Financial soundness of Kazakhstan banks: analysis and prediction.
Salina, Aigul Pazenovna
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SALINA, A.P. 2017. Financial soundness of Kazakhstan banks: analysis and prediction. Robert Gordon University, PhD thesis.
Purpose – The financial systems in many emerging countries are still impacted by the devastating effect of the 2008 financial crisis which created a massive disaster in the global economy. The banking sector needs appropriate quantitative techniques to assess its financial soundness, strengths and weaknesses. This research aims to explore, empirically assess and analyze the financial soundness of the banking sector in Kazakhstan. It also examines the prediction of financial unsoundness at an individual bank level using PCA, cluster, MDA, logit and probit analyses. Design/Methodology/Approach – A cluster analysis, in combination with principal component analysis (PCA), was utilized as a classification technique. It groups sound and unsound banks in Kazakhstan's banking sector by examining various financial ratios. Cluster analysis was run on a sample of 34 commercial banks on 1st January, 2008 and 37 commercial banks on 1st January, 2014 to test the ability of this technique to detect unsound banks before they fail. Then, Altman Z” and EM Score models were tested and re-estimated and the MDA, logit and probit models were constructed on a sample of 12 Kazakhstan banks during the period between 1st January, 2008 and 1st January, 2014. The sample consists of 6 sound and 6 unsound banks and accounts for 81.3% of the total assets of the Kazakhstan banking sector in 2014. These statistical methods used various financial variables to represent capital adequacy, asset quality, management, earnings and liquidity. Last but not least, the MDA, logit and probit models were systematically combined together to construct an integrated model to predict bank financial unsoundness. Findings – First of all, results from Chapter 3 indicate that cluster analysis is able to identify the structure of the Kazakh banking sector by the degree of financial soundness. Secondly, based on the findings in the second empirical chapter, the tested and re-estimated Altman models show a modest ability to predict bank financial unsoundness in Kazakhstan. Thirdly, the MDA, logit and probit models show high predictive accuracy in excess of 80%. Finally, the model that integrated the MDA, logit and probit types presents superior predictability with lower Type I errors. Practical Implications – The results of this research are of interest to supervisory and regulatory bodies. The models can be used as a reliable and effective tool, particularly the cluster based methodology for assessing the degree of financial soundness in the banking sector and the integrated model for predicting the financial unsoundness of banks. Originality/Value – This study is the first to employ a cluster-based methodology to assess financial soundness in the Kazakh banking sector. In addition, the integrated model can be used as a promising technique for evaluating the financial unsoundness of banks in terms of predictive accuracy and robustness. Importance – Assessing the financial soundness of the Kazakh banking system is of particular importance as the World Bank has ranked Kazakhstan as leading the world for the volume of non-performing credits in the total number of loans granted in 2012. It is one of the first academic studies carried out on Kazakhstan banks which comprehensively evaluate the financial soundness of banks. It is anticipated that the findings of the current study will provide useful lessons for developing and transition countries during periods of financial turmoil.