Speaking of the pro-rata sharing, one should keep in mind the following: the pro-rata sharing implies repaying the debt by one of the creditors to the other creditors within the syndicate by the simultaneous transfer of debts through subrogation. In Kazakhstan, however, the subrogation is provided only for certain circumstances, including subrogation in the insurance relationships.

According to the Article 339 of the Civil Code of the Republic of Kazakhstan, a claim could be transferred to the third party on the basis of a deal (assignment) or legislation. Transfer of claim under a loan agreement implies mandatorily conclusion of the assignment agreement. Moreover, if the loan is secured by the pledge which requires a registration, then assignment of pledgee's right should be additionally registered within the relevant registrar. In other words, there is no automatic change of creditor (without need of conclusion of additional documents/agreements). Automatic replacement of creditor takes place only in following cases [13]:

-in case of the universal succession;

- on the grounds of the court's decision;

- as a result of execution of the obligation by the guarantor, surety or pledger, such that none of them is a borrower;

- in case of subrogation of the creditor's rights to the insurer;

- in other cases stipulated in the legislation.

It has to be noted that the other cases do not imply the repayment of the obligation by the third party in accordance with the agreement.

For such cases, when the obligation is implemented by the third party, the legislation provides creation of the regression right in favor of the party that has performed the obligation. At the same time, regression right does not mean any transfer of the creditor's right, but only provides the right to reimburse the claim according to the performed obligation. The obligation reimbursement is the new separate obligation between the third party and the debtor.

As a consequence, this might negatively affect the position of the creditor who made the pro-rata sharing. In case of the secured loan, sharing creditor is in the risk of losing his security interest. Since the reimbursement obligation is a new separate obligation which is not covered by the security that covers the loan, the sharing creditor might lose the security or became less prioritized creditor in ranking. In order to secure the obligations by the pledge, the parties have to conclude a pledge agreement as it is required by the Article 300 of the Civil Code of the Republic of Kazakhstan. However, the secondary pledge is allowed only in if it's not prohibited by the previous pledges. So, taking into account that such negative pledge conditions happen often, in order to conclude and register properly of the pledge agreement covering the new security interest of sharing creditor, it would be needed to obtain consent of all the existent pledgees (i.e. other creditors within the syndicate). They arc not obliged to give their consent, but even if they agree, and the pledge agreement is signed and registered properly, it won't imply the equality between the creditors, because the fulfillment of the security interest would have been made later than others. Thus, the sharing creditor bears the risk to become below the others in the ranking, or even lose the security in case of not getting the consent from the others to secondary pledge.

In additions, since the regression rights to claim reimbursement are not a loan in nature, the bank will not be in a position to accrue the interest on it, except the legally defined fines.

As for the availability of the security trustee mechanisms and implementation of syndicate democracy it was stated above that they also have some complications in usage within the modem legal system of Kazakhstan, which reduces the willingness to be involved in such deals within the country.

There are no restrictions regarding the types of facilities in Kazakhstani legislation, except for the list of activities that are allowed to be conducted by the banks. However, it is necessary to say that granting the loans (including overdrafts), issuance of guarantees/ suretyships, letters of credit are included to that list. So, if the bank has the relevant license it might be involved in such operations.

Taking into account that legislation provides the possibility to conclude mixed agreements with the different conditions, the banks are allowed to specify agreement conditions for granting of several credit instruments within the syndicated loan, using both revolving or non-revolving facility conditions. Mixed facility becomes very well spread in banking practice of Kazakhstan.

The main credit instruments used in Kazakhstan are loans (including overdraft), bank guarantees and letters of credit. At the same time, it has to be noted that standby letters are not used in our country, because they are considered guarantees according to the Kazakh law.

Guarantees and letters of credit issued by the banks are contingent liabilities of banks. It means that before the execution of such guarantee or letter of credit by the bank, the borrower is not obliged to reimburse any amounts to the bank. Therefore, there is the risk that the issuing bank would bear greater risk in comparison with the others within the syndicate because it will be independently liable before the beneficiary whether the other creditors participated in sharing the risk or not.

Besides that, there are some risks of default of the borrower and enforcement of the security. According to the Article 319 of the Civil Code of the Republic of Kazakhstan, if the proceeds from the enforcement of security exceed the amount of claim, then the difference should be returned to the pledger. But if the contingent liabilities haven't become real, the bank cannot include it into the claim and covers them from the proceeds. The contingent liabilities of the bank, therefore, might become unsecured.

There is no legal definition of covenants in the Kazakhstani legislation, except specifying them as some sort of self-restrictions imposed by the issuers of the non-state bonds. So, according to the “Rules on the State Registration of Issuance of Non-State Bonds and on Examination of Reports on Placement and Retirement of the Bonds, on Annulment of Issuance of the Bonds”, the bond prospectus has to stipulate the “restrictions (covenants) established by the issuer and not provided in the Law [on securities market]

However, it does not mean that the covenants exist only in the form of restrictions. Kazakhstani legislation allows imposing certain obligations contractually. Thus, for example, the parties can state the obligation on providing certain documents, performing certain acts by the agreement. According to the classification of covenants as they are understood in the international experience, such obligations would also fall under the notion of covenants, as mentioned in the previous chapter.

Banks are also widely use covenants when granting the credits. Although they are not always called so, they are present in the loan agreements. For instance, in among the General loan terms and conditions for legal entities/private entrepreneurs of JSC “ATFBank”, there are obligations to provide certain documentation and information, to act in compliance with the legislation, and other obligations. Additionally, there are certain circumstances in occurrence of which the bank will be allowed to claim early repayment. For example, granting loans to the third parties, disposal or pledge of property, change of shareholders, dividend payment can be construed as the events that allow the bank to call for acceleration of the loan.

Therefore, it can be inferred that Kazakhstani practice allows use of all three types of covenants - financial, affirmative and negative, if the parties agreed on them contractually. However, the negative covenants are implemented in practice with some caution. There are some differences in opinions of the practicing lawyers regarding the contractual rejection of certain rights guaranteed by the law. For example, waiver made by the borrower of the right to freely dispose his property (not pledged property) may be considered as an invalid condition, because, by the law, everybody is guaranteed to enjoy his right to freely dispose his property, unless it is restricted by the law. According to that ambiguity some banks stipulate negative covenants not as some restrictions, but rather as circumstances to trigger the bank's right to accelerate of the outstanding amount.

It is also important to note that the breach of covenants doesn't result in invalidity of the deals. According to the Article 159 of the Civil Code of the Republic of Kazakhstan, breach of covenants does not falls under the grounds of invalidity of the deals concluded with third parties'. Therefore, if the borrower sells or pledges the property contrary to the covenant condition, such deal would not be considered invalid according to the law.

1.3 The 3 Types of Syndicated Loans

Syndicated loans are debts issued by a consortium of lenders to a sole borrower. The amount of one syndicated loan is so big such that one lender cannot fund or take on the debt alone. Corporations are usually the borrowers for this type of loan. They use the funds to help them bankroll takeovers, acquisitions or expansion projects. Also, sovereign countries may apply for syndicated debts to fund infrastructure projects or bridge gaps in their national budgets.

The lenders are usually composed of big banks, but financial institutions like mutual funds and insurance companies also participate in this type of lending. There will be a lead lender or arranger for each consortium. Apart from funding a substantial portion of the loan, the lead agent will also be responsible for facilitating the loan and allocating cash flows to the other members of the consortium. Here are the main types of syndicated loans:

1. Underwritten Deal

The underwritten deal is one of the most widely available types of syndicated loans in Europe. Under this arrangement, the lead agent or underwriter guarantees and syndicates the entire loan. If the loan has not been fully subscribed, the lead agent can opt to absorb the undersubscribed portion. Then, if market conditions are bullish, the same lead agent can sell to other investors the undersubscribed part of the loan that it has absorbed. However, if markets are bearish, the lead arranger may be forced to sell any undersubscribed portion at a discount or simply consider the whole thing as a loss.

There are several reasons why a bank may decide to become the underwriter. First, this type of loan can make a financial institution look more competitive. Next, a syndicated debt could mean huge profits for the bank because the risks involved in this type of loan can translate to higher service fees. Lastly, underwritten deals now have floating interest rates, thus the risks are no longer as high as debts with fixed rates.

Club Deal

This type of syndication usually entails a smaller amount, typically between $25 and $150 million. The main feature that makes this type of syndicated loan unique is the fact that the lead agent and other members of a club deal consortium all share equal, or nearly equal, parts of the fees earned from the loan facility.

Best-Efforts Syndication Deal

Of all the types of syndicated loans, the best-efforts syndication is the most commonly used in the United States. Under this arrangement, the lead agent does not commit or guarantee the entire amount of the loan. Any undersubscribed portion of the loan will be filled up by taking advantage of the changes in market conditions. However, if the loan continues to be undersubscribed, the borrower may be forced to accept a lower loan amount or the loan agreement is canceled entirely.

A borrower's ability to secure a syndicated loan, though, is predicated on its ability to spur the creation of a syndicate in the first place. "No two syndications are identical," wrote Bunn. "The market changes every day. Many intangibles influence the structure and pricing of a credit, including the experience and depth of a company's management team; trends in the industry and market; and financial trends within a company."

The first thing the company has to do is select an agent to facilitate communications and transactions between the borrower and the banking institutions that will form the syndicate. "The first place to look for an agent is among your existing relationships," said Fidler and Neumeyer. "Certainly you will want a bank that has the necessary syndication capability and experience to obtain market credibility. Although the agent need not always be the largest participant in the syndication, the agent should have sufficient capital strength to be the anchor for the credit. Most important, however, is that you are comfortable with the bank. Because the agent is acting on your behalf, they must fully understand your business and share your attitudes and priorities."

Once an agent has been selected, the process of finding willing banks is undertaken. This phase of the process can vary considerably in terms of complexity. Some agents gauge the interest level of other lenders by simply sending them necessary financial information on the borrower and the intended shape and size of the syndicate group, as well as data on borrower operations, background, management, and marketing. Bunn noted that in other cases, however, this process can be more complex, involving extensive due diligence, the preparation of a complete syndication offering memorandum (including financial projections), and a formal bank presentation.

By and large, the length of time necessary to form a bank group is roughly equivalent to the complexity of the proposed deal. Creation of a syndicate can take place over the course of a few weeks or a few months. Analysts note, however, that the length of time necessary to conclude the deal is usually less if the banks are already familiar with the borrower's operations. Once the membership of the group has been determined, the relationship quickly assumes the character that the borrowing business would expect when dealing with a single lending institution. "This is not to say that the borrower relinquishes control over the process and the participants will still actively call on the borrower," noted Fidler and Neumeyer. "It is merely the interaction between the participating banks that should diminish--to your benefit. The agent should educate you about the market and help you navigate the specifics of pricing and structuring the transaction."

Indeed, the agent's responsibilities are many and varied. The agent is charged with administering the syndicated facility itself, as well as all borrowings, repayments, interest settlements, and fee payments. A chief component of the administration function is to make sure that communications between the lending institutions and the borrower remain open so that both sides remain informed about changing business and market realities. In return for providing these services, the agent is compensated with an annual fee.

2. PECULIARITIES OF LENDING TO LARGE BUSINESSES IN JSC "BANK CENTERCREDIT"

2.1 The history of creation of JSC "Bank CenterCredit" and its place in the modern banking system of the Republic of Kazakhstan

Bank CenterCredit - one of the most dynamically developing companies, offering a full range of financial services in Kazakhstan. This is a universal banking group, which has its own extensive branch network in the country, serving businesses and individuals in more than 100 branches and offices. A correspondent bank network consists of 40 foreign banks, which allows to carry out calculations with partners around the world.

JSC "Bank CenterCredit" was founded September 19, 1988 and today is one of the leading commercial banks in Kazakhstan.

CenterCredit Bank is a credit institution, a member of the banking system of the Republic of Kazakhstan and the leadership in the activity of Kazakhstan legislation, regulations of the National Bank of Kazakhstan, as well as the Charter of JSC "Bank CenterCredit".

The mission of Bank CenterCredit: "One of the best banks in providing" quality service, new products and tools, customer-focused.

Corporate Values Bank CenterCredit "These are important principles of our work."

In their daily activities the bank's employees strive to follow the bank's corporate values:

- Integrity;

- Professionalism;

- Timeliness;

- Goodwill towards colleagues, customers and partners, keeping business and professional ethics.

. The Bank was registered as the Central Cooperative Bank License №4 State Bank of the USSR.

In 1996, the Bank was re-registered in the JSC "Bank CenterCredit" and was the only representative of the international money transfer system Western Union in Central Asia and Kazakhstan.

In accordance with the decision of the Government of the Republic of Kazakhstan of December 08, 1997 № 1713 "On reorganization of JSC" Zhilstroibank "Bank CenterCredit took part in the tender among the second-tier banks to reorganize by merging with JSC" Zhilstroibank "and become a winner in it. Then in 2004, JSC "Bank CenterCredit" began to operate as a public company.

In 2008, the Bank signed an agreement with a strategic partner - the South Korean bank Kookmin. To date, "Bank CenterCredit" is among the five largest and most successful banks in Kazakhstan.

The Bank's mission: "One of the best banks in providing quality service, new products and tools, customer-focused".

Corporate values of the Bank: "These are important principles of our work."

In their daily activities the bank's employees strive to follow the bank's corporate values:

- Honesty,

- Professionalism,

- Efficiency,

- Goodwill towards colleagues, customers and partners, keeping business and professional ethics.

Figure 1 - Corporate Values

Note - drawn up on the basis of the source [1].

The main strategic objectives:

1. The introduction of a corporate culture focused on performance. By constructing the cultivation system and retention combined with the automation of HR - processes and the development and implementation of concepts for dealing with high and low-productive workers

2. Consolidation of management with a strategic partner. A reduction «gap» between the two banks and the consolidation of the financial statements. Improving processes through bank transfer and implementation of technology Kookmin Bank

3. Improvement of the risk management system.

- Introduction of the integrated system analysis and assessment of market risks;

- Improvement of operational risk management system;

- Strengthening the competencies of credit risk management, together with additional business activities.

4. Effective financial planning and increased profitability.

- Implementation of systems allowing to improve the process of liquidity risk management, transfer pricing method based on MOR and allocation of expenses system

- Emphasis on work with high-margin products; RM increase competence and individual approach to customers.

5. Strengthening of internal control systems, compliance and internal audit in order to minimize losses.

6. Development of new products and new tools, customer-oriented. Focused on the client's business model through an integrated approach to sales and service. Development of the product range, structured banking products for various business segments - large, medium, small and retail. The development of self-service systems, and remote access.

7. Implementation of a new IT-strategy to improve the efficiency and management of business processes efficiency. Introduction of automated control and monitoring systems, the optimization of processes and procedures in the field of risk management.

The Bank has its own extensive branch network in the country, serving businesses and individuals in more than 100 branches and offices

Correspondent bank network consists of 40 foreign banks, which allows to carry out calculations with partners around the world.

BCC is actively involved in virtually all government business support programs. At the end of 2015 BCC was awarded the title "Best Bank for subsidizing loans in 2014 within the framework of single-industry towns development program for 2012-2020." BCC is also a leader in the number of signed contracts guarantee of JSC "Entrepreneurship Development Fund" Damu "" under the program "Business Road Map 2020".

Bank CenterCredit today is not only a commercial bank, but also acts as a financial group, offering services in the areas of broker-dealer operations, asset management (BCC Invest). Moreover, we are able to serve their customers abroad, thanks to the presence of our representative offices in Kiev and Bishkek.

Subsidiary Bank JSC "BCC Invest", the professional securities market participant, license first category №0401200688 for brokerage and dealer activities in the securities market with the right to manage client accounts as a nominal holder of 23.01.04g., Litsenziya№0403200124 to exercise the management of investment portfolio of 24.12.03g. It offers a wide range of services on the securities market:

- Brokerage services;

- Nominal holding;

- Financial consulting on the issue and placement of securities;

- Underwriting;

- Support the liquidity of the securities at the institutional market (market maker services);

- Investment portfolio management.

BCC has positioned itself as a bank, to develop stable and steady pace that allows him every year to strengthen its position in the international financial market.

International Finance Corporation (IFC) - The International Finance Corporation, a member of the World Bank Group, is the largest global development institution aimed at supporting the private sector in emerging markets. The share of IFC in the bank's capital is 10%.

Table 1 - Credit ratings by international rating agencies: Fitch Ratings, Moody's Investors Service и Standard & Poor's.

Name	Fitch Ratings	Moody's	Standard & Poor's
Long-term rating	B	B2	B+
Short-term rating	B	NP	B
National rating	BB+(kaz)	В1.kz	kzBBB
Forecast	Stable	Stable	Stable
* Note - compiled by the author based on the source [1].

Rating agency Fitch Ratings assigned the following ratings: B - long-term rating in foreign currency; B - Short-term foreign currency rating. Forecast - stable.

Ba2 - long-term rating on bank deposits in foreign currency; NP - short-term rating on bank deposits in foreign currency; E + - rating of financial stability. Outlook stable.

BCC's international business strategy focuses on the development and strengthening of cooperation with foreign financial institutions, as well as expanding the range of services and products in the field of trade and project financing, documentary operations, international loans and so on.

During the year, BCC continued active engagement with international financial development institutions such as the European Bank for Reconstruction and Development (EBRD), of FMO (Netherlands), of DEG (Germany), International Finance Corporation (IFC), the Asian Development Bank (ADB), of OPIC ( USA). Long-term cooperation with international organizations is a recognition of the financial stability of the BCC, the transparency of its operations, the reliability for customers and partners.

During 2014, BCC has successfully repaid some of its obligations and, as of December 31, 2014, the total balance of attracted resources from the above institutions totaled 37.6 million US dollars. BCC has long-term correspondent relationships with financial institutions in the CIS countries, Kazakhstan and in foreign countries, which has contributed greatly to the expansion of the geography of trade and financial transactions of our customers. The stability of development, strong financial condition and creditworthiness of BCC marked by international rating agencies.

Bank Branches (regional banks, branches) are not entitled to legal entities and operate on the basis of regulations approved by the Management Board, shall have a seal with the image of the logo of the bank with its own name, as well as other seals and stamps, have a balance, which is included in the bank's balance sheet.

the bank's organizational structure is as follows:

Stage 1 - the Chairman of the Board of Directors

Stage 2 - Chairman of the Board

The Board is responsible for the daily management and administration of the Bank. The Management Board has all executive powers, while the Board of Directors carries out supervisory functions. Duties of the Board include:

- Making executive business decisions;

- The implementation of the Bank's business strategy;

- The appointment of senior management and representatives of the Bank's branches;

- Deals with all other matters which are not within the competence of the Board of Directors or the General Meeting of Shareholders.

More detail on lending to business clients of "Bank CenterCredit". Lending to business customers on a commercial basis on terms of maturity, repayment, serviceability, security and use for the intended purpose. The exception is the overdrafts, financing operations of equity securities.

Loan Process business customers is carried out in accordance with the "technological map" where are described in detail the actions of each employee participating in the process of lending and postkreditovaniya business customers.

Relationship manager (RM) - is a bank employee, is carrying out customer acquisition, package the collection of documents, preparation of rapid analysis of funding, and other activities. RM is the focal point in the process of lending, which oversees credit application and contribute to its further advancement. Credit analysts and administrators should communicate with the client on matters within their competence and functionality, while providing information RM, upon their request.

Attracting customers is carried out by employees of sales divisions of legal entities, as well as heads of departments, individually or jointly, by telephone contacts, personal meetings and presentations banking services of lending business customers, and on the whole range of services provided by the bank.

To attract customers to finance the following recommended methods to find potential customers:

- Vertical method;

- Horizontal method;

- Search through the analysis of statistical data on the sector and region;

- Visits to specialized exhibitions;

- Drawing up their own databases and the use of other sources of information.

Search according to the vertical structure of the client's activity involves access to the customer through its suppliers of goods and services through activities such as:

- Access to a potential customer by analyzing the contractors / partners, existing customers of the bank;

- Tracking payments on bank accounts of existing customers. In this case, the periodicity and timeliness of payments for goods and services is an indirect confirmation of the creditworthiness of the borrower, ie, a "coarse filter" when selecting borrowers.

Search according to the horizontal structure kind of client activity: in the presence of a corporate customer with a stable financial status, involvement of small and medium-sized businesses carried on his oral recommendations. In this case, in the event of default on loans to SMEs, there is a possibility of renewal of the loan to a corporate customer. This has the following interest financing for participants:

- The bank - a decrease in credit risk due to the presence of alternative sources of loan repayment (corporate client financial flows);

- For small and medium-sized businesses - this is a great opportunity to obtain a loan;

- For a corporate client - the possibility of expanding its infrastructure with payment by installments in the form of a loan.

Consideration of applications for all borrowers is made with the obligatory visit to the CCP's credit analyst location of the client's business and collateral in the agreed time with the client, together with the RM, if necessary. Regarding the major borrowers in the region must necessarily be carried out meeting the director of the branch manager and RCCP.

2.2 The syndicator's art in Kazakhstan

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).

These consolidated financial statements are presented in millions of Kazakhstani tenge (“KZT millions”), unless otherwise indicated. These consolidated financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments according to International Accounting Standard (“IAS”) 39 “Financial Instruments: Recognition and Measurement” (“IAS 39”).

The Group maintains its accounting records in accordance with the accounting policies authorized by the Resolution of the Board of Directors of the Group. These consolidated financial statements have been prepared from the statutory accounting records and have been adjusted to conform with IFRS. Adjustments include certain reclassifications to reflect the economic substance of underlying transactions including reclassifications of certain assets and liabilities, income and expenses to appropriate financial statement captions.

Items included in the financial statements of each entity of the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the “functional currency”). The functional currency of the Group is the Kazakhstani tenge (“KZT” or “Tenge”).

The consolidated financial statements incorporate the financial statements of the Bank and entities (including special purpose entities) controlled by the Bank (its subsidiaries). Control is achieved where the Bank has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.

All significant intra-group transactions, balances, income and expenses are eliminated on consolidation.

In translating the financial statements of a foreign subsidiary into the presentation currency for incorporation in the consolidated financial statements, the Group follows a translation policy in accordance with IAS 21 “The Effects of Changes in Foreign Exchange Rates” (“IAS 21”), and in particular, performs the following procedures:

- Assets and liabilities, both monetary and non-monetary, of the foreign entity are translated at closing rate;

- Income and expense items of the foreign entity are translated at average exchange rates;

- Equity items of the foreign entity are translated at exchange rates on the date of the transaction;

- All resulting exchange differences are classified in retained earnings until the disposal of the investment;

- On disposal of an investment in a foreign entity, related exchange differences are recognized in the consolidated income statement.

The assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognized as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the consolidated income statement in the period of acquisition.

The minority interest is initially measured at the minority's proportion of the fair values of the assets, liabilities and contingent liabilities recognized. The equity attributable to owners of the parent and net income attributable to minority shareholders' interests are shown separately in the consolidated statement of financial position and consolidated income statement, respectively.

The Group accounts for increases in ownership of a controlled entity by revaluing all identified assets and liabilities of the subsidiary at fair value on the date of acquisition of additional interest in proportion attributable to the additional interest acquired. Goodwill is recognized for any excess of the cost of the acquired additional interest over the net fair value of the proportion of the respective assets and liabilities.

For a business combination involving an entity or business under common control, all assets and liabilities of the subsidiary are measured at the carrying values recorded in the stand-alone financial statements of the subsidiary. The difference between the carrying value of the acquired share in net assets of the subsidiary and the cost of acquisition are recorded directly in equity attributable to the equity holders of the parent.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

The difference, between the carrying amount of minority interest and the amount received on its purchase is recognized in equity attributable to the equity holders of the parent.

The Group recognizes financial assets and liabilities on its consolidated statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting. Regular way purchases of financial instruments that will subsequently be measured at fair value between trade date and settlement date are accounted for in the same way as for acquired instruments.

Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent remeasurement of these items are disclosed in the respective accounting policies set out below.

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where:

- the rights to receive cash flows from the asset have expired; * the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a `pass-through' arrangement; and

- the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial asset is derecognized when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive the asset's cash flows; or (b) retains the right to the asset's cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group reassesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains in the consolidated statement of financial position. If substantially all of the risks and rewards have been transferred, the asset is derecognized. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not is has retained control of the asset. If it has not retained control, the asset is derecognized. Where the Group has retained control of the asset, it continues to recognize the asset to the extent of its continuing involvement.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated income statement.

Cash and cash equivalents include cash on hand and unrestricted balances on correspondent and time deposit accounts. For the purposes of determining cash flows, cash and cash equivalents include cash and balances with NBRK and due from banks with original maturities of 90 days or less. The minimum reserve deposits with the NBRK are not subject to restrictions to its availability and therefore are included in cash and cash equivalents.

Financial assets and liabilities are classified as valued at fair value through profit or loss if they meet any of the following conditions: (1) acquired principally for the purpose of selling them in the near future; (2) which are a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent and actual pattern of short-term profit taking; or (3) are designated as derivatives.

A financial asset other than a financial asset held for trading may be designated at fair value through profit or loss upon initial recognition if: (1) such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or (2) the financial asset forms part of a group of financial assets or liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or (3) it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract (asset or liability) to be designated as at fair value through profit or loss.

Financial assets at fair value through profit or loss are initially recorded and subsequently measured at fair value. The Group uses quoted market prices to determine fair value for financial assets and liabilities at fair value through profit or loss. The fair value adjustment on financial assets and liabilities at fair value through profit or loss is recognized in the consolidated income statement for the period. The Group does not reclassify financial instruments in or out of this category while they are held.

In the normal course of business, the Group enters into various derivative financial instruments including forwards, swaps and spot transactions to manage currency and liquidity risks and for trading purposes. Derivative financial instruments entered into by the Group are not designated as hedges and do not qualify for hedge accounting. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Derivatives are included in financial assets and liabilities at fair value through profit or loss in the consolidated statement of financial position. Gains and losses resulting from these instruments are included in Net gain/loss from financial assets and liabilities at fair value through profit or loss in the consolidated income statement.

Derivative instruments embedded in other financial instruments are treated as separate derivatives if their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value with unrealized gains and losses reported in the consolidated income statement. An embedded derivative is a component of a hybrid (combined) financial instrument that includes both the derivative and a host contract, with the effect that some of the cash flows of the combined instrument vary in a similar way to a stand-alone derivative.

Investments available-for-sale represents debt and equity investments that are intended to be held for an indefinite period of time. Investments available-for-sale are initially recorded at fair value and subsequently measured at fair value, with such re-measurement recognized directly in equity, except for impairment losses, foreign exchange gains or losses and interest income accrued using the effective interest method, which are recognized directly in the consolidated income statement. When sold, the gain/loss previously recorded in equity is recycled through the consolidated income statement. When transferred to investments held to maturity the fair value of investments availablefor-sale at the date of transfer becomes the new amortized cost of the investments held to maturity. Any previous gain or loss on those assets that has been recognized in equity is amortized into the income statement over the remaining life of the held to maturity investments using the effective interest method for financial assets with fixed maturity and when financial assets are sold or otherwise disposed of for financial assets without fixed maturity.

The Group uses quoted market prices to determine the fair value for the Group's debt securities held as investments available-for-sale (equity securities are not material) where available. If the market for investments is not active, the Group establishes fair value by using valuation techniques including discounted future cash flows and option pricing models. When valuation techniques are used, the input data is based on market-based valuation parameters, such as interest rates, volatility, exchange rates and the credit rating of the counterparty, recent arm's length market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the same. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Group uses that technique.

Dividends received on investments available-for-sale are included in other income in the consolidated income statement.

Non-marketable debt/equity securities are stated at amortized cost/cost less impairment losses, if any, unless fair value can be reliably measured.

When there is objective evidence that such securities have been impaired, the cumulative loss previously recognized in equity is removed from equity and recognized in the consolidated income statement for the period. These financial assets are recognized net of impairment loss.

Investments held to maturity are debt securities with determinable or fixed payments. The Group has the positive intent and ability to hold such securities to maturity. Such securities are carried at amortized cost using the effective interest method, less any allowance for impairment. Amortized discounts are recognized in interest income over the period to maturity using the effective interest method.

In the normal course of business, the Group maintains advances and deposits for various periods of time with other banks. Due from banks are initially recognized at fair value and are subsequently measured at amortized cost using the effective interest method. Amounts due from credit institutions are carried net of any allowance for impairment losses.

In the normal course of business, the Group enters into sale and repurchase agreements (“repos”) and purchase and resale agreements (“reverse repos”) in the normal course of its business. Repos and reverse repos are utilized by the Group as an element of its treasury management.

A repo is an agreement to transfer a financial asset to another party in exchange for cash or other consideration and a concurrent obligation to reacquire the financial assets at a future date for an amount equal to the cash or other consideration exchanged plus interest. These agreements are accounted for as financing transactions. Financial assets sold under repos are retained in the consolidated financial statements and consideration received under these agreements is recorded as collateralized deposit received within balances due to banks.

Assets purchased under reverse repos are recorded in the consolidated financial statements as cash placed on deposit collateralized by securities and other assets and are classified within balances due from banks. The difference between the sale and repurchase prices is treated as interest expense in the consolidated income statement and accrued over the life of the repos agreement using the effective interest rate method.

The Group enters into repos and reverse repos agreements using the automated system of the Kazakhstan Stock Exchange (KASE) in accordance with the trading rules established by the KASE (the “Rules”). According to the Rules the automated repos and reverse repos are concluded using open sale methods. For open sale methods the counterparty remains undefined and all risks the Group undertakes, including credit and settlement risks, are with the KASE.

Loans to customers are non-derivative assets with fixed or determinable payments that are not quoted in an active market, other than those classified in other categories of financial assets.

Loans to customers granted by the Group are initially recognized at fair value plus related transaction costs that directly relate to acquisition or creation of such financial assets. Where the fair value of consideration given does not equal the fair value of the loan, for example where the loan is issued at lower than market rates, the difference between the fair value of consideration given and the fair value of the loan is recognized as a loss on initial recognition of the loan and included in the consolidated income statement according to nature of the losses. Subsequently, loans are carried at amortized cost using the effective interest method. Loans to customers are carried net of any allowance for impairment losses.

Loans are written off against the allowance for impairment losses when deemed uncollectible. Loans are written off after becoming 180 days past due. Subsequent recoveries of amounts previously written off are reflected in the consolidated income statement.

The Group accounts for impairment of financial assets not recorded at fair value when there is objective evidence of impairment of a financial asset or a group of financial assets. The impairment of financial assets represents the difference between the carrying value of the asset and current value of estimated future cash flows including amounts which can be received on guarantees and security discounted using the initial effective interest rate on financial assets recorded at amortized value. If in a subsequent period the impairment amount decreases and such a decrease can be objectively associated with an event occurring after recognition of the impairment then the previously recognized impairment loss is reversed with an adjustment of the provision account.

For financial instruments recorded at cost the impairment represents the difference between the carrying value of the financial asset and current value of the estimated future cash flows discounted using the current market interest rate for a similar financial instrument. Such impairment losses are not reversed.

The impairment is calculated based on the analysis of assets subject to risks and reflects the amount sufficient, in the opinion of the management, to cover relevant losses. The provisions are created as a result of an individual evaluation of assets subject to risks regarding financial assets being material individually and on the basis of an individual or joint evaluation of financial assets not being material individually.

The change in the impairment is included into profits using the provision account (financial assets recorded at amortized cost) or by a direct write-off (financial assets recorded at cost). Assets recorded in the consolidated statement of financial position are reduced by the amount of the impairment. The factors the Group evaluates in determining the presence of objective evidence of occurrence of an impairment loss include information on liquidity of the debtor or issuer, their solvency, business risks and financial risks, levels and tendencies of default on obligations on similar financial assets, national and local economic tendencies and conditions, and fair value of the security and guarantees. These and other factors individually or in aggregate represent, to a great extent, an objective evidence of recognition of the impairment loss on the financial asset or group of financial assets.

It should be noted that the evaluation of losses includes a subjective factor. Management of the Group believes that the amount of recorded impairment is sufficient to cover losses incurred on assets subject to risks at the reporting date, although it is probable that in certain periods the Group can incur losses greater than the recorded impairment.

Finance leases are leases that transfer substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract.

2.3 Peculiarities of Lending to Large Businesses

The lease transfers ownership of the asset to the lessee by the end of the lease term;

- The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised;

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