Possible closure of some banks in Azerbaijan not to create threat to deposit insurance system

Business Materials 14 August 2012 12:41

Azerbaijan, Baku, Aug. 14 / Trend A.Akhundov /

The possible closure of a large number of banks will not create a threat to the system of deposit insurance of individuals in Azerbaijan, Executive Director of the Azerbaijan Deposit Insurance Fund (ADIF) Azad Javadov told Trend on Monday.

According to the decision of the Central Bank of Azerbaijan (CBA) dated July 25, the minimum total capital of existing banks, as well as the authorised capital of newly established banks is increased from the current 10 million manat ($12.7 million) to 50 million manat ($63.7 million). The new standard for the minimum total capital for existing banks shall take effect from January 1, 2014. Many experts, including the international rating agency Moody's Investors Service, expect a serious reduction in the number of participants in the banking system of Azerbaijan.

"Closure of the bank does not mean its bankruptcy. For example, in recent years, three or four banks in the country had their licenses revoked, but not all of these banks were declared bankrupt. These banks had the necessary funds, and they paid for their obligations [compensation is paid only on insured deposits of Royal Bank], no problems have arisen with this," Javadov said.

Over the past few years licenses of four banks have been revoked - Birlik Bank (from January 28, 2011), Kovser Bank (from December 1, 2010), Debut Bank (from December 1, 2010) and Royal Bank (from July 12, 2012). Birlik Bank and Royal Bank have officially been declared bankrupt.

"Today, all the small banks are working properly, otherwise their license would have been revoked. In addition, banks have the time to increase their capital or to merge before the end of 2013," Javadov said.

He said the fund is ready for any scenario of events.

"The Fund is ready to pay compensation for the insured deposits in case of bankruptcy of one or more banks. If in this case, the fund does not have enough money to return the deposit, we can borrow additional funds from the state," Javadov said.

From August 1, ADIF through three agent banks started to pay compensation to depositors of Royal Bank. For the first in its history payment the fund expects to spend about 16 million manat, or one-third of its funds (currently the fund has 48 million manat).

By the end of 2011, only 11 out of 43 the existing banks have the capital, corresponding to the new requirements of CBA. These banks (about a quarter of banks in the country) hold more than 70 percent of the assets of the banking sector.

"Among the other 32 banks, which had less than 50 million manat of capital, we estimate that only 13 medium size banks (21 percent of banking system assets) will be able to meet the new capital requirements via internal capital generation and capital injections from their shareholders or by consolidating. As a result, the new requirements will likely encourage most of those banks to consolidate, creating stronger financial institutions that will be in a better position to compete with large banks," the Moody's said last week.

The remaining 19 small banks, which comprised only 6 percent of total system's assets at year-end 2011, will find it difficult to raise additional capital via consolidation or external capital contribution, the agency believes.

"As a result, we expect them to be liquidated if they are not acquired by larger banks. Liquidation of small banks would result in a more stable banking system since they are generally non-transparent financial institutions with weak financial fundamentals, high risk-taking, high shares of related-party lending and limited franchises," the statement said.