An assessment of the financial soundness of the Kazakh banks.

Salina, Aigul P.; Zhang, Xin; Hassan, Omaima A.G.

Abstract

The contribution of the banking industry to the financial crisis of 2007/8 has raised public concerns about the financial soundness of banks around the world, with many countries still suffering the backlogs of this crisis. The continuous emergence of such crises at both national and international levels increases governments', bank regulators' and financial market participants' need for reliable tools to assess the financial soundness of banks. In this context, this study investigates the financial soundness of the Kazakh banking sector, which is ranked by the World Bank as the first in the world in terms of the percentage of non-performing loans to total gross loans in 2012. Using data about all Kazakh banks over the period January 01, 2008 to January 01, 2014, this study identifies a number of accounting indicators that influence the financial soundness of banks using principal component analysis (PCA). It then uses the outcomes of the PCA in a cluster analysis, and groups the Kazakh banks into sound, risky and unsound banks at two points in time: January 01, 2008 and January 01, 2014. This methodology was further tested against a ranking system of banks and was proven to be more reliable in detecting risky banks. Fifteen financial ratios were initially selected as accounting indicators for the assessment of bank financial soundness. Using PCA, twelve indicators were isolated, which explain five principal components of capital adequacy: return on assets, profitability, asset quality, liquidity and leverage. Using the "k-means" method, the results suggest a structure of the Kazakh banking sector on January 01, 2008 that includes two groups of banks: sound and risky banks. On January 01, 2014, this structure of the banking system has changed to include three groups of banks: sound, risky and unsound banks. Thus in 2014 a new group of banks has emerged, i.e. financially unsound banks. The proposed cluster-based methodology has proven to be a reliable tool to detect the financial soundness of Kazakh banks, which makes it suitable for bank monitoring and supervision purposes. This study is the first to employ a cluster-based methodology to assess the financial soundness of a banking sector. This methodology can be used at a micro-level to determine the structure of a banking sector. Also, it can be used to monitor any changes in the structure of a banking sector and provide early warning signals about the financial health of banks.

Citation

SALINA, A.P., ZHANG, X. and HASSAN, O.A.G. 2021. An assessment of the financial soundness of the Kazakh banks. Asian journal of accounting research [online], 6(1), pages 23-37. Available from: https://doi.org/10.1108/AJAR-03-2019-0022

• Journal Article Type: Article
• Acceptance Date: Jul 20, 2020
• Online Publication Date: Sep 24, 2020
• Publication Date: Jun 30, 2021
• Deposit Date: Jul 23, 2020
• Publicly Available Date: Jul 23, 2020
• Journal: Asian journal of accounting research
• Print ISSN: 2443-4175
• Electronic ISSN: 2443-4175
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• Volume: 6
• Issue: 1
• Pages: 23-37
• DOI: https://doi.org/10.1108/AJAR-03-2019-0022
• Keywords: Financial soundness; Banks; Banking; Emerging economies; Cluster analysis; Principal component analysis; Kazakhstan
• Public URL: https://rgu-repository.worktribe.com/output/951060
• Related Public URLs: https://rgu-repository.worktribe.com/output/906761
• Additional Information: Tables and appendices for this article are available as a separate file: https://rgu-repository.worktribe.com/output/906761