Azernews.Az

Qabil Ashirov

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Raising capital requirements has significantly strengthened the resilience of Azerbaijan's banking sector, according to a new report by Moody's Ratings, AzerNEWS informs.

The agency said Azerbaijan has already introduced new capital buffers under the Basel III regulatory framework and is expected to achieve full compliance with Basel III standards by 2027.

According to Moody's analysts, the alignment of Azerbaijan's regulatory framework with Basel III, alongside the introduction of risk-based supervision and stricter capital requirements, has reinforced oversight of the country's banking sector.

"Banking regulators across Central Asia and the Caucasus—including Kazakhstan (Baa1, Stable), Azerbaijan (Baa3, Positive), Georgia (Ba2, Stable), Armenia (Ba3, Positive), Uzbekistan (Ba2, Stable), Tajikistan (B2, Stable), and Kyrgyzstan (B3, Positive)—are strengthening supervisory frameworks and improving prudential regulation in line with international standards," the report said.

Moody's noted that these reforms are credit positive because they contribute to higher-quality loan portfolios, enhance banks' ability to absorb losses, and gradually reduce systemic risks.

The report added that regulatory reforms across most countries in the region have led to tighter prudential requirements and stronger risk management frameworks.

"These measures include larger capital buffers, more conservative asset classification, stronger provisioning for potential loan losses, and improved liquidity management. Several countries have also made progress in establishing more effective bank recovery and resolution frameworks. Enhanced supervision has reduced delays in recognizing losses, while regulators have adopted a more proactive approach," Moody's said.

According to the agency, higher capital requirements have strengthened the solvency of banks in both Kazakhstan and Azerbaijan. In Uzbekistan, the gradual reduction of directed lending has improved loan portfolio quality and encouraged wider adoption of risk-based lending practices. However, the report notes that government influence over the banking system remains significant.

Looking ahead, Moody's expects governments across the region to continue strengthening prudential standards and refining supervisory practices, with a particular focus on preserving financial stability, increasing transparency, and limiting contingent liabilities related to the banking sector.

At the same time, the agency cautioned that the pace and effectiveness of reforms will vary considerably from country to country. Their success will largely depend on the quality of public institutions, the independence of banking supervisors, and governments' commitment to developing market-based banking systems.