In previous articles, we analyzed the general indicators of the Azerbaijani economy. Such materials are of interest to the trained reader, and the average citizen is closer to the situation in specific industries that he encounters every day.

Azerbaijani Economy Worse Than It Was in Azerbaijan SSR

About the Reasons that Azerbaijanis Live "Not Like in Dubai"

One of such segments is the banking sector, which is also interesting for specialists, since in the modern world market regulation is mainly carried out using monetary leverage. Recall how the whole world expects the announcement of the discount rate of the US Federal Reserve.

There is another reason to take stock. After 25 years of leadership of the National Bank, Elman Rustamov was reelected by the Milli Majlis to his former position. He got enough time to implement the most ambitious plans, if he has them.

Every day we are faced with a shortage of banknotes of small denomination to pay for the purchase. The seller also does not have them to give us change. It seems to be a trifle, but it takes up the precious time and nerve forces that are needed to complete our basic tasks. This is the result of the fact that in the total mass of banknotes, banknotes with high denomination prevail over banknotes with a low denomination.

From the statistical reporting of the National Bank (NBA) it is clear that 92% of banknotes are banknotes in denominations of 50, 100 and 200 AZN. It should be noted that 200-manat notes were issued quite recently, last year. Instead of simplifying this problem, the NBA aggravates the situation with its reckless decision. This initiative runs counter to the government’s policy to increase the share of cashless payments made by plastic cards. 200 manat notes expand the possibilities of cash payment for the purchase of expensive goods. Our small banknotes consist of 1, 5, 10 and 20 manat notes (8% of the money supply). In this situation, it is difficult to get the right amount. We believe that it will be more effective, instead of 200-manat notes, to issue 3-manat and 25-manat banknotes. With them, the problem indicated by us will be fixed very easily.

One of the main duties of the NBA is to increase confidence in banks to such a level when the population is not afraid to keep their savings in deposits. In this situation, the manat turnover increases. But the statistical reporting shows that 52% of the money supply (excluding foreign currency deposits) is in the hands of the population. In Georgia, this figure is about half lower and equal to 27% percent. Russian indicators are also better than our numbers. The figures indicate a low level of confidence in banks on the part of the population.

When analyzing the money supply of the population - the M3 aggregate (cash supply outside the bank + demand deposits + long-term deposits + deposits in foreign currency) in Georgia and for us per capita, the picture is not very good. In Georgia, this figure is $ 2019, and we have $ 1,676. This can be taken as the fact that the Georgians are richer than us, or there is a better system of sharing resources.

One of the questions that interest us most is the manat rate. Unlike most countries in the region, our national currency is regulated administratively. At first glance, this approach seems to be a stabilizing factor. But if you analyze a little, the weaknesses of this method are revealed. The administrative rate does not reflect the true price of the manat and is dependent more on political than on market decisions. In this case, the population prefers foreign currency to accumulate their funds, which in turn creates pressure on the manat. This approach discourages both local and foreign investors from our market when it comes to long-term investments. Confirmation of our position is the sharp depreciation of the manat in 2015. And now the population, despite the assurances of the NBA, lives in anticipation of a decrease in the manat. In my opinion, over the years, the NBA, with a surplus in the balance of payments, should have smoothly made the transition to market-based mechanisms for determining the rate. This approach helps to accelerate integration processes with developed countries, meets international standards and the interests of local manufacturers, and saves us from unnecessary headaches.

Over the years, we have witnessed the monopolization of the banking sector. The beginning was an incomprehensible departure from our market of the fourth bank in the world hierarchy - the English HSBC. Now in our market there is no any significant foreign bank. As a result, the banking sector does not play such a significant role in the formation of GDP. The banking sector in GDP is so small that it is not indicated in the statistical reports as a separate line. Thus, the financial sector could not make a worthy contribution to the development of the non-oil sector.

If we consider the example of the UAE in this area, we will see the benefits of an open banking sector. There are 50 banks, of which 26 are foreign. They have 86 branches in the UAE. The restrictions on opening branches are offset by the opening of service desks in places with a high population density. As a result of the openness and application of the elements of offshore, this sector in the UAE forms 10% of the country's GDP, which is equal to 42.5 billion dollars. This amount is approximately equal to our GDP. If the NBA had applied this model before, we could have become one of the financial centers of the South Caucasus. The Caucasian republics of the Russian Federation are economically closely linked with our country. Iran is experiencing difficulties in banking operations. We could accumulate an important part of the financial segment of the region. It should be noted that banks are not only finances, but also jobs, rented areas and users of various services.

As noted above, while banks in the UAE open service desks in shopping centers, our banks cannot even reach rural areas. Therefore, post offices are given the authority to conduct certain banking operations. City bank branches are too busy. Sometimes it takes more than an hour to spend a simple operation. This is an indicator of the low level of development of the banking sector in Azerbaijan.

Monopolization of the market has become the main reason for high lending rates, which negatively reflected in business development and contributed to higher prices. Until 2015, lending rates for businesses ranged from 24 to 30%. Banks were not interested in issuing long-term loans, which put the manufacturing sector in a difficult position. And such rates were absolutely unacceptable for the real sector. This is one of the reasons for the low development of the non-oil sector. These rates were unfounded.

Credit rates are closely tied to inflation and the NBA discount rate. In 2013-2015, inflation was in the range of 2.4-4%, and the discount rate was 4.75-3%. Low inflation is a sign that bank funds are not depreciating until the end of the year. And the discount rate is the percentage at which the NBA provides loans to commercial banks. In such a favorable situation, the NBA should not have allowed such high interest on loans to be formed.

This policy continues today. At a discount rate of 9.75 - 8.7% in 2018-2019 and with inflation of 2.3-3.2%, business loans are issued at a rate of 24% per annum. In the USA and the EU, the average annual interest rate is 5.3 - 1.88%, in neighboring Georgia consumer loans are issued at 14.14%, and business loans - 13.6%. It turns out that we pay more for a loan per month than a European pays per year.

Another popular service of banks is money transfers. Excessive restrictions in this area, insufficient coverage of the population and bureaucratic barriers make “gray” transfers still relevant. Visual observations show that individuals involved in import and wholesale trade in most cases do not use bank transfers.

In 2014-2015, the share of bad loans amounted to about 20% of the total loan portfolio, which became one of the main reasons for the closure of banks. Then 13 banks were liquidated. This crisis has shown how weak our banking system is. During this period, the number of banks in Georgia decreased by 2 units. And today, the share of problem loans is high - 12.2%. In Kazakhstan, with a larger market than ours, this figure is 9.5%. The banking system of Georgia is such that it is impossible to obtain an unsecured loan.

Very often, information about corruption schemes with the participation of Azerbaijani high-ranking banking workers is leaked to the media. Comparing with Georgian banks, we can note that they did not attract the attention of international regulatory authorities. Summarizing this side of our banks, we note that all this is the result of a low professional level of personnel, which is the fault of the NBA.

The weakness of our banks is confirmed by the fact that now, during the pandemic crisis, they, unlike Georgian banks, responded to the crisis later (April 25). In Tbilisi, they solved the problem very simply, giving lenders a three-month vacation payout. The proposals of the Central Bank imply a selective approach that depends on the consent of commercial banks.

In the end, for complete clarity, we compare some indicators of individual banks of Georgia with our indicators. Two leading banks in the neighboring country, Bank Georgia and TBS, have a capitalization of $ 4 billion. And the total capitalization of Azerbaijani banks is $ 2.7 billion. This is the result of the fact that the shares of these Georgian banks, unlike our banks, are freely traded on the London Stock Exchange.

90% of the Georgian banks are owned by non-residents (foreign citizens and organizations permanently registered and located in another country). And 77% of the investments in the banking sector are foreign capital, which is the best indicator of investment attractiveness. Unfortunately, we have nothing to brag about in this indicator.

In Georgia, over 10 years, the banking segment increased by 16 times with a decrease in interest rates on loans. There are no state banks. Our International Bank, which controls 40% of the market, is owned by the state.

In Georgia, you can open an account for offshore. According to the IMF report, Georgian banks are leading in profitability among the countries of Asia and Europe. The loan portfolio of Georgian banks even after the recent devaluation of the lari is $ 9.1 billion, and our loan portfolio is $ 8.8 billion. Given our GDP (above 2.7 times) and population (2.7 times), the difference should be at least twice in our favor. These data also indicate the best business environment in Georgia.

Unfortunately, the new Milli Majlis with such a not very attractive landscape, without serious discussion, almost unanimously re-elected the former head of the NBA, E. Rustamov, to this post. After that, it is difficult to hope for radical changes in the Azerbaijani banking sector.

Shahmar Agabalayev,
PhD in Economics


Editor’s Note: The day after this article was written, news came about the appointment by the NBA of provisional administrations in four banks - Atabank, NBC, Amrahbank, and AGBank. The author of the article believes this decision may indicate the upcoming closure of these banks.



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