Weekly actual topics in Azerbaijan (Sept. 19-24)

Analysis Materials 28 September 2011 14:05

What are prospects of Islamic banking in Azerbaijan?

Today, when the world's largest banks open "Islamic windows", which, in essence, is proof of the growing interest in the Islamic banking, the process of introducing Islamic banking in Azerbaijan is becoming increasingly important and relevant.

Azerbaijan may become a regional hub for Islamic finance and promote cooperation in Islamic banking within the Persian Gulf and Central Asia, the team leader for the introduction of Islamic banking at the International Bank of Azerbaijan (IBA), Behnam Gurbanzade, said. "Our market analysis confirmed the demand of corporate and private individuals in the products and services of Islamic banking in Azerbaijan," Gurbanzade added.

The Islamic banking has great investment potential, Islamic banks have long been demonstrated their capabilities to the world. Therefore, attraction of more investment in Azerbaijan's banking sector and their subsequent infusion into the economy, of course, is one of the most important incentives for the government and banks of Azerbaijan.

Azerbaijan is a country where most of the population adheres to the Islamic principles. Therefore, the presence of banks coordinating the existing norms in the country with Sharia law will lead to that part of the population, who did not trust their funds to the usual commercial banks, will trust the Islamic bank .

Financing of the entrepreneurship activity was carried out at the expense of depositors, after which the bank and the entrepreneur share the profits. Thus, the need for loan interest falls away. In turn, depositor and bank's receiving remuneration will depend only on the profitability and success of entrepreneurial activity, which has been invested.

However, the relevant legal basis is required for full funding of the Islamic banking in Azerbaijan, so today the Azerbaijani banks interested in the Islamic banking products have a task to develop proposals and submit them to the country's central bank.

Yet Azerbaijan lacks legal framework governing the development of this direction. The Central Bank of Azerbaijan (CBA) continues to explore issues of implementing the Islamic banking principles, which is scheduled to be considered within the overall strategy of the banking system and estimate in relation to how it is beneficial to the Azerbaijani economy.

In addition, one of the most important factors for the Azerbaijani market is a factor of the championship. Being the first, a bank will receive a number of advantages and it will considerably approve its position on the market. The main difference between these banks and commercial banks is that their activities adhere to the requirements of Islam, under which lending under a loan interest is prohibited. Islamic Bank gets profits from its activities, but at the same time uses such financial instruments for its reception, which can meet this condition. This mechanism works at the expense of the investment fundamentals of business of an Islamic bank.

In turn, depositor and bank's receiving remuneration will depend only on the profitability and success of entrepreneurial activity, which has been invested.

Azerbaijan links future with alternative energy sources

Azerbaijan is considered as being among the most profitable countries in terms of alternative energy development. The Azerbaijani State Agency for Alternative and Renewable Energy under the Industry and Energy Ministry plans to bring the share of alternative energy sources in total energy production to 20 percent by 2020, the Head of the agency Akim Badalov told media.

He said that at present, the share of alternative sources is at 10 percent, given the use of small hydropower stations in the country.

Meanwhile, Azerbaijan has very favorable natural conditions to develop renewable energy sources. First of all, there is a high potential for wind energy, especially on the Absheron peninsula. Wind speed ranges between 3 to 7 m / sec, year-round, which is considered ideal for efficient wind generators.

It is still more profitable to use solar energy. There are 260-280 sunny days in Azerbaijan per year. There are thermal waters in the country, especially in Guba. The water temperature sometimes reaches 90 degrees. Thermal waters are used in households for heat production.

The appropriate legal base must be created for alternative energy development in Azerbaijan.

According to international experience , alternative energy is developing only in countries with strong legislation and effective laws. A number of issues, including environmental and economic relations between the supplier and consumer, and others, must be legally stipulated. That is, a favorable sphere must be created for this sector.

The world has great demand for energy at present . Power consumption in China and India is roughly 20 percent of the total world level. Although the development of alternative and renewable energy sources requires significant time, it will meet most of the demands for clean energy in the future.

Renewable energy sources will help Azerbaijan reach a new stage in future development. Oil and gas reserves are not eternal, so the countries involved in oil and gas extraction must think seriously about their future prospects.

Of course, depletion of resources will not occur today or tomorrow. Therefore Azerbaijan, having good potential in the field of alternative energy, has enough time to develop this sector, including the introduction of new equipment.

The Experimental Landfill will be commissioned in Gobustan soon, with the first hybrid power plant in Azerbaijan to be placed there.

Wind power stations, solar modules and facilities producing electricity from biomass will work at a hybrid power plant in Gobustan. Production capacity will reach 5.5 megawatts.

The construction of a new plant producing solar cells will be completed in Sumgait by late 2011. The plant will also produce energy efficient LED-lamps.

Azerbaijan 's non-oil sector to boost growth

The growth rate in the non-oil sector of the Azerbaijani economy exceeds the growth rate in the oil sector, which ensures positive growth throughout the economy. The development of agriculture, information, communication, transport, environmental and tourism areas is a priority for Azerbaijan's economic development.

Based on State Statistics Committee data, an increase in industrial production was recorded in many areas of the non-oil sector in the eight months of 2011. Growth rate has reached 10.4 percent.

During the reported period, the volume of production in the mining industry decreased by 5.5 percent, while the figure was 3.8 billion manat in the processing industry, with an increase of 9.8 percent.

This increase was mainly achieved through the production of food products (with annual growth of 7 percent), metallurgy (79.8 percent), clothing (60.3 percent), chemicals (53.2 percent), machinery and equipment installation and repair (53.4 percent), and their production (25.4 percent). Production of paper and wooden boards grew by 33.4 percent, alcohol by 30 percent, and computers and other electronic equipment by 20.6 percent, etc.

The role of Azerbaijan's non-oil sector gradually increases in investments which flow into the country. Based on official statistics, some 71.8 percent (3.944.4 billion manat) of funds invested in the main capital in Jan.-Aug. 2011 are directed toward the development of Azerbaijan's non-oil sector, including 14.9 percent (816.9 million manat) in the non-oil industrial sector.

Thus, the country is implementing large-scale industrial projects, including projects to build a shipyard, three cement plants, a new sea port, and a new international terminal at the Heydar Aliyev international airport, reconstructing the railway industry, and establishing a railroad car repair plant. About 60 industrial objects were put into operation in the country in 2010 and another 80 industrial enterprises are in various stages of construction. Most of them will be located in the Garadag district of Baku, Ganja and Sumgait, where three industrial zones will be set up.

As for export of non-oil products, Azerbaijan's non-oil sector yields to the oil sector, but demonstrates the growing indicators. Based on the most recent payment balance of Azerbaijan, the total value of exports in the non-oil sector amounted to $786.0 million in January-June 2011, with an increase of 11.9 percent, compared to the same period in 2010. Thus, the share in the non-oil sector in Azerbaijan's exports amounted to 4.1 percent, compared to a 95.9 percent share of oil products in the country's total exports.

Today, Azerbaijan is exporting non-oil sector products such as electrical machinery, equipment, parts, chemicals, food (including sugar, fruits and vegetables), cotton, and other such products, as well as textile industry products.

Does Azerbaijan face food security?

Ensuring food security in future years is a priority of Azerbaijan. No country has been insured from food shortages, and therefore Azerbaijani ministries must seriously approach the problem of food security, Deputy Prime Minister Ali Hasanov said, giving a speech at a seminar on food security.

According to the UN information, today about one billion people in the world suffer from hunger and malnutrition.

The food security of each country depends on how it is able to provide itself with necessary volume of food, of which main indicator is the volume of grain reserve stored by the next harvesting. According to estimate of the Food and Agriculture Organization (FAO), the security is considered so-called grain reserve for 60 days (about 20 percent of grain consumed in the country during year).

According to the forecasts of Azerbaijan's Agriculture Ministry, Azerbaijan is expected to produce 2.5 million tons of grain in Azerbaijan, which is 500,000 tons more than last year. Azerbaijan's total demand for grain is 3-3.2 million tons. Consequently, the remaining part of grain is imported from other countries, particularly from Russia and Kazakhstan.

Currently, Azerbaijan completely meets its own needs only for vegetables, melons and fruits, which are also exported. According to the State Customs Committee, in January-July 2011, Azerbaijan increased its agricultural exports by 1.68 times compared to the same period of the last year. During January-July, export of fruit and vegetables amounted to $95.976 million compared to $57.156 million last year.

During the reported period, Azerbaijan imported food products in amount of $615.07 million (an increase of 19.42 percent), which accounted for 11.96 percent of total imports. Country's dependence on imports of these or other products indicates the level of dependence of food balance.

"Azerbaijan has a problem of about 1 million refugees and IDPs. We surely should be very cautious over the issue of food security until this problem is resolved, until Azerbaijan has poor people and poverty reduces to zero," Hasanov said.

According to State Statistics Committee, the expenditure on buying foods in the structure of household consumption expenditure in Azerbaijan continue to remain high for their share (70 percent) and play a decisive role in the dynamics of final consumption.

Even if today there is not a real threat to food security in Azerbaijan, the country should strengthen its food security through maximum production of foods, which assume a strategic importance for the country.

Azerbaijan's gold opportunities

Azerbaijan will soon start exports of precious metals. Anglo Asian Mining Plc, a manufacturer of gold in Azerbaijan, carried out the first sale of copper concentrate in the first half of 2011.

According to the Company, the income in amount of $2.1 million was generated through the sale of 87.25 percent of developed 90 tons of copper, 29,132 ounces of silver and 335 ounces of gold.

Since early second half-year, regular copper concentrate has been supplied, sales of which will be completed in the coming months.

As of late August 2011, copper concentrate reserves hit approximately 383 tons of copper, 2,422 kg of silver, and 3 kg of gold.

"We are negotiating with the government, partners and potential buyers on the sale of these reserves and hope to sign an agreement to sell it in the near future," the company said.
Azerbaijan had transferred all rights to exploit gold fields in the country to Canadian R.V. Investment Company in August 1997. The Government of Azerbaijan and R.V. Investment signed a production sharing agreement (PSA) to develop six fields of gold, silver and copper in the south-west of the country - Gadabay, Gosha, Ordubad group, Soyudlyu, Gizilbulag and Vyadzhnali.
However, during seven years after signing the contract, the company did not carry out any work on these fields, explaining its inaction through fall in world gold prices. Other reasons for delay in the development of gold fields included lack of working capital, which were later found in foreign banks. Beginning in late 2005, positive tendencies in the market of precious metals stimulated preparations. The first gold and silver were produced on the Gadabay field in May 2009.

The Anglo Asian Mining Plc plans to start gold production on all new fields. Previously, the company submitted to government a document confirming the discovery of gold reserves on new Gosha field, which was adopted by the Azerbaijani side. According to information, government's approval of the program for the development and production on the field is expected in October 2011.

According to State Statistics Committee, over eight months of 2011, Azerbaijan produced 2,073 kilograms of precious metal, which is 6.3 percent higher than the same period of 2010. The storage reserves of precious metals amounted to 125 kg. In January-August 2011, Azerbaijan produced 1,154 kg of gold and 919 kg of silver. Gold reserves as of Sept. 1 were produced at 68 kg, silver - 57 kg.

According to estimates of Azerbaijan's Ministry of Ecology and Natural Resources, the country is able to produce about 10-15 tons of gold per year.
The global financial crisis showed that gold was one of the few investments that brought profits to investors. When all rapidly became cheaper and collapsed, gold continued to demonstrate an enviable stability and tended to increase.
December futures for gold in electronic trading in New York on Stock Exchange Comex as of 11:43 Moscow time rose in price by 0.2 percent to $1.746.1 per troy ounce.