The banking System of Belarus

Posted on March 16th, 2010 in: Finances

The National Bank is a state agency which is independent of the government and which reports to the President of Belarus. It does not only regulate the functioning of commercial banks by decree, but also holds stakes in some banking institutions.

The development of the Belarusian banking system has the following stages:

The first stage which ran from 1988 to 1995 saw the establishment of first commercial banks and the passage of banking-related legislation (in December 1990): On the National Bank of Belarus and On Banks and Banking Activities in Belarus.

Privatisation got off the ground and the formation of private capital, including in the banking sector, was under way. Both internal and external sources of funds were drawn into this process. Financial intermediaries came into being. About 40 banks sprung up in 1988-1995.

During the second stage which lasted from 1996 to 2000 the process of privatization decelerated sharply and the state restored its position in the economy and the financial sphere. State companies were mandated to transfer their accounts to state banks and the state built up stakes in numerous banks.

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.

The  third stage (2001-2005) experienced a change in the financial policies of the state. 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.

During this period, the Banking Code was enacted on 1 January 2001 and a 30 % profit tax was introduced for banks.

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, Belgasprombank, Belinvestbank and Belagroprombank have a B- rating from Fitch. A switch to the international accounting standards should be 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. 

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. 

Even PriorBank, which managed to retain some major state companies among clients due to its ability to tap international financial markets, was not immune to this trend. (In early 2003, Raiffeisen Zentralbank Österreich acquired a controlling stake in the bank). In 2005, companies in which the state had a shareholding were pressured into moving their accounts to state-controlled banks.