The banking system in Belarus is highly regulated and mostly state-owned. Banks are used as a tool of the government to support different programs. The National Bank of Bealrus, the country's Central bank, is the regulator of the system. The main principles of banking activities are included Banking Code of the Republic of which came into force in October 2000.[1]
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a two tier banking system was established at the end of 1990 with the enacting of both the Law "On the National Bank of Belarus" and the Law "On Banks and Banking Activity in the Republic of Belarus". The National Bank of Belarus was established from the Belarusian branch of the former Soviet Gosbank. The second tier of banks consisted of two types of banks: specialist banks (which took the place of the Soviet specialist banks on the territory of the republic), and newly founded commercial banks. The first type of bank included Belagroprombank (which supplies credits to agriculture, Belpromstroirbank (credits to industry), Belarusbank (specializing in household deposits, financing budgetary programs and extending housing loans), Belbusinessbank (light industry and trade) and Belvnesheconombank (foreign trade)[2]
The number of newly founded commercial banks mushroomed in 1992–1994. Their development as market institutions was limited at the beginning of transition by a number of problems inherited from the past, such as a problem of bad debts, sectoral segmentation of specialized banks, and the absence of capital markets, and macroeconomic instability that undermined the credibility in the banking system. Sectoral sectoral segmentation of banks immediately brought to the surface the problem of creditor dependence and limited portfolio diversification, which made these banks exposed to the failure of their clients, who were mostly the largest state-owned enterprises. Another problem typical of the early transitional period was the appearance of 'pocket banks' that were established by enterprises to finance their own activities.
In 1995–1996 The Chairman of the National Bank of Belarus Bogdankevich introduced a policy of positive interest rates, tightened monetary policy ad reduced reserve requirements. Moreover, a fixed exchange rate introduced at the end of 1994 appeared to be an anchor for stabilization policies. These measures were very effective in curbing inflation, which was brought down from a 4-digit rate in 1994 to 2-digit rate in 1996. The credibility of the Belarusian rouble was partly restored and individuals' share of deposits increased.
Since 1996, a policy of centralization and nationalization of the banking industry. The new President Alexander Lukashenko's attack on banks started with his criticizing them for reaping profits at a time "when the government has debts to teachers, doctors, workers and pensioners". Lukashenko further accused banks of diverting profits from the real, productive sector of the economy into speculative transactions such as interbank loans, and from the sale and purchase of foreign currencies. He even accused bank clerks of having very high salaries.[3]
The nationalization of the banking sector started with the merger of the state-owned National Saving Bank with the commercial Belarusbank in August 1995.
Further nationalization proceeded with Presidential decree 209 signed on May 24, 1997 "On measures on regulation of banking sector of the Republic of Belarus"; It approved a list of banks servicing state programmes and measures to be undertaken by the government to increase it's share, and the share of state-owned enterprises, in the statutory funds of banks. Finally, it required the wages of bank clerks to be paid according to a tariff system for the public sector.
The National Bank imposed stricter requirements on commercial banks, raising the threshold for the equity capital of a bank to 5 million Euros and up to 10 million Euros for banks taking deposits from the population.
At this stage mounting state expenditure was financed by the National Bank’s emissions, which fed inflation and drove the devaluation of the Belarusian rouble. Doing the state’s bidding, banks funds inefficient projects. As a result of such practices the share of problem loans in their loan portfolios was very high and reached 11.3% as of 1 January 2001.
The resultant problems caused a steep decrease in the number of banks. By the end of 2001, only 25 commercial banks remained in operation. Apart from state-owned banks, the banking institutions, which served large foreign companies, stayed afloat. Tough requirements clamped on financial companies drove most out of business.
Priorbank, the largest private bank in Belarus, resolved mounting problems by selling a stake to the European Bank for Reconstruction and Development in 1997.
In October 2000, a Banking Code was enacted in Belarus.
The National Bank gradually moved away from extending direct loans to the government and measures were deployed to lower inflation and stabilize the exchange rate of the Belarusian rouble.
Belarusian banks stepped up efforts to enter the international market and sought ratings from international institutions. Belarusbank was the first to secure a rating from Fitch in 2001. Belarusbank, Belpromstroybank, Belgazprombank, Belinvestbank and Belagroprombank have a B- rating from Fitch. A switch to the international accounting standards was completed by 1 January 2008.
A concept for the development of the banking system for 2001–2010 was drawn up. This document mandates that the state is to retain controlling stakes in BelarusBank, Belagroprombank, Belinvestbank and Belpromstroybank until 2010. The stakes in all other banks held by the state may be divested.[4]
However, foreign investment in Belarus remained insignificant. The growth of private banks was held back the small size of the segment they were allowed to operate in. The development of state companies was primarily driven by retained profits and budgetary infusions. Only in 2004–2006 there was a pick-up in the development of private banking and the retail sector.
Banks increasingly tapped small business and retail sectors which showed a certain dynamism. Some banking institutions, however, continued to service the financial flows of the founders.
In this period foreign investment was driven not as much by the enabling environment in Belarus but rather by a desire to stake a position in the market which might prove promising in the future. The creation of AstanaEximBank, a member of TuranAlem Group owned by Kazakhstan’s largest bank, is a good illustration of this trend. While it initially focused on financing trade between Kazakhstan and Belarus, it soon expanded into SME financing.
A similar strategy was followed by Russian-owned Slavneftebank and Belgazprom, which are among the ten largest banks in Belarus. In 2005, companies in which the state had a shareholding were pressured into moving their accounts to state-controlled banks.
Banks operating in Belarus fall into two categories. The first one consists of six major banks, five of which were established on the basis of pre-existing Soviet banks: Belarusbank, Belagroprombank, Belinvestbank, Belpromstroybank and Belvneshekonombank and Priorbank, the largest privately-owned banking institution. These banks finance state programs and account for about 90% of all assets in the Belarusian banking sector. The state holds controlling stakes in the first four banks.
The Belarus banking sector is characterized by a high rate of concentration. The largest bank, Belarusbank, represents 41% of the banking sector assets, and overall the first five largest banks control 80% of the assets. Four of these five banks are owned by the state, with the third largest bank being owned by Priorbank.
Financially, the banking sector is considered under-capitalized, suffering from a lack of liquidity, and pressured by the imbalance of its short-term and long-term assets and liabilities.
The state share (usually through the Ministry of Economy) in the basic capital of a bank is as much as 81%, with the share of foreign sources at 9%, domestic sources (especially industrial corporations) 7,6%, and the National Bank of Belarus (NBB) 2.8%.
Every year, the authorities approve a new list of state programs and a list of banks, which are “authorized” to provide financing under these programs. The programs involve lending to priority sectors, projects, and individual companies. Around 30 such programs are in place in 2008, and the nine largest Belarusian banks are involved in their financing.
The NBB has established a relatively functional system of bank supervision. According to the statements of NBB leaders and its bank supervision, they are trying to implement a modern system of bank supervision based on the Basel II principles. At the same time, the NBB is preparing for implementation of the international accounting standards. Representatives of banks, including Priorbank, also appreciated the progress achieved in the area of quality enhancement of the supervision over banks.
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