Azerbaijan's banking system is experiencing a serious turn to high-quality changes, such as development of retail business, consolidation of capital, expansion of services, and increase in credits taken in international financial institutes.
Role of senior supervision body in banking field which is the National Bank of Azerbaijan (NBA) grows in such circumstances.
Functional structure of Bank Supervision Department of the NBA includes six following departments: licensing and methodology, exterior supervision, interior supervision, IT and payment system supervision, and money-laundering. This Bank Supervision Department covers all stages of bank supervision.
In compliance with NBA's requirements in order to improve transparency in bank supervision system, which is stipulated in the new Law on Banks (took effect on 30 March 2004), all banks had to be audited and had to publicize the reports by the end of May, 2007. NBA also requires opening of sites by the banks, though it is not yet a normative requirement. The side shall provide for all data, such as financial accounting, services, and rates on products.
NBA's key requirement is introduction of corporate governance standards. Transparency issues are also on focus. Within the framework of one of Basel-2 elements on market discipline NBA plans to lay down terms regarding data opening in the banks. In accordance with NBA strategy it is planned to provide for additional data which shall be placed in the banks' sites. In this case opening of a site will be an obligatory condition, but that is now a prudential requirement.
Special measures regarding violation of prudential norms are stipulated in the law. NBA can offer time for removal of the violations, but if the violations are not removed in the defined term the license of the violator-bank shall be restricted or even withdrawn. Prudential norms should not be violated, while there are still cases when the NBA had to cancel license of three banks due to non-fulfillment of re1quirements. At present there are 44 banks in Azerbaijan, including 21 with the participation of the foreign capital. In 2000 their number was 59, including 16 banks with the participation of foreign capital.
Six banks have not fulfill requirement set by the National Bank of Azerbaijan (NBA) on the minimum amount of aggregate capital, which is to comprise AZN 10mln by 1 July, the NBA said on August 31.
Thus, by 1 July the capital of 31 banks exceeded AZN 10mln, according to the NBA's statistic data. The capital of ten banks ranged between AZN 5mln to AZN 10mln and two banks from AZN 3.5mln to AZN 5mln.
There are 43 banks working in Azerbaijan, because Pochtbank does not carry out accounting, because its operations are completely restricted. Three banks - Kauthar Bank, Euro Bank (former AzInvestBank) and Azal Bank - function with restricted license (without permission for accepting deposit).
Simultaneously NBA is negotiating with the stockholders of the banks which did not fulfil the requirement in order to get familiar with their further capitalization plans. In accordance with banking legislation, there is a range of successive sanctions. Change of juridical status, restriction of bank license, recommendations on merge of capital with another bank is among the sanctions. The extreme sanction is withdrawal of banking license. Merge of capitals shall be initiated by the stockholders of the banks firstly.
An initiative on merger of capital should first of all come from the shareholders of banks. The same cases were experienced when Mbank and Promtechbank merged into UniBnak.
The deposit attraction licenses of the banks avoiding the requirement will be suspended. So, they will not be able to join the Deposit Insurance Fund. They will have to consolidate or change their status to non-bank credit organizations. Change of the status will be possible after adoption of the new law on Non-bank Credit Organizations
Currently, the non-bank credit organization function in accordance with rules and instructions of NBA. The NBA has concluded work over the bill and presented it to the Parliament to discuss during the =autumn session. NBA expects the document should be adopted by the end of 2007.
The aggregate capital of all 43 banks operating in Azerbaijan increased by 39.5% compared to the beginning of 2007 (AZN 603.3mln to 1 January) making up AZN 841.7mln to 1 July
The NBA has not made a decision on further increase of requirement set for the capital, but if to view the dynamic of growth of capital in other post-Soviet countries, minimal requirement is $5mln. NBA regarded AZN 10mln as a normal amount and no formal decision has been taken yet.
Radical reforms have been successfully held at the banking system of Azerbaijan over the past 10 years. Special regime will be established in this sector, when partner relations will be established between the regulating and regulated bodies. In this respect no resistance is felt by banks with regard to fulfillment of requirements, which they accept as supervising decision.
This, it is necessary to take measures on the application of corporate governance standards after the approval of new banking legislation. In this respect the NBA carried out estimation of corporate governance at every bank. A plan of actions are developed for bank where the shortages were observed.
The National Bank of Azerbaijan has sent to all banks a form on self-estimation of the state of application of corporate governance standards. Generally, 6 standards have been adopted on IT, internal audit, risk governance, financial management and accountability, strategic planning and organization structure, human resources, the replies will be analyzed upon submission of inquiries from banks.
The NBA also continues the estimation of the country's banking sector to define the impact on their state in connection with transition to Basel-2 standards.
Simultaneously, the National Bank of Azerbaijan (NBA) has devised a strategy to introduce the new standards of "Basel- 2" into the banking sector of the Country. According to the recently conducted appraisal of the Country's banking system, the effect the new standards may have on the system was determined. The NBA has decided to introduce the second and third element to the banking system, out of the three available.
The first element envisages the agreement on capital, the second - requirement to the current supervision (on governance of capital), and the third - market disciplines (information disclosure). "Due to the introduction of the second and third elements of "Basel- 2", we have our own elaborations, and we are expected to make some amendments to the regulatory base, as well as determine new requirements to banks operating in the country," said the NBA representative.
According to the first element, the appraisal of banks is underway, and its introduction is not only linked with the banking sector. It also has a more extended question of whether the economy has been prepared for it as a whole, as not only the NBA's participation in it was required. The NBA has not made any definite decisions at the time of full transition to "Basel- 2". Due to the difficulty of the transition to the new standards, even the U.S.A. has postponed it from 2007 to 2009. However, the NBA suggests that Azerbaijan may introduce the second and third elements into its banking system.
On introducing the second element (on governance of capital), NBA establishes requirements to the policy on governing capital, but the regulations remain unchanged as of yet. Even when changing to "Basel- 2", the regulations will be kept, but the requirements to changing capital will be changed.
"Basel- 2" Standards are a special method on appraising risks for counting capital. Every year, the E.U. and other countries delay full transition to "Basel- 2", since they appraise macro prudential indicators, and see that the rapid transition to the mentioned standards might impact the level of financial services (qualitative and quantitative indicators), and that, in turn, may cause a reduction of financial services in the real sector resulting in slowing economic growth.
Full coincidence of the banking control in Azerbaijan to Basel 1 indicators to Basel 1 principles was revealed through the estimation of financial sector appraisal program (FSAP) held by the World Bank jointly with the IMF.
It was the first IMF assessment within this program was made in 2003. After the first assessment, laws "On banks" and "On National Bank of Azerbaijan" and many standard acts were adopted. All of them served to resolve the issues which arose in the first part of the FSAP assessment. In addition, there are assessment methods, which have been devised by the Basel Committee and are used jointly by the experts of the WB and IMF.
Fighting with 'money laundry' and terror financing has become one of the major elements of the banking control after 11 September 2001. NBA has adopted methodological guidelines on prevention of legalization of illegal money and property through banks.
Azerbaijani banks carry out these principles, but it is something new for Azerbaijan and for the world, It became actual after 11 September 2001. NBA has done great work in this direction.
There were cases of terrorism financing in the Azerbaijani banking system and the law-enforcement bodies were informed of that.
Azerbaijan was the first country which passed estimation in 2003 in accordance with new regulation of Moneyval. Azerbaijan considerably correspondent to FATF standards and the estimation by Moneyval was higher than the one given under the interdepartmental expert group.
An expert group has developed a draft Law on Fighting with Money Laundry and financial terrorism, after the adoption of which a financial intelligence body will be established.
Attraction of more and more number of foreign banks and international financial banks by the local banks can be regarded as the efficient result of the banking supervision. So far, the Azerbaijan are still unable to fully cover the demand of the national economy. Censure by international experts is explained by the fact that only big banks can allocate big loan exceeding million. The presence state banks in the banking system (the International Bank of Azerbaijan and KapitalBank) testifies for the necessity of intensifying their privatizations.