Very dynamic banking sector
The bank system of Azerbaijan is going through big changes for the better which is indicated by the developed retail business, consolidation of capital, rise in the offered services, and increase in the loans granted by the international finance institutions. The marked competition in the market of bank services brings new strong players to this market and removes weak ones.
According to the last estimates of the National Bank for the first quarter of 2008, a total of 142 credit organizations had the license of the National Bank to operate as a bank. A total of 96 of them are non-bank credit organizations (no new license issued during the year) and 46 are banks (two licenses granted). There are a total of 23 banks with a foreign capital in this country. The percentage of the foreign capital in 7 of them makes up 50% to 100%, in 14 banks - up to 50% to and two branches of the foreign banks.
Organizational Pattern of Bank System in Azerbaijan
The number of the operating branches of the banks made up 501 with a rise of 16 branches for a year. A total of 125 are branches of state-owned banks and 376 are that of business banks. The number of banks with local branches amount to 41. There are also 95 branch banks. The numbers of organizations of the banks abroad makes up six, three of which are representations, two - subsidiaries and one of them is branch. There are also four representations of the foreign banks operating in Azerbaijan.
During the second quarter, these figures were subject to several changes which National Bank will soon make them public as a report. We will do it ahead of them by informing of several, but important innovations that occurred recently. So, last week already third new bank was registered by the Ministry of Taxes since the beginning of the year - Azfinansbank open Joint Stock Company. The authorized capital of the bank is AZN10mln.
It is worth mentioning that since the beginning of the year Nakhchivanbank Open Stock Company and CP Bank have been registered by the Ministry of Taxes through the 'single window' system introduced from 1 January 2008. These banks have already gone through the first stage of licensing in the National Bank of Azerbaijan. Nakhchivanbank Open Stock Company and CP Bank enter the bank market of the country with an authorized capital stock of AZN10mln and AZN11mln respectively.
It means that the capitalization of the domestic bank system has already increased remarkably. So, as of June of 2008, the capitalization of bank sector of Azerbaijan increased by 7.93% and totaled to AZN1,349,900,000 and increased by 75.8% for a year. So, according to the statistics of NBA, as of end of the first quarter of the current year, the capital of 39 banks exceeded AZN10mln which is one bank more than the beginning of the year. Their percentage in the aggregate capital of all banks made up 96.1%.
In 2008, the National Bank does not plan to set forth new standard requirements for the capital of banks, but it intends to work out strategy on their further capitalization. As a whole, in the future, the banks must meet capital adequacy requirements which are wide-spread in the international practice.
In 2008, the operational sub-division of the Russian VneshtorgBank is expected to be opened in Azerbaijan. The universal business bank of Georgia - TBC Bank Stock Company has announced its intentions to take part in the bank sector of Azerbaijan. Moreover, Commerz Bank from Germany is also permitted to open its representation in Azerbaijan. The French Societe General, TuranAlem and Kalig Bank from Kazakhstan are also expected to appeal. Today, foreign banks and banks with foreign capital in Azerbaijan hold one third of the market (up to 30% on separate indicators and about 25% of all bank market). One should take into consideration the fact that this indicator rose for the last three years when EBRD, German development bank of KfW, and International Finance Corporation purchased part of the shares in the large business banks including Azerdemiryolbank, UniBank, Azerigazbank and Bank of Baku.
However, though new players enter the market, banks which operated for more than 10 years, leave the market as they can not stand competition, do not meet requirements of the bank legislation, and not conform to the minimal aggregate capital and prudential standards of NBA. The removal of such banks is carried out within the conversion of the bank system of the country, ensuring financial stability and making financial mediation more efficient. In order to fight crisis in the financial markets all over the world, the National Bank is toughening the prudential standards of regulations to improve operations on loans, deposit guarantee, management of liquidity and on its part, the current control in the banks focus on the management of risks. In the early 2008, NBA called on banks to pursue careful policy including assessment of all elements of situation in the market. In case of violation of standards and non-fulfillment of legislation requirements, the National Bank will levy sanctions on the banks.
Such sanctions were levied in July 2007 on nine banks that were banned to borrow loans. On 9 July 2008, licenses of 2 of these 9 banks were withdrawn. So, in the beginning of July, the Board of Directors resolved to cancel the license of Atlantbank Open Joint Stock Company and Poctbank. Atlantbank Open Joint Stock operated for 15 years and Poctbank for 16 years in the bank market of Azerbaijan. Though Poctbank did not operate as a bank for several years, the cancellation of license was delayed because of the international court proceedings on the case of the Maltese FIM Bank in which the Azerbaijani bank figures. There six banks with restricted licenses (not allowed to take deposits). Therefore, they could not become members of the Deposit Insurance Fund. [Sanctions were imposed on these banks because of the non-conformance to the minimal amount of the aggregate capital set at AZN10mln]. There are sanctions on Kauthar Bank, Euro Bank (former AzInvestBank), Azal Bank, Credo Bank, Birlik Bank, and AFBank. The term of restrictions is determined for each bank in a separate way. It is first of all, aims at protecting the interests of depositors, securing financial stability and protecting investments of the joint stock banks.
The privatization of one of the two state-owned banks of Azerbaijan - Kapital Bank is also important event for the domestic bank sector. The privatization of a state share in the capital of Kapital Bank open joint stock company was completed this month. In 2005-2006, the Azerbaijani government held this share to privatize the state-owned banks of Azerbaijan. The International Monetary Fund also insisted on the privatization of the state-owned banks of Azerbaijan for a long time as it is one of the conditions of promoting structural reforms within the country. The management of Kapital Bank commends the privatization of the state-owned banks and the private bankers also highly appreciate the privatization of state-owned banks. The competition is always distorted when the state-owned company is competing with a private one. For instance, the state-banks can take risks from the social viewpoint which the private banks can not do. Furthermore, the state-banks do not adopt decisions on crediting at the market terms and support unequal conditions for private banks. So, Kapital Bank was one of first three leading banks of Azerbaijan though it held only 4% of the active bank sector. As of 1 January 2008, the assets of Kapital Bank made up AZN249,466,000 and obligation of the bank - AZN209,555,000.
One of the important tendencies in the bank market of Azerbaijan is the increase in the credit operations of the bank. The credit portfolios of the banks of Azerbaijan increased on average by 70%, which is prompted by the need to meet demands for financial resources of the population and economy as a whole. According to National Bank, in June the Azerbaijani banks increased the crediting for the economy by 5.6%. Today the total credit investments of the banks have reached AZN6bln.
However, such growth rates are always accompanied with the institutional development. Therefore, the National Bank calls on banks to create institutional platform until the beginning of rise in the assets and operations. Today, the Azerbaijani banks manage assets worth AZN150mln to AZN200mln on average, and therefore, their risk management, adequacy of capital, and system of corporate management must meet the best standards.
Meeting all requirements of the regulatory body [National Bank], which is accompanied with the removal of weak banks from the bank sector, promoted the confidence of the population toward the bank system. It is reflected in the rise of the deposit base of the bank system of Azerbaijan. For the last 12 months, the deposit base of the Azerbaijani bank system went up by 63%, and growth rates have been varying from 67% to 68% on average for the three to four years. According to NBA, as of 1 June 2008, the amount of deposits of the legal entities and physical persons in the banks totaled to AZN3,857,800,000, AZN1,603,300,000 of which accounted for the deposits of the population
This process began in 2000 within the program of conversion of the bank sector with over 30 banks being removed from the market. Moreover, the measures are being adopted to conduct a control over the bank sector in line with the international standards. Its conformance was confirmed in 2003 as a result of the assessment of the financial system of Azerbaijan conducted by the experts of IMF and WB.
Besides, the new Bill on Banks that took effect in 2004 includes all elements of banking such as entrance to the bank market, process of licensing, current activities, work with the banks who face problems, protection interests of population and investors.
All these measures promote the confidence in the bank sector. The introduction of a system of insurance of deposits gave a powerful impetus to the confidence of the depositors toward the credit organizations. Now banks, joining Deposit Insurance Fund have also become attractive for the clients from the viewpoint of securing the safety of deposits.
The inflow of the deposits to the bank system with high rates is a positive process which enables banks to invest in spheres which need credits. Within the macroeconomic adjustment, this process promotes the opportunities of NBA as the current legal funds are more subject to the instruments of the monetary adjustment rather than money reserves beyond the boundaries of the financial system.
As it is obvious, the hard work toward the radical reforms in the bank sector of Azerbaijan that took a number of years, yielded results. In 2007, the bank system of Azerbaijan achieved the highest growth rates for the last four years as a result of the active foreign loans and involving stock capital to the country.
In a year, the bank assets rose by 72%, obligations - 59%, and deposits - 48%. NBA expects drop in the growth rates of bank indicators as a result of 2008 because of the crisis in the stock market and toughening of requirements for the domestic banks. However, judging from the intensified dynamic growth of the bank sector of Azerbaijan for the first quarter of 2008, one can witness the opposite and can forecast results leaving behind that of 2007.