Analysis of the Business Model of a Kazakhstan Banking Market

The banking market of Kazakhstan, after a decade of crisis, has finally begun to change. Several factors contribute to this: the political will of the country's top leadership, tightening regulation by the National Bank, increased competition in the market, a shortage of qualified personnel, and much more. Numerous challenges faced by banks, divided them into, relatively speaking, the rich and the poor. If the former feel normal, then the latter have to survive, since access to deposits of the quasi-public sector is not so simple, and they have not yet learned how to work under market conditions.

It is strategic management’s duty to assess the situation and choose appropriate position of commercial bank within the realm of banking industry, whether it is adaptive, formational, or “saving the right to participate in the game”. But the strategic management and planning of the commercial bank is quite difficult to determine in terms of the type of information included in it. Not all banks have the same content. However, no matter what, the strategic plan should include the following components:

The bank’s mission is determined at the very first stage of marketing activities and serves as a starting point for strategic planning. It establishes what the bank seeks, and affects the level of organizational units, outlining the range of their activities. The mission of the bank, or its main task, is a clearly formulated reason for its existence. Based on the main task of the organization, an entire hierarchical ladder of bank tasks is built.

The mission is formulated at various organizational levels of the bank, but there is always a clear subordination of the tasks of the structural units to the overall task of the organization. The general bank mission should describe the organization’s activities in terms of the services it provides, the customer groups served. Here, the National Bank of the Kazakhstan defines its mission: to promote the country's socio-economic development and the well-being of its population by providing quality banking services in the retail market segment.

The choice of the bank’s mission is a very crucial stage of strategic planning, where it is important to approach the scale of setting the task, not to go down to the details. A very strong narrowing of the scope of the bank’s activities limits the ability of top management to consider options when making decisions.

Goals are formulated and established on the basis of the overall mission of the bank and certain values and goals that top management orients. To make a true contribution to the success of an organization, goals must have a number of characteristics: concreteness and measurability, orientation in time, reachability.

• The main strategic goal of the Commercial Bank nowadays is to consolidate the positions it has achieved of a universal commercial bank that retains its specialization and leadership in the retail banking services market, actively expanding its presence in other sectors of the market while minimizing risks, adequately to market economy conditions and occupying a worthy place in international ratings largest credit institutions in the world.
• The initial position of the market. It should reflect the state of the environment in coelom in the individual segments in which the bank operates. The study of each segment using the so-called market – production characteristics, carried out when analyzing the initial position of the market, allows to reflect in the strategic plan the factors characterizing the degree of market attractiveness, and draw appropriate conclusions about the quality of certain segments and the appropriateness of their service.
• Assessment of factors affecting the bank's strategy, an extremely important component of the strategic plan, which focuses on the assessment of competitiveness. This assessment is made at the stage of analysis of market opportunities, and even more specifically - in the analysis of the microenvironment of the bank. The plan should contain an objective assessment of the strengths and weaknesses of the bank (and we can speak of strength or weakness only with a base of comparison: in this case, competitors) in terms of market share, quality and prices for services provided.
• Assessment of hazards and opportunities. The strategic plan should contain an assessment of market hazards, as well as opportunities to achieve goals and objectives in each of the segments in which the bank operates or only intends to act. This assessment is based on an analysis of the initial market position and relative competitiveness.
• Business portfolio development strategy. For each market segment where the bank operates, it determines the priority directions of investment. However, the direction of investment without justification means little, therefore the strategic plan should reflect clearly formulated goals for each of these market segments and the amount of funds necessary for them. progress.
• Strategic changes in regulated factors. Market conditions change quite often and unexpectedly, so it is not possible to foresee everything in a strategic sense. In this regard, it reflects a set of variables that can be adjusted during the implementation of the specified plan. The goals and objectives of action plans are aimed at implementing these changes, the selection of which is done especially carefully to achieve the desired results. In the development of action plans, special programs can be developed with their own tasks, specific activities and a time frame.

Expected financial results - the possible result of the bank for the year, expressed in the valuation.

Strategic Planning in Kazakhstan

Unfortunately, it is extremely difficult to make a real analysis of the practice of strategic planning of Kazakhstan’s commercial banks, since such planning is just beginning to be implemented. At the same time, strategic approaches to the development of the banking sector of our economy have recently begun to seriously change. The expansion underlying the development strategy of large Kazakhstani banks is being replaced by a focus on strengthening positions through the solution of internal problems. This refers to changes in the loan portfolio, the transformation of organizational structures in accordance with the new tasks, the rejection of the clientele, which does not fit into the new strategy of the bank.

In the latest 1990s, commercial banks commenced the implementation of development strategies that was based on: refusal of further expansion; development strategy in breadth is replaced by a development strategy inland. Inkombank assumes restructuring of the assets, it is planned to use new opportunities to place funds, primarily on the domestic and international securities markets.

Developing a bank’s strategy, defining its mission, long-term goals and objectives are the privilege and responsibility of senior managers of a credit institution, while employees have to implement the strategy at the level of departments. Commercial banks rely on proficiency of internal staff in order to provide high quality services on every day matter. This covers the functional-operational level of the bank and level of units. Staff must be well trained to perform well on routine tasks. Moreover, coherence between departments of commercial bank should not be shattered. In case of problems, delays and interruptions in work flow can occur. Importance of this level reflects on consolidation of functional-operational requirements for branches, departments, and subsidiaries.

In this regard, there is a potential threat of failure of the implementation of the strategy by bank employees, who will not keep up with or not be interested in its implementation for current operational activities. In order to avoid this danger, it is necessary to establish information exchange between the top management of the bank and the team, coordination of performers with the bank's global goals, create a system of motivation for the implementation of the strategy. Moreover, it is known from the experience of banks that the quality of management decisions depends on the accuracy and speed of information exchange between management and staff.

Many managers believe that by obtaining the maximum amount of data, they guarantee themselves from making the wrong decision. In this case, “more” does not mean “better”, as the time for preparing information increases, and, as a result, the decision is delayed, its quality decreases.

Under these conditions, the use of the principles of strategic management is a means to make the bank more successful, build momentum and customer base, increase assets.

In an example of Halyk Bank, strategical management and planning can be regarded in three hierarchical levels: the level of the bank as a whole, the level of units, functional-operational level. Framework of banking industry in Kazakhstan is peculiar in terms of orientation for commercial banks as well. Organizational structure can be developed toward the several strategies at the same time. By this development, headquarter of the bank can set territory orientation, customer orientation according to each region of Kazakhstan based on demand to certain services, products; according to prosperity of certain oblasts and cities within. Here it can be seen that territory orientation is closely tied with customer segmentation.

So, commercial bank can choose orientation of “customer’s bank”, which will include features of previously noted orientation. Halyk Bank is the largest privately owned commercial bank in Kazakhstan. Its market share after the merge with Qazkom Bank increased to 37%. In contrast, neighbor Russia’s enormous private bank “Sberbank” has only 28% of the domestic banking industry. It makes both banks to dictate their own rules within the industry and influence the banking sector tremendously. So, Halyk Bank is positioned in the mark as the formational bank. Products and services, tariffs and interest rates are the benchmarks for other commercial banks in Kazakhstan.

Analyzing the size and expansion of Halyk Bank, it is perfect example to scrutinize the coherence of strategies and financial plans in its huge organizational structure. Halyk Bank is the largest employer in the banking industry in Kazakhstan with more than 13,000 employees. Bank has its own employee schools that train future professionals. It makes hiring process easier and erase the borders between old and new staff. Throughout the years, the bank has built reliable and effective system of training employees, raising appropriate skills. However, based on the experience in Retail Business Department, effective execution of service provision still suffers.

Moreover, within the departments of Halyk bank turnover of workers is on the high level. It causes significant damage to the consolidation of long-term strategies and leads to the absence of general commitment, unity of command. Thus, the orientation on “customer’s bank” strategy, commitment and contribution of bank’s units, and functional-operational aspect is under the jeopardy.

Strategic management toward the departments, and separate units turns out to be the cornerstone of the bank’s development as the whole. Aggregately, there are three stages of implementation strategic management within the financial organization:

• strategic analysis;
• strategy development;
• implementation of the strategy.

Strategic analysis allows to identify the current and possible future state of the external and internal environment of the credit organization. It is necessary in order to provide managers with the necessary information to develop a bank strategy. One of the main problems faced by experts - analysts of banks, is the question of what actually should include a strategic analysis, what information should be input and output. The search for the most effective tools for analyzing the work of organizations allowed us to create a large variety of key indicator systems. These include: MBO (Management by objectives - MBO), BSC (Balanced Scorecard).

Peter Drucker is considered the author of the MBO concept (Management by objectives - MBO). MBO is a method of management by objectives, combining planning and control, as well as a way of motivating employees. The stages of the management process by objectives are presented below. Every manager in the organization, from the lowest to the highest level, should have clear goals that support the goals of managers at a higher level. Proponents of the MBO method believe that setting specific goals improves labor productivity because employees present what results are expected of them and how this will affect wages. Moreover, the provision of public information about the achievements in each area of work, stimulates the natural desire for competition and increases the productivity of the entire staff of the bank.

When introducing the MBO method, the following obstacles are possible:

• lack of interest and support of top management of the bank;
• distortion of the concept, resistance, if the MBO is used as a “stick” to strengthen the control over employees;

Difficulties in setting goals;

• an increase in clerical work;
• lack of planning skills and effective use of working time among managers; Lack of appropriate qualifications, if managers who implement MBO methods do not have the skills to set goals, plan, exchange information, train, consult;
• lack of individual motivation. The system of remuneration is not sufficient or not understandable to the team, in some cases it is consciously complicated and vague with the aim of creating an authoritarian authority of the leader;
• poor integration with other systems, such as forecasting, budgeting;
• the strategy of inappropriate changes.

Management by purpose in practice requires five steps that organizations should use to put the management method into practice:

The first step is to define or revise organizational objectives for the entire company. This broad overview should be based on the mission and vision of the firm. The second step is the translation of organizational goals into the language of employees. Drucker uses the abbreviation smart (concrete, measurable, acceptable, realistic, time bound) to express the concept. The third step is to encourage employee participation in setting individual goals. Once the organization’s goals are shared with employees, from top to bottom, employees should be encouraged to help set their own goals to achieve these larger organizational goals. This gives employees greater motivation because they have more opportunities. The fourth stage involves monitoring the progress of employees. In the second stage, one of the key components of the goals was that they were measurable so that employees and managers could determine how well they were achieved. The fifth step is to evaluate and reward employee progress. This step includes honest feedback on what has been achieved and not achieved for each employee.

Another method that can be taken as a basis for developing a bank’s strategy is a BSC (Balanced Scorecard). This method is extremely popular in western countries and used in different industries. The authors of the Balanced Scorecard method are David Norton and Robert Kaplan, a professor at Harvard Business School. The research work was conducted within several organizations such as KPMG audit and consulting company Peat Marwick.

The study also involved managers of major companies representing various fields of activity, such as high technology, consumer goods production, and services. As a result of the study, it was revealed that only financial indicators are not enough to adequately assess the organization’s activities. Balanced Scorecard is based on four main components - finance, marketing, internal business processes, training and growth. The system was called 'balanced' because it was based on an integrated approach to valuation of both tangible and intangible assets.

Finance

How will shareholders evaluate us if we succeed? Financial results are key criteria for assessing the current activities of the enterprise. The typical goals within the financial block are increasing the profitability of banking services, return on assets, return on equity, net cash flow, net profit.

Marketing

How should we look in the eyes of the consumer to achieve the mission? As part of the bank’s marketing strategy, managers identify key market segments in which they intend to focus their efforts to promote and market their products. The main indicators of the effectiveness of the marketing policy of a credit organization are: customer satisfaction and retention, the acquisition of new customers, customer profitability, and market share in target segments. Moreover, the importance of marketing research needs and preferences of target groups of clients. Moreover, outsourced services in marketing are valued higher than internal marketing department of the organization.

The results of such studies can provide insight into what weaknesses exist in the work of a credit institution, which banking services need to be expanded and why, what customers are dissatisfied with and what needs to be done to improve the quality and speed of the services provided. The use of marketing research data enables managers to strengthen their marketing strategy, which should lead to an increase in financial performance in the future.

Internal business processes

What processes should we perform to satisfy the consumer? What new technologies, software should be used in a credit organization? This could be telebanking, Internet banking, a call center, automated accounting systems for interaction between bank employees and customers, etc.Studying internal business processes, monitoring bottlenecks that need to be improved and developed in order to strengthen competitive advantages will improve the quality of the bank.

Learning and Growth Perspective

How should an organization learn and develop to achieve a mission? This block of the Balanced Scorecard model defines the infrastructure that an organization must build in order to ensure growth and development in the long term. The long-term success and prosperity of a credit institution is difficult to ensure using the technologies currently used. The growth and development of an organization is the result of combining three main factors: human resources, systems, and organizational procedures. In order to secure a long-term market presence, a business must invest in the development of its employees, information technology, systems and procedures.

In this “Training and Growth” block, the main indicators of efficiency can be the satisfaction of bank employees with wages and the adopted reward system; retaining employees on the basis of a well-thought-out system of promotion or transfer to more complex, responsible areas of work; improving the skills and qualifications of employees with the help of permanent, compulsory economic studies; conducting seminars and trainings with the invitation of third-party specialists. The completeness and timeliness of obtaining the information necessary for making management decisions, the generation of initiatives, the effectiveness of the information system of a credit organization depend on the quality of specialists.

Main disadvantages of Balanced Scorecard: a scorecard can be built only after all employees have adopted and understood the strategy; there is no responsibility for the overall result; more focused on the management of assets and resources, rather than on their financing.

In order to effectively manage their strategy, banks need a management system that allows them to monitor ongoing strategic initiatives. Balanced Scorecard meets these requirements and can be used as a tool for developing and implementing a credit institution’s strategy. But it is necessary to understand that the introduction of a strategy begins with the training of those who must execute it. With the help of specially designed training programs, meetings at various levels, issuing corporate newsletters at regular intervals and information systems, management must ensure the communication function of the strategic vision of all bank employees.

The Role, Importance and Application of the Integrated Business Model of the Bank

Business modeling in one form or another is carried out in all commercial banks, the difference lies only in the level of development and depth of this activity Nevertheless, banks, as they grow, are aware of the need to formalize their activities and, as a result, build an integrated business model.

So, the benefits and advantages that the bank receives when building an integrated business model are as follows:

1. An integrated business model is of great importance in mergers and acquisitions of banks. As a rule, banks have different organizational structures, business processes, strategies and other controls. With the mergers and acquisitions of banks, the need arises for the joining of these different elements and their reorganization. And if they are not formalized in the form of business models, then the implementation of this activity becomes quite problematic.
2. An integrated business model is of great importance when replicating a bank’s business to branches. Many successful banks have developed and are using the integrated business model of a typical branch, including the branch’s business processes, its organizational structure, the structure of information systems and operational resources, and the schemes of interaction between the branch and the head office. Thus, an integrated business model facilitates and accelerates the process of opening new branches, increases the stability and quality of their operation.
3. An integrated business model is particularly effective as a tool for establishing order in the bank and development, increasing the transparency of operations and manageability of the bank. Thanks to an integrated business model, you can quickly and efficiently perform various tasks for the development of a bank: effective automation, proper selection and motivation of personnel, development and launch of new products and services, and much more.
4. An integrated business model is a significant step towards building and certifying a quality management system of a bank according to the standards of the ISO 9000 series, improving the image and market value of a bank.
5. An integrated business model is one of the key success factors in the implementation of a bank’s strategy, as it links the strategy to all elements and management systems in a bank (business processes, personnel, projects, IT, etc.).
6. Comprehensive business model due to the availability of ready-to-date business models, regulations, rules allow you to free up the time of managers from performing routine functions, to make timely and correct management decisions. Instead of learning, total control and adjustment of employees' work, focus on more strategic tasks.

As it was noted earlier, building an integrated business model is important and beneficial for the bank. But if all banks build an integrated business model from scratch, it will not be entirely appropriate.

Each bank is unique in its own way and each has its own differences and competitive advantages, but all commercial banks can identify common elements in management and operation.

First, it is dictated by uniform requirements and regulatory documents of the National Bank of Kazakhstan. Secondly, there are uniform generally accepted standards, operating principles and successful practical solutions throughout the banking industry.

Thus, it is about the need to use an integrated typical business model of a commercial bank, in particular for Halyk Bank.

A comprehensive typical business model of a commercial bank (hereinafter referred to as the Bank's Business Model) is an effective tool and informational and methodological tool for formalizing and improving the bank’s activities. It is applicable, both for banks, which start from scratch the description of business processes and the formalization of activities, and for banks, which continue to actualize and improve the already described business processes and other elements of banking.

Halyk Bank operates in different segments of financial industry: banking, insurance, pension, asset management, and leasing. It strives to develop services according to world standards effectively maintaining customers’ needs and multiplying stakeholders’ welfare. Since the acquisition of Qazkom, Halyk Bank expanded its customer base, product line, and service provision. Thus, Halyk Bank acquired Qazkom’s financial capital, intellectual capital, organizational capital, dynamic abilities and technology. It increments market value of the bank and secure its financial capital. Qazkom had subsidiary companies in different financial fields such as asset management, insurance and broker agencies. Halyk Bank is also promoting former Qazkom’s project regarding the bonus system. It was called “Go! Bonuses”, and now it is under the management of Halyk Bank. Moreover, Halyk Bank modernized its internet banking system. Qazkom was arguably leader within the digital banking sector as it used simple and convenient service in “Homebank”. Since the acquisition, this internet banking engine is also being executed Halyk Bank. This deal significantly helped Halyk Bank in order to consolidate in first positions of service provision. On the one hand, this merge gives impetus to conduct structural reorganizations and alterations of business model if it is required.

Thus, the bank’s business model contains successful practices and solutions, models, documents, regulations on the main areas of management and business engineering in the bank: strategy and BSC / KPI, business processes, organizational structure and personnel, methodology and banking products, quality and ISO 9000, regulation and document management, system architecture, and much more. The business model of the Bank is regularly updated with new elements and is being improved in accordance with the emergence of new solutions and practices, changes in banking legislation, and features of the banking market.

The use of the Integrated Business Model allows the bank to:

Significantly reduce the time and financial costs of implementing the project of formalizing and optimizing the activities of the bank and other organizational development projects;

• quickly and efficiently design new products / services and business processes;
• introduce successful banking practices into the bank’s activities;
• improve the quality of banking services and internal activities;
• improve the efficiency and quality of management decisions.

Before you start developing business models, you need to study and in the future always follow the following basic principles:

• Systems approach

Developed business models should be a system, i.e. should be: consistent, interrelated, relevant, understandable. Also, business models should reflect the main aspects of the bank’s activities, various factors and options for carrying out activities.

• Standardization and unification

Business models of the same type should be developed according to uniform methods and standards, all business models should meet the general rules of business modeling described in this chapter;

• Effectiveness of development

The process of developing business models should be efficient, i.e. carefully planned, provided with necessary resources, automated;

• Effectiveness of use

Only those business models that are currently needed by the bank should be developed, which are of great importance and effectiveness of use. The development of business models for the sake of development itself or for the purpose of “so that it was” is unacceptable;

• Security

The rights of access to business models must be differentiated, different levels of confidentiality are established. Business models and their use should minimize the operational and other risks of the bank;

As the aftermath of business model creation, the general corporate governance system is created. The organizational structure of the bank is based on following departments: Strategic Planning Committee, Audit Committee, Nominations and Remunerations Committee, Social Responsibilities Committee. Headquarter is set on by management board. Management board itself is divided into number of working bodies: directorates, committees and working groups. The functions of both board of directors and management board are allocated in accordance to Kazakhstani law.