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The Banking System of Belarus

The banking system of Belarus was created in the early 1990s on the basis of Soviet banks which were located on its territory. It comprises two levels: the National Bank as well as commercial banks and non-banking financial institutions. The National Bank is a state agency which is independent of the government and which reports to the President of Belarus. It not only regulates the commercial banks by decree, but also holds stakes in some banking institutions.

Banking system structure

As of 1st August 2007, the Belarusian banking system comprised 27 functioning banks. Of these, four were either bankrupt or at the liquidation stage: Belorusskiy Birzhevoy Bank, Jam-Bank, MBES-Bank and InvestProm-Bank. The total number of branches reached 371. It should be noted that many branches have sub-branches. The equity capital of the banking sector in Belarus equalled $2.577 bln. (BYR 5.527 trillion) as of 7 August 2007.

On behalf of the Belarusian Government, the Ministry of Economy and the State Property Committee held stakes in the charter capitals of 10 banks worth a total of $1.28 bln. (2.749 trillion roubles) as of 1 September 2007 while the aggregate charter capital of all commercial banks stood at $1.815 bln. (BYR 3.896 trillion) on the same date. 

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.

BelarusBank, which has taken over the branch network of the Soviet banking behemoth Sberbank, is a case apart. Fully owned by the state, it accounted for 44% of the overall loan portfolio of the banking sector, 35% of its equity capital and 62% of its deposits.

23 banks were foreign-invested. Seven banks were fully foreign-owned. As of 1 August 2007 foreign investment accounts for 8.2% of the charter capital of the Belarusian banking sector. Russian investments accounts for 3.03%.  Belarusian banks have attracted capital from Austria, Switzerland, the USA, Great Britain, Cyprus, Latvia, Lithuania, Kazakhstan, Libya and other countries.

A total of 8 representative offices of foreign banks were opened in Belarus (three Latvian banks, one Russian, one German, one Lithuanian, one Ukrainian, and the office of the Interstate Bank).

The development of the Belarusian banking system

First Stage: Emergence of Private Banks

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

Privatization began to grow, with private capital forming - including in the banking sector. Both internal and external sources of funds were drawn into this process and financial intermediaries came into being. About 40 banks sprang up from 1988-1995.

 

Second Stage: The State Reasserts its Position in the Banking Sector

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

At this stage, mounting state expenditure was financed by the National Bank, this fed inflation and drove the devaluation of the Belarusian Rouble. At the state’s bidding, banks funded inefficient projects. As a result of such practices, the share of problem loans in loan portfolios was very high - at 11.3% as of 1st January 2001.

This resulted in a steep fall in the number of banks. By the end of 2001, only 25 commercial banks remained in operation. Apart from the state-owned banks, some banking institutions serving large foreign companies stayed afloat.  Tough requirements placed 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.

 

Third Stage: Reform Takes Off

The  third stage (2001-2005) saw 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. The Banking Code was enacted on 1st 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 1st January 2008.

A concept for the development of the banking system for 2001-2010 was drawn up. This document provides for the state retaining controlling stakes in BelarusBank, Belagroprombank, Belinvestbank and Belpromstroybank until 2010. Stakes held in all other banks by the state may be divested.

Foreign investment in Belarus remained insignificant during this period. Private banks’ growth was held back by 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. In addition, companies in which the state held shares tended to open accounts with state banks.

Only from 2004-2006 did private banking and the retail sector bounce back. Banks increasingly tapped the small business and retail sectors, which were showing a certain dynamism. Some banking institutions, however, continued to service the financial flows of their founders.

Foreign investment was driven less by Belarus’ enabling environment as by a desire to stake a claim in a 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 its 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 through its branch  Raiffeisen International Beteiligungs AG).

 

Fourth Stage: Banking Boom Takes Hold

A new stage of development was inaugurated in 2006. 

Belarusian banks switched to a commonly-used taxation system, which allowed them to boost their profits and increase the attractiveness of banking investment. 

Russia’s refusal to continue its hidden subsidies of the Belarusian economy in the shape of cheap energy supplies led to a resource crunch. This opened up a new niche in the banking sector - namely, the financing of enterprises which no longer had sufficient internal resources. The funding needs of these companies overwhelmed the capacity of state and private banks.

This spurred Belarusian banks to step up efforts to attract funds from abroad. The share of non-residents in the liabilities of Belarusian banks rose from 8.8% to 10.2% and, then, to 12.7% in the first quarter of 2007. In 2007, a number of major Russian banks entered the Belarusian market. Specifically, Vneshtorgbank and Vneshekonomabk acquired controlling stakes in Slavneftebank and Belvneshekonombank, respectively.

In view of the changing operating environment for banks and an unexpected boom of banking services, the 2001-2010 concept for the development of the banking sector was replaced by the 2006-2010 program for the development of the banking sector. However, this change did not bring about any shift in state policy towards banks.

 

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