If the year of 2016 was a real test for Azerbaijani banks, then 2017 became a year of reforms for them, adaptation to new economic realities and preparations for further growth.
In general, the past few years have been rich with bank-related events. The past year was not an exception – the institution of banking ombudsman, the Financial Literacy Council and the Azerbaijan Credit Bureau LLC were established. Licenses of some banks were also revoked in 2017.
In general, after the difficult period of 2015-2016, the banking sector began to recover gradually, and it was observed more clearly in late 2017. Firstly, the sector has restored its profitability – in early November 2017 [the figures for the whole 2017 are not yet available], net profit of banks amounted to 549.6 million manats as compared to the loss of 1.7 billion manats in 2016. The aggregate capitalization of banks has grown from 1.9 billion to 3.1 billion manats. The number of bank employees has also increased.
One of the banking sector’s main problems is the continuing growth in overdue loans. Certain measures taken by banks didn't provide the expected results. It was clear that a more comprehensive approach is needed. As expected, the “Baku approach” will become the needed approach. Created by analogy with the Istanbul and London approaches, it is meant to unite the banks in the fight against the growth of credit delinquencies. The general principles of these approaches are that banks restructure problem loans and facilitate loan terms for debtors who are in a particularly difficult situation.
The growth of problem loans, both for individuals and legal entities, has been observed in Azerbaijan since February 2015, when the first devaluation of the national currency occurred. As of late October 2017, overdue loans accounted for 15.55 percent of all loans issued in the country. This is almost 1.9 billion manats (an increase of 37.4 percent during the year) out of 12.15 billion manats [data of the Central Bank].
The development of the “Baku approach” continues. However, the fact that the government creates comprehensive measures to fight against the growth of problem loans, and gives a chance to improve the condition of banks and their customers in 2018-2019.
Establishment of Institution of Banking Ombudsman
The Institution of Banking Ombudsman was established in Azerbaijan in September 2017. Banking Ombudsman Ikram Karimov reviewed more than 160 cases in this period, some of which were solved in favor of bank customers. The establishment of the Institution of Banking Ombudsman is one of the landmark moments of 2017. Of course, it will be possible to speak about the effectiveness of this institute only according to the results of, at least, the first half of 2018. However, a certain positive effect is already being observed.
Currently, the ombudsman considers appeals on disputes that amount to about $2,000. Meanwhile, there are more than 100,000 citizens, who have disagreements with banks that amount to about $2,000.
Earlier, Secretary of the ombudsman Elchin Hasanov said that, the limit for the consideration of cases may be increased in the future, but it is not yet known to what extent. At the same time, it is expected that on the basis of the institution of banking ombudsman, the institution of financial ombudsman will appear in the country, which will help to solve not only disputes between banks and their customers, but also will consider a wider range of issues related to business.
Growth of non-cash payments
The Ministry of Taxes, the Financial Market Supervisory Authority (FIMSA) and the banks themselves implemented various measures to stimulate non-cash payments in 2017.
Entrepreneurs’ cash operations have been restricted since 2017. Thus, the operations of entrepreneurs involved in the areas of trade and public catering have been limited to 30,000 manats per month, which had a monthly turnover of more than 200,000 manats within 12 months. This limit is 15,000 manats per month for other taxpayers.
Meanwhile, crediting, payment of administrative fines, financial sanctions, taxes, customs duties, insurance payments, issuance of loans and payment of debts for leasing operations, pensions and others has been transferred to non-cash form since 2017.
Moreover, for the cashing of funds, entrepreneurs must pay tax from the source in a simplified procedure at a rate of one percent of the amount they cashed.
All these measures led to an increase in funds in bank accounts of, primarily, entrepreneurs, and banks received additional funds for the issuance of loans.
Consolidation of banks
Negotiations about the need to consolidate the banks that have continued for many years, finally produced some results in 2017.
Although the number of merged banks could be more, taking into account the active negotiations that took place last year, but in practice, it did not go further than talking.
Nevertheless, there was only one merger last year – the merger of AtaBank and Caspian Development Bank was completed in 1H17.
As a result, Caspian Development Bank was liquidated and its assets were transferred to AtaBank. This enabled AtaBank to significantly increase its financial indicators.
One of the participants of the sector, which could also merge with another bank, was DemirBank. These plans were not implemented, because FIMSA revoked the license of the bank in December 2017. As a result, after one consolidation and revocation of one license, there are 30 participants in the banking sector of Azerbaijan.
First transformation in the history of Azerbaijan’s banking sector
Non-bank credit organization PARA appeared in Azerbaijan in March 2017. In fact, this is an important event of the past year, since this is the first bank in the history of the Azerbaijani banking sector that turned into a non-bank credit organization.
Parabank’s license was revoked in 2016. However, unlike other banks, it decided to continue its activities. Instead, the bank appealed to the regulator for a license to operate as a non-bank credit organization. This is the first such case in Azerbaijan, but perhaps not the last.
New stage of recovery of the International Bank of Azerbaijan
The International Bank of Azerbaijan is in the process of recovery since 2015. The country’s biggest bank successfully completed the restructuring of foreign liabilities worth $3 billion in 2017.
The previous year became a preparatory one for the bank before being put up for privatization. It is expected that this year the IBA, the majority of shares of which is owned by the government represented by the Ministry of Finance, will be sold.
Who will become the buyer of the bank is, of course, unknown, but the European Bank for Reconstruction and Development (EBRD) has already shown interest in it. EBRD President Suma Chakrabarti said that the financial organization is ready to take part in the privatization only in case of reforming the corporate governance system. The EBRD is not a new player in the Azerbaijani banking sector, and it is a shareholder of several banks in the country. It also owned a part of shares of DemirBank, which was closed in late 2017.
The banking sector of Azerbaijan still has problems – banks have to take measures to resume growth in crediting, attracting deposits. Of course, great work is waiting for banks and the regulator in terms of restoring public confidence in banks. Over the past few years, much has been done to improve the situation in the sector: new laws have been adopted, and old ones have been modernized and supplemented.
Much has been done, but more needs to be done. However, the initiatives and measures implemented in 2017 give hope that in 2018, the stage of reconstruction and development will begin in the banking sector and the economy as a whole.
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