15-09-08
Azerbaijan Banking System

AzeriRating looks at the state of and development trends in the banking sector in Azerbaijan:

• The banking system of independent Azerbaijan is very young and has an enormous development potential.
• Capital markets are not sufficiently developed, dominated by state banks.
• Political risk is insignificant in the short term transition period (less than 5 years). Long-term risk is estimated as low.
• Positive changes in the main financial indicators are gradually correlated with qualitative developments.
• Low diversification of attracted funds by source combined with low capitalization affect risk levels of active transactions.
• The high cost of resources puts a strain on the banks’ ability for corporate financing.

Changes over the past two years show that the Azerbaijan banking sector has entered a new development stage as the monopoly of state banks is gradually diminishing.

Despite its recent accomplishments, the Azerbaijan banking system faces high risks and its funds are not adequate to the economic needs of the country. The banking sector accounts for only 13% of the economy (ratio of capital to GDP).

One of the main problems is the low capitalization of the banking sector, compared to Russia, Kazakhstan, and Ukraine.

Despite a high GDP growth, Azerbaijan remains a country in transition, whose economy is dependent on the global oil market.

Quantity changes in the banking sector

(Data from the National Bank of Azerbaijan)

The number of credit institutions licensed by the National Bank increased in the first quarter of 2007 by 6, totaling 135. The number of non-banking credit institutions increased in 2006 from 85 to 94, staying at that level on 1 July, 2007.

The monopoly of the state banks is gradually decreasing while the private sector is growing. Based on aggregate assets and liabilities, the private sector accounts for 60% of the market. Its capital levels are significantly higher than that of state banks.

The National Bank of Azerbaijan (NBA) is conducting far-reaching reforms of the banking sector. The main challenges are due to the slow privatization rate of the state banks, a weak financial market and a lack of bank transparency. However, the reforms have started showing positive results and competition among the leading banks is increasing.

The banking system has overcome the initial setup challenges and entered the period of qualitative reforms. Its main goals are capitalization, competition and eliminating inert banks. Economic problems spill over into the banking sector; controlling inflation results in a disproportionate growth of the NBA’s refinancing rate and denomination of the local currency.

AzeriRating forecasts that changes in the banking legislature, active reforms of the National bank and the participation of international financial institutions will bring substantial changes in the banking sector in the near future.

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