An assessment of the financial soundness of the Kazakh banks

Abstract

PurposeThe 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 nonperforming loans (NPL) to total gross loans in 2012.Design/methodology/approachUsing data about all Kazakh banks over the period January 01, 2008 to January 01, 2014, the study identifies a number of accounting indicators that influence the financial soundness of banks using principal component analysis (PCA). Then, it 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 proved to be more reliable in detecting risky banks.FindingsFifteen 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. Then 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.Practical implicationsThe proposed cluster-based methodology has proven to be a reliable tool to detect the financial soundness of Kazakh banks, which makes us advocate its employability for bank monitoring and supervision purposes.Originality/valueThis 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.

The Impact of Financial Soundness Indicators (FSIs) on the Market Value of Palestinian Public Shareholding Banks

“…Moreover, the findings of this study were relatively consistent with the findings of Salina et al (2021), which aimed to assess the financial soundness of Kazakhstani banks for the period 2008-2014. The study identified several accounting indicators that influenced the financial soundness of banks using Principal Component Analysis (PCA).…”

“…This assessment encompasses four primary dimensions namely capital indicators, asset quality indicators, return and profitability indicators, and liquidity indicators, as outlined in their annual reports (Palestine Monetary Authority-Publications, 2019). (Youssef, 2019), (Bouherira, 2020), (Ibrahim et al, 2021), (Khemis, 2021), (Kullab & Yan, 2018), (Rahman, 2017), (Ouma & Kirori, 2019), (Abusharbeh, 2020), (Almahadin et al, 2020), (Salina et al, 2021) Palestinian Monetary Authority Indicator References Source Nonperforming Loans Net of Provisions to Capital (Bouherira, 2020), (Kullab & Yan, 2018).…”

“…Net income is the one before taxes to total assets (Youssef, 2019), (Bouherira, 2020), (Khemis, 2021), (Kullab & Yan, 2018), (Musdholifah & Hartono, 2018), (Abusharbeh, 2020), (Salina et al, 2021), (Rahi & Salman, 2021).…”

“…Liquid assets to total assets (Youssef, 2019), (Bouherira, 2020), (Talhi, 2021), (Kullab & Yan, 2018), (Abusharbeh, 2020), (Salina et al, 2021).…”

A Statistical Analysis of the Effects of the Strengthening of Accounting and Auditing Standards on the Financial Soundness of Banks

“…On the other hand, weaknesses in accounting and auditing standards or the misuse of these standards will lead to the dissemination of asymmetric information among the internal and external stakeholders of the firm and, accordingly, making wrong investment decisions. These systemic wrong decisions will feed finance and the emergence of economic crises (see, Salina et al, 2020).…”