordinary premiums

Rules for compliance verication of the automated databases for recording insured deposits of the DIS

member banks with the standard requirements by the KDIF as established with the Contract of Adhesion

Methodology for establishing the maximum recommended interest rates on the newly accepted bank

deposits of individuals

Newly introduced documents

Risk Management Administration Rules

Information Security Guidelines

Rules for Information Systems Development, Updating, Completion, Implementation and Administration

Methodology for determination of the target reserve ratio and amount

Development of legislation

Fulllment of goals, objectives and functions of the compulsory deposit insurance system is governed by Constitution

of the Republic of Kazakhstan, the Civil Code, the legal and regulatory provisions, resolutions of the KDIF’s Sole Shareholder

or Board of Directors. In this sense, the KDIF remains actively involved in development of legislation governing deposit

insurance.

In August 2014, Government of the Republic of Kazakhstan approved 2030 Financial Sector Development Concept.

The Concept is aimed at building the nancial sector being upmost effective in its nancial intermediation function for

society, State, and nancial organizations. Herewith, in identication areas for improvement, developments that are

currently taking place in the Global context have to be addressed as well. The KDIF, within the limits of its jurisdiction,took part in elaboration of the Financial Sector Development Concept 2030.

As part of the measures aimed at addressing bank insolvency resolution issues, provisions for bank insolvency

resolution as going concern via conservation and purchase-and-assumption transaction (including transfer of insured

deposits) will be elaborated. Those provisions are supposed to be ef cient and sensitive in addressing the needs of the

market participants, and comprehensible enough for depositors. In this framework, as well as a measure of the deposit

insurance system development, the following arrangements will be put into practice:

1) assignment of the bank insolvency functions (after the withdrawal of banks’ license) to the KDIF,

2) ensuring use of the deposit insurance system funds provided that the KDIF is directly involved in the bank

insolvency resolution processes as going concern, and documentary verication that the resolution costs not exceeding the

liquidation costs being made,

3) considering further increase of the maximum coverage limit according to the Core Principles for Effective Deposit

Insurance Systems (the maximum coverage limit is established in such a way that 90% or more accounts is fully covered,and under 50% of total deposit balances is covered),

4) considering extension of coverage to current accounts of legal entities.

In line, legislation governing banking businesses will be enhanced in part of establishing grounds and criteria for

implementation of measures aimed at bank insolvency resolution as going or gone concern (purchase and assumption

transaction, establishment of bridge bank, forced obligations restructuring and bail in, etc.), presumably within the period

of 2016 – 2018.

Enhancement of bank liquidation procedures implies establishment of a revised regimes of institutional mandate and

powers, along with optimization of procedures of writing unrecoverable liabilities off by the receiver.


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In 2014, in order to fulll its mission to ensure protection of rights and lawful interests of depositors and increasing

public trust in domestic banking system and, in a broader sense, to contribute to stability of banking system, the KDIF was

taking active part in drafting amendments to the Law of the Republic of Kazakhstan “On compulsory insurance of deposits

placed with second-tier banks in the Republic of Kazakhstan” in part of increasing the maximum coverage limit from 5

million up to 10 million tenge.

Furthermore, in the framework of general course for deposit insurance system development, the KDIF was actively

involved in assignments under direct supervision of the National Bank, particularly the following:

1) Financial Sector Assessment Program by the International Monetary Fund,

2) Elaboration of Rules for procurement of good and services by the National Bank of the Republic of Kazakhstan

and its subsidiary legal entities,3) Discussion of problem issues related to JSC “Valut-Tranzit Bank” in the process of liquidation.


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The National Bank is the founder, the sole shareholder, and higher governing body of the KDIF.

According to the KDIF’s Corporate Charter, Deputy Governor of the National Bank Mr. Nurlan Kussainov is empowered

to take all decisions falling within the purview of the Sole Shareholder’s competence.

In 2014, the KDIF’s Board of Directors consisted of 8 members, three being Independent Directors and one being

the KDIF’s Chairman. Deputy Governor of the National Bank of the Republic of Kazakhstan Mr. Kuat Kozhakhmetov is the

Chairman of the Board of Directors.

As of the end of 2014, three Committees of the Board of Directors were established:

1) Strategic Planning And Internal Audit Committee,

2) Risk Management Committee,

3) Staf ng, Remuneration And Social Affairs Committee.

The Risk Management Committee was established in 2014.

During 2014, 6 meetings of the Board of Directors were held, 5 being in-person meetings and 1 being absent vote.

The Board of Directors performance in 2014

Strategic Development Plan 2014 – 2016 was approved.

The KDIF was assigned to elaborate suggestions regarding making amendments and addenda to the Law of the

Republic of Kazakhstan “On compulsory insurance of deposits placed with second-tier banks in the Republic of Kazakhstan”

in part of increasing the maximum coverage limit for deposits in national currency up to 5 million tenge (coverage

provisions for deposits in foreign currency remaining unchanged, i.e. 5 million tenge),

Amendments and addenda to the Rules for determining the value and order of payment for the compulsoryregular, additional and extraordinary premiums were approved,

The Risk Management Committee was established under the KDIF Board of Directors,

Internal Audit Of ce was established within the organizational structure of the KDIF, a risk manager function was

provided for,

Amendments and addenda to the Contract of Adhesion were approved,

Investment Management Policy and Investment Management Strategy were approved,

Risk Management Guidelines were approved,

The Methodology for determination of the target reserve ratio and amount was approved,

Information Security Guidelines and Rules for Information Systems Development, Updating, Completion,

Implementation and Administration were approved,

Amendments to the methodology for establishing the maximum recommended interest rates on the newly

accepted bank deposits of individuals were appoved,

The maximum recommended interest rates on newly accepted bank deposits of individuals were approved,

The Board approved amendments and addenda to the procedures for compliance verication of the automated

databases for recording insured deposits of the DIS member banks against the standard requirements as established with

the Contract of Adhesion,

Amendments and addenda to the Employees Remuneration Guidelines were approved,

An internal procedure Staff Travel Guidelines was approved.

CORPORATE GOVERNANCE


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Mr. Nurlan Kussainov currently holds the position of the Deputy Governor in theNational Bank of the Republic of Kazakhstan.

Since 2010 to 2011, Mr. Kussainov was holding the position of Senior Executive ViceChairman of the Management Board, and since 2011 to 2013 was serving as Chairman ofthe Management Board in Development Bank of Kazakhstan. Up to 2010, was serving asManaging Partner at Al Falah Capital Partners (the 500 million US dollars private equityfund in Kazakhstan). Since 2003 to 2004 in the capacity of coordinator of the workinggroup under Ministry of Industry and Trade of the Republic of Kazakhstan was taking part incoordination of the negotiation processes on the Republic of Kazakhstan’s WTO accession.

Graduate of Kazakh State Academy of Management majoring in International economicrelations (1997). Holds Master of Science degree in management with Stanford GraduateSchool of Business (under Sloan Master Program). Graduate of the Economic DevelopmentPolicies Program by Japan International Cooperation Agency.

Mr. Kuat Kozhakhmetov currently holds the position of Deputy Governor in the NationalBank of the Republic of Kazakhstan.

Earlier, since 2008 Mr. Kuat Kozhakhmetov was serving as Deputy Chairperson of the Agency of the Republic of Kazakhstan on regulation and supervision of nancial marketand nancial organizations, and since 2011 was holding the position of Chairman of theCommittee for Control and Supervision of the Financial Market and Financial Organizationsof the National Bank of the Republic of Kazakhstan.

Since 2001 to 2006 was serving as Deputy Chairman of the Management Board, andlater on as Chairman of the Management Board in JSC “Tsesnabank”.

Graduate of Kazakh State Academy of Management after Turar Ryskulov (diploma with

honors, 1994). Awardee of the Jubilee Medal “20 Years of Independence of the Republic ofKazakhstan” (2011), Breastplate «Honored Employee of the National Bank of Kazakhstan»(2011), Order «Kurmet» (2010).

Mr. Oleg Smolyakov currently holds a position of Deputy Governor in the National Bankof the Republic of Kazakhstan.

Mr. Smolyakov has extensive experience working for the National Bank for over 16years, and since 2006 Mr. Smolyakov has been serving as the nancial stability departmenthead. Earlier, Mr. Smolyakov was working at the Balance of Payments and CurrencyRegulation Department, particularly since 2002 was serving as a deputy director of theBalance of Payments Department.

Graduate of Kazakh State Academy of Management majoring in economics (1996).Holds degree of Master of Science in Government Policy with Graduate Institute of Political

Science (Japan), Master of Science in nance and economics with University of Warwick(UK).

Mr. Bakyt Kogulov was appointed Deputy Chairperson of the KDIF on 2 April, 2014, andlater on, 30 April, 2014. Mr. Kogulov was appointed Chairman of the KDIF.

Mr. Kogulov has earned extensive experience working for various departments of theNational Bank in the eld of banking and insurance regulation and supervision. Over 15years Mr. Kogulov has been serving at senior managerial positions.

Graduate of Kazakh State Academy of Management majoring in economics (1997).

NURLAN KUSSAINOV - the representative of the Sole Shareholder

KUAT KOZHAKHMETOV – Chairman of the Board of Directors

OLEG SMOLYAKOV

BAKYT KOGULOV – Chairman, Kazakhstan Deposit Insurance Fund

The KDIF Board of Directors (as of the end of 2014)


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Mr. Mukhtar Bubeyev currently holds the position of Research and Strategic AnalysisDepartment Director in the National Bank of the Republic of Kazakhstan.

Earlier, since 2011 Mr. Bubeyev was holding the position of Deputy Chairperson ofthe Committee of the National Bank for control and supervision of nancial market andnancial organizations. Later on, in 2014, Mr. Bubeyev was appointed Acting Chairman ofthe Committee.

Graduate of London School of Economics and Political Science.

Mr. Beisenbek Ziyabekov has extensive experience working over 30 years in agriculturecredit, starting with the U.S.S.R. State Bank, and later on holding senior managerial positionsat Kazagroprombank. Since January, 2011 Mr. Ziyabekov has been holding a position of Vice-President of the Inter-State Association of Agricultural Industrial Banks of the CIS(headquartered in Moscow). During 1993 – 1994 was serving as Deputy Governor of theNational Bank of the Republic of Kazakhstan.

Mr. Ziyabekov has over 10 years of academic experience, during 2007 – 2008 being theRector of the Academy of Banking.

Ms. Slava Sizova has extensive experience of over 30 years both in industry and inpublic service, 17 years serving as Legal Department Deputy Director in the National Bankof the Republic of Kazakhstan.

Doctor of Economics, professor.Mr. Serik Akhanov has been serving as Chairman of the Financial Institutions Association

of Kazakhstan Council since 2004. Member of the Board of Directors of major Kazakhstanibank JSC “Kazkommertzbank” (since 2011), Council of Entrepreneurs under the Presidentof the Republic of Kazakhstan.

Mr. Akhanov has very broad experience in public service and nancial sector. Mr. Akhanovwas serving on various positions at Council of Ministers of Kazakh SSR (1990 to 1991), thePresidential Administration (1991 – 1993), in capacity of Deputy Minister of Economy (1993 – 1994 and 1999 – 2001), Senior Executive Vice Chairman of the Management Board at JSC “Eximbank Kazakhstan” (1994 – 1997 and 2001), Deputy Governor of the National Bank ofthe Republic of Kazakhstan (1997 – 1999), Vice-Minister of Finance (1999).

In 2002 – 2003 was serving as a member of the Board of Directors of JSC “Kazkommertzbank”, in 2001 – 2002 and 2003 – 2004 serving as councilor to the Chairpersonof the Management Board of JSC “Kazkommertzbank”.

MUKHTAR BUBEYEV

BEISENBEK ZIYABEKOV– Independent Director

SLAVA SIZOVA – Independent Director

SERIK AKHANOV – Independent Director


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The KDIF Advisory Council

The Advisory Council is a collegial advisory authority incorporated in the KDIF governance structure which is established

with a view to representing interests of the deposit insurance system member banks. The Advisory Council consists of

representatives of the DIS member banks.

The core objectives of the Advisory Council are as follows:

1) consideration and delivery of suggestions concerning the key development areas for deposit insurance system in

the Republic of Kazakhstan from the DIS member banks position,

2) interim approval of the drafted amendments and addenda to the Contract of Adhesion, the Rules for determining

and establishing the order of payment of compulsory calendar, additional and extraordinary premiums, and other tentative

documents being submitted to the KDIF Board of Directors for approval,

3) communication of suggestions concerning settling uncertainties, imprecisions and conict arising in fulllment of

their respective obligations by the member banks within the provisions of the Contract of Adhesion,

4) delivery of suggested provisions to prevent possible cases of failure of the member banks to fulll their respective

obligations under the Contract of Adhesion, including payment of premiums and nes.

The Advisory Council members are elected annually at General Meeting of the DIS member banks.

The Advisory Council Chairperson shall be elected annually from among its members. In 2014, a representative of JSC

“Halyk Bank of Kazakhstan” was elected Chairperson of the Advisory Council.

The Advisory Council performance in 2014

In 2014, 9 meetings of the Advisory Council were held. The agenda items for the meetings were the following:

1) amendments and addenda to the Rules for determining and establishing the order of payment of compulsory

regular, additional and extraordinary premiums,

2) practicability of revising the maximum recommended interest rate on the newly accepted bank deposits ofindividuals,

3) the order of calculation of nominal interest rate for insured deposits,

4) member banks’ suggestions on introducing amendments and (or) addenda to the guidelines for calculation of the

differential premium rates for the compulsory regular premiums,

5) practicability of applying greater accountability of the DIS member banks if higher interest rates on newly accepted

deposits than those recommended by the KDIF are offered,

6) perspectives of joint effort of the KDIF and the DIS member banks in maintaining public awareness of deposit

insurance system via the banks’ marketing and PR campaigns,

7) enhancement of procedures related to compliance verication checks of the member banks’ automated insured

deposit recording databases, particularly via installment and use of the “SalT Inspect” Information System.

In consideration of the agenda issues, the KDIF Board of Directors shall consider the views of the Advisory Council.In 2014, on the Advisory Council platform two joint working groups were launched, one being dedicated to taking

coordinated action in maintaining public awareness, and another one being dedicated to enhancement of differential

premium rates calculation guidelines.


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Advisory Council in 2014

MERUERT KARDZHANOVA

JSC “Halyk Bank of

Kazakhstan”

Chairperson of the Advisory

Council in 2014, Customer and

Agency Services Marketing

Department Director

TATYANA BELOVA

JCS “Alliance Bank”

Retail Banking Department

Director

ANTON LEE

JSC “ATF Bank” Managing Director – Member of

the Management Board

LARISSA ZDANOVICH

JSC “Bank CenterCredit”

Planning and Finance

Department Director

BERTRAN GOSSAR

JSC “Eurasian Bank”

Managing Director – Retail

Banking Strategy Department

Director

IRINA STEPANOVA

JSC “Bank RBK”

Managing Director

ALEXEY SYCHEV

JSC “Kazkommertzbank”

Retail Banking Department

Director

ANDREY TIMCHENKO

JSC Subsidiary Bank “Sberbank”

Deputy Chairman of the Board –

Retail Business Development

AYGERYM ZHAPPAROVA

JSC “BTA Bank”

Managing Director – Member of

the Management Board

KAYRAT ALTYNBEKOV

JSC “Housing Construction

Savings Bank of Kazakhstan”

Deputy Chairman of the Board


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Observers

BULAN KOPESHOV Managing Director, JSC “AsiaCredit Bank”

PAVEL MIRONOV Managing Director, JSC “Kaspi Bank”

DINA KALIYEVA Retail Banking Department Director, JSC “Temirbank”

RUSTAM YAKUPBAYEV First Deputy Chairman of the Board, JSC “Tsesnabank”


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The KDIF revises the differential premium calculation guidelines on ongoing basis, providing for consideration of

the suggestions and professional judgment received from the member banks and the current situation in the domestic

banking sector and the bank reporting being approved by the nancial regulator. The latest comprehensive revision of

the differential premium rates calculation guidelines was conducted in 2013. Since September 2013 up to August 2014

adjustment and update of the “BATA” Information System were made following the approved amendments and addenda

to the Rules for determining and establishing the order of payment of compulsory regular, additional and extraordinary

premiums.

Globally, as of the end of 2014 the differential premium system was implemented in 22 IADI member organizations,

compared to 58 organizations applying at rate, and 13 organizations applying these two approaches combined.

In September, 2014, the KDIF continued its work towards enhancement of the differential premium rate calculations

guidelines, to fulll this task a joint working group was established. At the KDIF Advisory Council meeting preliminary

discussion of the member banks’ suggestions on amendments and addenda to the Guidelines was taking place, a tentative

working group membership was agreed. The objective of the joint working group is to complete comprehensive revision

of the differential premium rate calculation guidelines. The joint working group comprised representatives of the Advisory

Council member banks, as well as representatives of the National Bank from the Banking Supervision Department,

Department of Financial Stability and Risk Management. Some 45 various suggestions from the joint working group

members were delivered, including those related to threshold values of the indicators.

In October, 2013 joint working group meeting was conducted to consider in detail all suggestions on this issue, so

that the KDIF was able to deliver all required data and make calculation of the indicators being suggested and to further

complete statistical analysis and testing. As part of this job, the KDIF accumulated the body of data relevant to both

active and proposed indicators over 13 periods given on a monthly basis. In the meantime, the KDIF commenced work

on cross-testing of the accumulated datasets for its further statistical tests. Furthermore, all suggested quality indicatorswere tested against their economic relevance for further use in calculation of total accumulative scores and the assigned

classication groups.

Differential premium rates scale

lassication group B C D E S

Differential premium rate (% of the total insured

deposits balances)

0,04 0,08 0,11 0,19 0,38 0,5

DIFFERENTIAL PREMIUM SYSTEM

The KDIF implemented the differential premium rate system in 2007.

The Differential Premium System as effective builds upon comprehensive approach to risk assessment.

Particularly, 70% of the total cumulative scores are attained via qualitative indicators, while other 30% of the scores

are qualitative indicators.

The advantage of using both quantitative and qualitative indicators is that those indicators combined provide

for the upmost ef cient and comprehensive approach to structural assessment of risks inherent to the banking

businesses and process larger scope of available information.

Following the calculation results of these indicators, total cumulative score is calculated for any single member

bank. Depending on the total score, a bank should be assigned a classi cation group, each being assigned a

particular premium rate. Therefore, the higher the level of nancial soundness and the lesser the level of risk is, thelower premium rate shall be assigned.


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The differential premium system “BATA” builds upon the key nancial indicators and implies 6 classication groups,

each being assigned a respective premium rate. Over the reporting year, 9 member banks strengthened their positions and

moved up to a group with lower premium rates, while 3 member banks settled the breach of the recommended interest

rates offered on new insured bank deposits, and thus left the classication group “S”, and 23 member banks retained their

positions. Furthermore, in 2014 two banks attained membership in deposit insurance system, which implies being assigned

classication group “D” for two consecutive years.

Following the results of the 4 quarter, 2014, the deposit insurance system member banks were distributed among the

classication group as follows: Group A taking a share of 5.4% (2 banks being assigned), 18.9% Group B (7 banks), 40.5%

Group C (15 banks), 27.0% Group D (10 banks), 5.4% Group E (2 banks), and 2.7% Group S (1 bank).

Distribution of meber banks among the DPS classication groups

20

1 1 1 12

32

67 7

14

1716

18

4 . 2013Qr 1 . 2014Qr 2 . 2014Qr 3 . 2014Qr 4 . 2014Qr

Group А (0,04%)

В (0,08%)Group

С (0,11%)Group

(0,1 %)Group D 9

(0, %)Group D 38

(0, %)Group S 5

15

1112

109

10

1 12

12

5

32

1 10


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The KDIF reported increase in net income by 3.2 billion tenge over 2000 – 2013, the share of the net income in thespecial reserve structure comprising 19.7%, compared to 22.8% as of the end of 2013. The amounts payable in settlementthe KDIF’s claim to the liquidation commissions of OJSC “Komirbank”, JSC “Nauryz Bank Kazakhstan” and JSC “Valut-Tranzit

Bank” increased by 920 million tenge, and comprised 9.4 billion tenge.By resolution of the Sole Shareholder, the special reserve for payouts was increased by 8.5 billion tenge by the means

of the KDIF’s expenses under the provisions of subparagraph 1, paragraph 1, Article 22 of the Law of the Republic of

Kazakhstan “On compulsory insurance of deposits placed with second-tier banks in the Republic of Kazakhstan”. In 2014,the National Bank of the Republic of Kazakhstan increased the KDIF’s authorized capital balance by 10%, or by 177.2 billiontenge.

The maximum amount which could be allocated to reimbursing depositors in the event of a member bank failure

comprises 320.9 billion tenge.

Alternative sources in accumulation of special reserve for payouts

The effective legislation provides for allowance in part of the KDIF’s authorized capital as a reserve nancing sourcein the event of insuf ciency in the special reserve funds. According to the National Bank Strategic Development Plan 2011

– 2015, the National Bank shall increase the KDIF authorized capital by 10% on an annual basis.5 December, 2013, amendments to the Law of the Republic of Kazakhstan “On compulsory insurance of deposits

placed with second-tier banks in the Republic of Kazakhstan” were introduced. According to the amendments, the share

of the authorized capital which upon resolution of the Sole Shareholder is allowed in reimbursing depositors in the eventof a member bank failure in case of insuf ciency of the special reserve funds was increased from 50 up to 70%. This legalnovelty became effective 1 January, 2014.


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INVESTMENT MANAGEMENT

Implementing conservative investment management strategy

The KDIF’s investment management strategy may be assessed as highly conservative. The KDIF shall adhere to threeprinciples in investment management, namely safeguarding its assets, risk mitigation and mitigation of risks speci c toreporting losses, and increasing yields on investments.

The National Bank of the Republic of Kazakhstan serves as trustee, and delivery of services is governed by investmentmanagement agreement.

The KDIF’s Investment Management Policy is approved by resolution of the Board of Directors (minutes No. 5 dated 27

November, 2014) and is deemed to be the document which governs the terms and conditions in investment managementwith the view to attain target return on investment, mitigation of risks related to reporting losses and ensuring assets ofhigh liquidity.

Since 1 January, 2014 the KDIF introduced accounting of special reserve assets and proprietary assets on a segregatebasis:

1) proprietary assets portfolio build up by the means of the KDIF authorized capital,2) special reserve assets portfolio.The proprietary assets portfolio is build up by nancial instruments listed in the domestic market and denominated

in national currency. The special reserve assets are allocated in nancial instruments denominated both in national andforeign currency, within the following limitations:

1) nancial instruments denominated in foreign currency taking share 25% up to 35% of total special reserve assets,

2) nancial instruments denominated in national currency taking share of 65% to 75% of the special reserve assets. As of the end of the reporting period, the present value of assets comprised 416.9 billion tenge (increase by 78.8

billion tenge, or 23.3%, over the year). In the net income composition structure, investment income reported on nancial

instruments in national currency take the share of 57.9%, net currency revaluation gain taking the share of 41.6%, and

investment income reported on nancial instruments denominated in US dollars taking the share of 0.32%. In the meantime,the weighted average yield on nancial instruments denominated in national currency comprised 6.09% (duration of 5.21),

the same indicator for nancial instruments denominated in US dollars being 0.47% (1.2 duration).

Approved nancial instruments in national currency for allocation of special reserve assets andthe KDIF proprietary assets:

Sovereign bonds of the Republic of Kazakhstan; Repurchase agreements traded on stock exchange and OTC (sovereign bonds of the Republic of Kazakhstan

being solely accepted as collateral); Deposits placed with the National Bank of the Republic of Kazakhstan;

Financial instruments issued by National Holding Companies and National Companies (not exceeding 30%of the proprietary assets portfolio or 10% of the proprietary assets portfolio, respectively).

Approved nancial instruments in foreign currency:

US Treasury bonds with maturity under 5 years (70% to 100% of the special reserve assets portfolio); Sovereign bonds and bonds of International Finance Organizations; Corporate bonds with minimum credit rating A/A2 (up to 30% of the special reserve portfolio, up to 10% of

the special reserve portfolio per one issuer organization); Deposits (maturity under 1 year) with non-resident banks provided that the bank is assigned minimum

credit rating A+/A1.


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As of the end of reporting period, present value of the KDIF assets in investment management comprised 400.9 billiontenge (96.2% of the total assets). Following the 2014 results, investment income comprised 31.3 billion tenge (increase by64.7% over the year). Over 2014, present value of the KDIF assets increased by 73.7 billion tenge, or 22.5%.

Following the developments on the currency exchange market, banking sector, shifts in returns of certain nancialinstruments, as well as other factors, the KDIF shall revise its Investment Management Strategy.

Investment portfolio composition as of 31 December, 2014

Since 2008 on, the KDIF in coordination with the Government of the Republic of Kazakhstan and the regulatoryauthorities has been engaged in the investment income tax exemption effort. The KDIF repeatedly initiated the discussionwith the authorized units of Ministry of Finance, Ministry of Economy and Budget Planning and the National Bank of theRepublic of Kazakhstan. Furthermore, the KDIF actively participated in the meetings of the special task force for makingamendments to the Tax Code of the Republic of Kazakhstan, and initiated discussion of this issue at the meetings with therepresentatives of the Upper and Lower Chambers of Parliament of the Republic of Kazakhstan (Senate and Mazhilis). As aresult of this effort, the respective amendments to the Tax Code of the Republic of Kazakhstan were made. Simultaneously,amendment to Law “On compulsory insurance of deposits placed with second-tier banks in the Republic of Kazakhstan”was introduced setting up the provisions for segregated reporting of proprietary assets and assets of special reserve forpayouts.

The KDIF assets in the dynamics (2005-2014).

450

400

350

300

250

200

150

100

50

031

December2005

31December

2006

31December

2007

31December

2008

31December

2009

31December

2010

31December

2011

31December

2012

31December

2013

31December

2014

10,7 14,326,6

122,5

162,1

202,4

243,9

282,3

338,1

416,9

The KDIF assets


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In order to ensure ef cient fulllment of obligations associated with reimbursing depositors in the events and in theorder as established in the Law of the Republic of Kazakhstan “On compulsory insurance of deposits placed with second-tier banks in the Republic of Kazakhstan” and in compliance with the effective legislation, the KDIF shall verify compliance

of the banks’ automated insured deposit recording databases with the requirements of the KDIF. These actions aim atensuring completeness and accuracy of data, as well as at improving the quality of the depositors’ records in banks.

Since 2009, the KDIF commenced the examinations to verify compliance of the automated insured deposit reporting

databases in the member banks on regular basis. In total, over the period commencing 2009 to 2014, the KDIF havecompleted the examinations to verify compliance of the automated insured deposit reporting databases in 32 memberbanks, including 6 member banks in 2014, 1 examination being conducted repeatedly to verify elimination of the non

compliant practices which had previously been detected.

The compliance verication examinations are conducted via the “SalT Inspect” Information System which is theKDIF’s proprietary software developed in 2011. This software allows fast-tracking of the electronic deposit databases

quality, detecting errors in depositor identication data and account details, and keeping statistics records on errors beingdetected.

In the beginning of 2014, the “SalT Inspect” Information System was updated, and testing was processed on the

depositor database of a member bank a part of compliance verication checks. Update and completion was conducted ona monthly basis as provided for in the agreement with the software development vendor. By the end of 2014, the KDIF

conducted operational testing of “SalT Inspect” Information System in coordination with ad-hoc commission dedicated toputting the property and equipment and intangible assets into operation.

During 2014, the KDIF continued delivery of the “SalT Inspect” Information System to the member banks for

autonomous testing. Furthermore, following the decision of the KDIF Advisory Council, in order to fulll the opportunitiesfor the banks related to autonomous testing of their proprietary insured deposits reporting databases, the KDIF is planningto install the “SalT Inspect” Information System in all member banks.

The “SalT Payout” Information System is used in operations of the KDIF after forced liquidation of a member bank hascommenced, and automates the processes related to recording and control of quality of data delivered by the liquidationcommission of the bank in forced liquidation, recording and control of quality of the payouts reports delivered by the agent

bank, completeness of the depositors’ les which are submitted to the KDIF by the agent bank, including the documentsverifying accuracy of the payouts, and report generation for analysis and display of statistics on the uploaded information.Since 2014, the KDIF has been processing a series of tests to enable completion of the “SalT Payout” Information System

to ensure completion and improvement of this software.The KDIF is planning to put the software into commercial operation in 2 semester of 2015.Since July, 2014 the KDIF has been conducting operations specic to administration of possible additional payouts to

depositors of JSC “Valut-Trazit Bank”. Action Plan dated 14 November, 2014 was approved among the KDIF, the NationalBank and the liquidation commission.

In order to ensure operational capacity of the KDIF to process additional payouts to depositors of JSC “Valut-Tranzit

Bank” in timely and orderly manner, in the end of 2014 the respective stress-testing was processed to verify smoothoperation of the KDIF commencing from the date of adoption of the respective provisions in the legislation of the Republic

of Kazakhstan.Following the results of the stress-testing, the KDIF was able to take action to streamline the payouts processing tools

and provisions, namely:• Action Plan for the KDIF in the event of additional payouts processing by agent bank,

• Action Plan for the KDIF in the event of additional payouts processing via its own means.In stress-testing, special attention was paid to the following key objectives:• Generating depositor register,

• Selection of the agent bank for payouts,• Payouts processing.

Following the results of stress-testing, a step-by-step action plan was elaborated with regard to operations conductedby each unit involved in payouts, and the employees in charge are appointed per each item. The KDIF also drafted publiccommunication in Kazakh and Russian languages.

In the meantime, during the reporting year, the KDIF was actively involved in negotiation processes with National Post

Service Operator JSC “Kazpost” to tentatively address the issues in the event if none of the member banks comply withspecial requirements to the agent bank in accordance with the Agent Bank Selection Guidelines.

DEPOSITOR REIMBURSEMENT PROCEDURES


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As of 31 December, 2014 the total reimbursement amount to the depositors of JSC “Nauryz Bank Kazakhstan”comprised 680 million tenge, what accounts for 88% depositors’ claims against the KDIF.

By year-end 2014, the liquidation commission has settled the KDIF’s claim at 88%. Over the last 3 years, in the

liquidation proceedings of JSC “Nauryz Bank Kazakhstan” no payment to settle the KDIF’s claim was made by the liquidationcommission.

The total reimbursement paid out to the depositors of JSC “Valut-Tranzit Bank” comprised 13.87 billion tenge, or 98%

depositors’ claims against the KDIF.The remaining unsettled reimbursement amounts are liabilities on “dormant accounts” which are 0.01 tenge to 500-

1000 tenge in value, and which have not been demanded.

By 1 January, 2015, the liquidation commission of JSC “Valut-Tranzit Bank” has settled the KDIF’s claims at the amount

of 8 673 billion tenge, or 61.5%.

Reimbursing depositors of member banks in forced liquidation,as at 31 Dec., 2012

Member bank in forcedliquidation

Amountspayable KDIFto depositors

Reimbursement paid Liabilities settled by theliquidation commissions

(mill ion tenge) (million tenge) (thous. of depositors) (million tenge) (%)

JSC “Nauryz Bank Kazakhstan”(Court’s ruling dated 16November, 2005)

772 680 3,6 679,4 88

JSC “Valut-Tranzit Bank” (Courtruling dated 13 February, 2007)

14 103 13 876 63,2 8 673 61,5

In 2014, the KDIF was planning a target claim settlement ratio (arising from reimbursement of insured depositors)

from JSC “Nauryz Bank Kazakhstan” at the level of 90% of the total claim amount, JSC “Valut-Tranzit Bank” at the levelof 65% total claim amount. In 2014, the resulting mismatch with the outlook comprised 2% for JSC “Nauryz BankKazakhstan”, and 3.5% for JSC “Valut-Tranzit Bank”.

The core issues impeding failure to replenish the special reserve via the means of the liquidation commission liabilitiessettlement were certain issues related to accounts receivable recovery and poor performance in enforcement proceedings.

The issues related to accounts payable recovery in enforcement proceedings are:

• missing documents in original or in copy, including credit and leasing les,• missing agreements between the bank and its counteragents regarding real estate transactions in original,• denial by the court to take legal action following a request to initiate civil proceedings based on the fact that the

defendant is declared a fraudulent entity,

• absence of legal entity at its registered of ce,• exclusion of the State legal entities register of a limited liability partnership that holds registered rights to real

estate,• no access to the case le materials at the stage of preparation of court claims.The other issues include:

• Zero balances on current bank accounts of the accounts payable,• Insuf cient or missing liquidation property for full settlement of the claim,• Low market value of collateral and other property owned by the accounts payable,

• Lengthy fulllment of the court decisions by the court executors,• Loss of case le materials.

During 2014, the KDIF’s claims to the JSC “Valut-Tranzit Bank” liquidation commission were settled at the amount of920 million tenge. Resulting from zero cash balances at disposal of JSC “Nauryz Bank Kazakhstan” liquidation commission,no KDIF’s claims were settled.

LIQUIDATION COMMISSIONS OPERATIONS


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In compliance with the Law of the Republic of Kazakhstan “On compulsory insurance of deposits placed with second-tier banks in the Republic of Kazakhstan”, to contribute to the nancial system stability and to safeguard the rights andlawful interests of depositors in the event of a member bank failure is a mission critical responsibility of the KDIF. Infulllment of this mission, continuous effort to ensure maintaining public awareness of deposit insurance system shall bedeemed of equivalent status with the other objectives.

Thus, the KDIF shall seek greater awareness of the general public of deposit insurance, as well as positive recognitionof the KDIF as an Government agency for all groups of population.

In 2014, the KDIF was utilizing various media resources, including TV, radio, press (Republic-wide and re

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KDIF Annual Report 2014

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