NEXT LIMIT FOR BANKS

The National Bank of Azerbaijan (NBA) made a resolution on double increase of requirements set for the minimal statutory capital of new banks. In compliance with the resolution, from 1 January 2006 the requirement set for the capital of newly banks will be increased to 50bn manats ($10m).

At the moment the figure comprises 25bn manats ($5m).

In compliance with the schedule of requirements set for minimal amount of capital, adopted on 3 May 2004, the minimal statutory capital of commercial banks was to comprise $5m from 1 January 2006. However, it was doubled to $10m.

Reasons

The resolution by the NBA is based on the will of achieving a reliable banking sector with enough level of capitalization. Though Azerbaijan enters the first five on CIS in accordance with the amount of assets in the banking sector, they have demonstrated rapid growth over the past few years.

for instance, in 2002 a special weight of assets in the Gross Domestic Product (GDP) comprised 14%, in 2004 it reached 20%. It is a good indicator.

The above said rise of assets occurred at the expense of a rise of a deposits base of the banking system, which looked too phenomenal amid speedy inflation and stable consolidation of manat in regard to U.S. dollar. As to private funds of the banks, they played inconsiderable role the rise of assets. If in 2002 the attitude of the banking capital to assets comprised 19.8%, in 2004 it was 17.2%.

It testifies for speedier rise of assets as compared to private funds of banks. Obviously, there appears necessity for further increase of confidence towards the banking system. The monetary authorities are seemed to carry out sharp rise in the minimal statutory capital namely for that reason. The NBA regularly comes out with initiatives on the consolidation of the capital base of banks as one of the strategic gaols of the development of banking system. "Well capitalized banking system is in condition to promote and support economic development thruogh maximal mobilzation of internal collections, the NBA says.

Results

Azerbaijan, with good position in CIS for the level of private funds, has weak weight of banking sector in economy.

One of the reasons is linked with the low level of community confidence in the banking system, though over the past few years the confidence has increased considerably. In this condition a resolution by the NBA will have a positive impact on the capitalization of the banking system.

On the other hand, we will witness further cut in the number of commercial banks through their liquidation and merger. Despite the goal-directed policy by the monetary authorities in this direction, the current number of banks (they total 42) with consideration of territory and population still seems redundant for Azerbaijan. Azerbaijan has more banks than Kazakhstan and Belorus, which hold incomparably large territory and developed banking system.

Country

Number of banks

Russia

1420

Ukraine (2004)

182

Azerbaijan

42

Kazakhstan

36

Belorus

32

Armenia (2004)

20

Kyrgyzstan

19

Moldva

16


Source: Central Banks of several countries, calculations by Trend


Along with cut in the number of banks one can expect the consolidation of the rest, as the rise of capital requires increase of profits. As a result, the banks will be obliged to increase the efficiency of the management of asserts, reduce the share of bad-credits in their structure.

However, the strengthening of requirements set for minimal amount of the statutory capital is still insufficient for increasing the confidence in the banking sector, though its reliability is increased considerably. It is necessary to carry out measures for insurance of community deposits.

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