Banking sector alive

According to preliminary information released by chairman of the Central Bank, during three quarters the indexes of the banking sector have improved as compared with the previous quarters. He said since early year assets of the banking sector increased by 11%, crediting expanding by 12% and population’s deposits by 8%. The banks’ capital increased by 18%. The securities market increased by 34% and the shares market increased by 3.3 times. These are all positive processes.

A significant growth was observed already in August. In August 2012 aggregate assets of Azerbaijani banks increased by 535.3 million AZN or by 3.6% up to 15513.9 million AZN. Since early year the banks’ assets increased by 11.2% and during a year by 16.6%. According to the Central Bank of Azerbaijan (CBA), by September 1, 2012 credit deposits totaled 10846.6 million AZN, increased by 3.2% on that month. During the past year crediting of economy increased by 16.7%. In August population’s deposits in the banks increased by 37.4 million AZN or by 1.1% and totaled 4462.6 million AZN. Since early this year this index increased by 8.3% and during 12 months by 22%.

In August 2012 aggregate capital of the banks increased by 106.9 million AZN or by 5%v and totaled 2237.5 million AZN. During a year this index increased by 201.4 million AZN or by 9.9%.

In August the banks’ obligations increased by 479.34 million AZN or by 3.8% up to 13189.29 million AZN. Of which 6897.7 million AZN were deposits, 4679.5 million AZN – funds allotted to the financial sector and 1612.1 million AZN – other obligations. In August the banks’ obligations to the CBA increased up to 17.2% By early September 2012 they totaled 2268.1 million AZN. During a year this index increased up to 281.9 million AZN. Since early year it increased by 235.5 million AZN. Contrary to its own statements, CBA continued pumping the banks with cheap credits.

The banks live their own life, which has indirect relations to real demands of economy. This is first of all related to value of money in the country.

Famous Russian businessman Deripaska recently said that the banks’ goal is to skillfully sell debts and goal of the Central Bank is to reduce value of credit and therefore, ensure economic growth and employment. He believes that Russian credit market is oriented today only at the speculative operations. Various schemes are used for development: soft crediting and subsidizing of interest rates. We see all this in our economy as well, where both small- and medium-size business hopes only on soft credits of the National Fund for Entrepreneurship Support.(The limit for the year was used up already by October.)

The share of consumer credits and credits to the commerce sector in crediting is high. The growth of consumer crediting means that money is not spent in the real sector. This calls in question the whole industrial policy of the government. The consumer crediting contributes to growth of import (especially with low level of import replacement) and even more suppresses export sectors. The industrial policy could be realized only in that sector, which is directly subsidized by the state or when such a giant as “SOCAR”, which can get relatively cheap loans outside of the country, gets down to business. The remaining business can count only on expensive credits. The deposit rates went down a little bit. But this is insignificant for the credit market of the country. Expanding of the debt market in the country is a topical issue.

Our Central Bank is extremely cautious and this means pragmatic. It was considered in the past that money should be strictly controlled, but it turned out that flexibility of inflation with respect to this index is low. There was an opinion that inflation hinders reduction of credit rates, but experience of the past years showed that the banks are more concerned about maintaining of the margin, than inflation. The evaluation of inflation is pretty subjective and parallel calculation of inflation rate by the State Statistical Committee and the Centre of Economic Studies prove that (see Attachment).

A real reason of a high cost of capital, especially in the oil countries, is strengthening of national current and high interest rates. With such high credit rates it is impossible to compete in open economy, especially if the country would like to join World Trade Organization (WTO). The value of the main resources is almost the same in the countries and the manufacturers that got a long-term credit with a low interest rate will win. We do not want to mention level of labor productivity in the economy or efficiency of labor resources.

The agrarian sector of the country is under-invested, because of poor development of agricultural processing and a shift towards the processing industry. It is not surprising that the talks about creation of a special agricultural bank or insurance of credits into the agrarian sector are resumed in the country periodically. Mammad Musayev, chief of the non-bank credit organization Agrarcredit, said that turning of the organization into Agrarian Bank could happen this or early next year. The bank will be established on the basis of the above-mentioned organization. The issue has been under discussion for years. But the now the government will have to invest a significant amount of money into creation of this bank, because its authorized capital should be increased up to 50 million AZN. As far as we know, this was not stipulated by the budget. But emergence of this bank seems inevitable, because of the stake on agrarian sector.

Some outsider banks have already started the merger negotiations. It is an absurd that four banks failed to have an authorized fund of 10 million AZN, which has been an obligatory norm for many years. Since 2014 the minimum authorized capital of the bank will be 50 million AZN.

International Bank of Azerbaijan (IBA) increased assets up to the historical maximum. By October 1, 2012 assets of IBA increased by 12% during 12 months and reached 5,505 billion AZN. By that day aggregate capital of the bank totaled 594.1 million AZN, up 91 million AZN against October 1, 2011. During quarter 3, 2012 ROA coefficient (profitability of assets) constituted 0.64% and ROE (profitability of own capital) – 7.42% against 0.15% and 1.64% by October 1, 2011.

IBA has opened as “Islamic window” and the first contract with the Islamic Development Corporation to the amount of $20 million was the result of this cooperation. This is the first deal concluded on the terms of “Islamic banking.” The annual contract was concluded for palladium trade. Islamic banking is interest free, which means the sides do not get interest yields, but share profit derived from the deal. Ansar leasing introduced by the Islamic Development Corporation is going to put into circulation the bonds on the basis of sukuk principle.

State Securities Committee is happy with the news to increase authorized capital of the banks up to 50 million AZN. It believes that next year the banks will replenish their capital at the expense of issue of shares and sales of shares at the exchange stock will grow. We already see mass issue of such shares. In addition, the law on securities, which is expected to be passed in the near future, will bring in motion the law on investment funds. This is expected to double turnover at the Baku Stock Exchange next year.