New glance at prospects of banking deposits in azerbaijan
The boom in the Azerbaijani economy over the past few years has contributed to the increase of community income. Today the difference between income and expenses is increasing progressively in favor of the first.
According to the State Statistics Committee, in January to June 2007 the net income of the Azerbaijani populations had exceeded AZN 6001.3bln, which is 38.4% more compared to 2006. During this period available income made up AZN 711.4 per capita, or 36.8% more compared to the previous year. The per capita available income was more than $500 with an increase of 37.6%.
Every month 40% of people manage to save vacant funds. The savings policy of the Azerbaijani population over the past period is inclined more towards the banking sector, which has restored its confidence in the recent years. Therefore the banks have grown and consolidated. In May 2007 the deposit basis of Azerbaijani banks rose by 6.15% with an increase of 6% in January to May compared to the annual increase of 65% over 2006. As of 1 June 2007 the amount of banking deposits and savings of juridical persons and individuals at the National Bank of Azerbaijan made up AZN 2.254.6mln almost $2.6bln compared to $2123.8bln as of 1 May and AZN 2129.2mln as of 1 January 2007. Over AZN 989.7 of this amount fell upon deposits in manats (+8.06% in May and +19.76% as of beginning of 2007) and the rest in foreign currency.
The community confidence towards the banking deposits could increase considerably in connection with the adoption of the law on Insurance of Deposits with respect to protecting the community banking savings from the threat of bankruptcy and other financial cataclysms. Such protective systems provide security for the activities of financial organizations in many countries and their application in Azerbaijan is met with understanding by the commercial banks.
In accordance with the law adopted, the Fund for Insurance will be established in Azerbaijan with the participation of financially healthy banks which fulfill all the requirements relating to capital, level of liquidity and observation of other prudential standards.
The Fund for Individual Deposits Insurance is likely to set up its activities in Azerbaijan in August 2007. At present the National Bank of Azerbaijan is selecting banks to be in the Fund. A list of 19 banks, selected by the Fund has been compiled. These are the banks which do not pose any doubt for the National Bank of Azerbaijan. Their capital is over $10mln.
The Fund will be formed at the expense of initial membership fees to the amount of around $10,000 per member, simultaneous payments by every member in the amount of $200,000, as well as calendar payments in accordance with the law on Insurance of Deposits - 0.15% of average daily remainder of protected deposits (in relevant currency) per quarter in the first year of the Fund's activities and 0,125% per quarter in the following years
The law also enables the Fund to attract capital at the expense of long-term liabilities, as well as grants and other aid. The German bank KFW has planned to allot a $5mln credit to the Fund,
As to protection of deposits, in accordance with the law, should the banks face problems, the holder can receive its compensation. In particular, the deposits, placed by 1 January 2008 in the amount of less than $4,000 will be compensated in the full amount. On 1 January 2010, the sum of a deposit that is to be compensated fully will be increased to $6,000 and from 2010 to almost $8,000.
So, Azerbaijan is experiencing active changes in baking system, the process of its improvement is underway, its authority and population's trust for it is rising. Azerbaijani citizens gradually diverge from primitive ways of money saving, for instance under a mattress, and begin to see the advantages of bank investing of free funds. The only thing able to impede rise of deposits is rise of inflation and consolidation of real rate of manat (Azerbaijani national currency), which prevent investors from benefiting from their investments. Bank deposits can become less attractive for money saving, for yield from deposits is at the level of inflation now.
The alternative preventing inflation of deposits is to open long-term deposits for over a year term, at the same time increasing the interest rate and thus substituting inflation with profitability. Recognizing low profitability of deposits in this situation, bankers still set hopes upon their stability. Bank deposits will remain the most reliable and popular tool of money placing, what is caused by the fact that today's securities market in Azerbaijan is not developed enough and the citizens consider investing to be a sort of risk, while classic bank deposits are maximum protected and reliable. Bank deposits remain a conservative tool with guaranteed profitability understandable for the most people. The forecasts saying that bank deposits market will retain its high availability are caused by rising real profits of the population and increasing inclination for money saving.
The current deposit market essentially differs from the one which existed several years ago. One of its tendencies is that the depositor is more and more interested not only in deposits, but also additional services: Internet, telephone banking, integration with payments of internet systems.
In case the profitability ratio of the product decreases and price difference gets minimized at the securities market in whole the banks are obliged to endow the deposits with different priorities - privileged long-term withdrawal of funds without essential losses in interest rates, the possibility of recalling part of funds, rendering more comfortable service, etc. Frequently, they introduce special deposits with additional functional in the form of drawing prize and presents for depositors.
Thus, in case of increasing the availability of banking services for population and the level of financial literacy demand for banking deposits following rise in people's incomes. The potential depositors are those who do not have banking savings.