Author: Khazar AKHUNDOV
Despite the pandemic-ridden recession period, the banking sector of Azerbaijan has demonstrated stability and avoided bankruptcies, keeping the bar of credit risks at an acceptable level. Since the spring of 2021, given the rising oil prices and the revival of non-oil sector, financial institutions have shown a steady growth in lending, while their deposit portfolio is increasing contrary to the dollarisation of deposits.
Meanwhile, lockdown restrictions pushed credit institutions to expand e-banking services. Mass use of technical solutions in the financial sector has become an uncontested trend amid the expected establishment of the OpenBanking platform in the near future.
In contrast to the 2014-2017 energy crisis, Azerbaijan’s banking sector has demonstrated a high level of crisis resistance during the long-standing pandemic period. Despite low business activity and decreasing demand in bank financing in 2020, stability in the monetary market has been preserved thanks to macroeconomic stability and competent monetary policy of the Central Bank of Azerbaijan (CBA). It was the CBA's conservative policy that helped keep inflation within acceptable limits, as well as strengthen the stability of the foreign exchange market and the exchange rate of manat. Thus, the rush demand for dollars and euros, which played such a negative role in the credit crisis six years ago and turned into bankruptcy of a dozen banks, was prevented.
The balanced monetary policy of CBA did not change significantly in the current year. The global rise of energy and other commodity prices since March 2021 has increased Azerbaijan's export revenues, and trade surplus, also improving the balance of its payments indicators. However, despite the relatively robust positions of the basic monetary indicators, the CBA Board of Directors decided in July to keep the discount rate at 6.25%, for the fifth time since the beginning of the year. The rationale for taking this step can be explained by the necessity to maintain macroeconomic stability in the country amid the increased pressure from the imported inflation. In general, inflationary and fiscal risks fully justify the refusal from the hasty liberalisation of monetary policy in the current very difficult conditions. After all, amid the excessive liquidity level in the banking sector, the latter successfully copes with financing the real sector of the economy, while the current balance between supply and demand for monetary resources is quite acceptable.
Obviously, the course taken by CBA is right because since the spring of this year, there has been a tendency for lending growth in Azerbaijan’s banking market. Thus, at the beginning of August, the banks' aggregate loan portfolio exceeded ₼14.9 billion, which means a 5.4% growth annually.
It is equally important that during this period there have been positive changes in the structure of the loan portfolio, where the share of business loans increased by 3%. During the seven months of 2021, 58.3% of the loan portfolio consisted of business loans, with the largest growth indicator (7.6%) shown by loans provided to trade and services.
Experts believe that in the medium term, the rate of lending to businesses will increase thanks to the rapid growth of production in the non-oil industries, as well as the involvement of the corporate sector and SMEs in a large-scale program for the revival of Garabagh and Eastern Zangezur. With the expansion of infrastructure operations, construction of housing, as well industrial and social facilities in the liberated territories will come the increase in demand for commercial loans and other banking products.
During the reporting period, we noted a significant growth (9.9%) in the consumer lending segment, which reached 26.9% of banks' loan portfolio (about ₼4 billion). The next by volume is mortgage loans (₼2.2 billion), which accounted for 14.8% of the total loan portfolio.
Despite the growth in consumer and mortgage lending, this segment maintains a high level of stability and minimises the risks of non-payments and defaults, which is strikingly different from the crisis situation in 2015-2016.
Decrease in dollarisation of deposits
Since the 2015 devaluation and the banking crisis, the joint efforts of CBA and the financial sector have contributed to a noticeable reduction in credit risks largely due to comprehensive measures taken to improve the banking sector, prudent regulation measures, including requirements for managing credit risks in accordance with modern international standards.
Effectiveness of this policy is clearly demonstrated by the statistics of the seven months of 2021. During this period, overdue and problem loans in banks of Azerbaijan decreased by 11.8%, reaching 6.1% of the total loan portfolio. For comparison, in 2020, the share of problem loans was 7.28%.
It was also possible to reduce the share of problem loans during the most difficult pandemic season, when, as a result of lockdowns and restrictions, many companies have suspended their operations, the growth of unemployment increased, etc. CBA's package of anti-crisis measures introduced in April 2020, as well as the adopted Procedure for Temporary Regulation of Activities of Credit Institutions during the COVID-19 Pandemic have also played an instrumental role in supporting the banking sector. This support is being provided today: in particular, the period of CBA’s recommendation to banks not to charge interest, penalties and other fines, and not to worsen the credit history of borrowers experiencing difficulties in repaying loans has been extended until October 1, 2021.
Another significant factor confirming the confidence of citizens in the banking sector was the growth of household deposits, as well as the decline in the dollarisation of deposits. The volume of bank deposits of the population, including individuals engaged in entrepreneurial activities, reached ₼8.6 billion at the beginning of August, which is 5.2% more than in the same period of 2020. At the same time, investments of the population in dollars and other foreign currency decreased by 7.4%, reaching ₼3.8 billion. Today, foreign currency deposits account for about 44.7% of all deposits of the population, while at the end of last year this indicator was 50.8% and in the most difficult period for banks (2016) even reached 81%.
It was possible to decrease the share of deposits in foreign currency through the consistent policy of local banks, which still maintain an extremely low interest rate on dollar deposits (about 1.5%), while the profitability on manat deposits is 5-6 times higher, which seems attractive to the population.
OpenBanking: digital future
Assessing the impact of the pandemic on Azerbaijan’s banking sector, we should note that in the foreseeable future, the rate of developments will largely depend on reforms implemented for the digitalisation of services. This trend was already observed during the lockdowns last year, hence significantly increasing the popularity of e-banking, mobile banking, Internet payments within the dynamically growing e-commerce, etc.
Given the new concept for the development of payment systems, which will soon be introduced in Azerbaijan, improving digital banking services will soon become the main direction for the development of financial services. In particular, CBA and specialists of the Association of Financial Technologies (AzFina) have developed a draft law On payment services and payment systems developed to increase competitiveness in the payment market, also due to the greater participation of international vendors and financial and technical organisations in the process.
At the same time, CBA will soon finalise the development of the OpenBanking platform. It is also developing a roadmap until 2026, which is going to introduce open banking mechanisms in all credit institutions of the country. The roadmap contains all the planned activities for the implementation of open banking approaches over a five-year period. As well, in the corresponding period, the legislative framework will be improved taking into account the principles of OpenBanking, which will contribute to the rapid development of the financial services market in the near future.
What will be the advantages for the clients of local banks after the implementation of OpenBanking tools? First of all, this will make it possible to expand the clients' access to banking data by combining various information on cards, accounts, loans, deposits in one or several banks through a single software interface. Free banking mechanism will provide payment systems, and tech companies focused on financial operations with access to bank data. Thus, the customers will be able to get more complete information, carry out transactions, open accounts and receive loans, analyse their data and optimise the credit load and tax burden, and much more. Moreover, with the introduction of the Open API (Application Programming Interface) system in banks, all this information will be available through third-party programming interfaces. Accordingly, bank customers will no longer need to use inconvenient applications, be limited to poor functionality and pay high commissions when more convenient solutions are available.
The listed advantages of Open API / OpenBanking toolkit are especially attractive for businesses, which massively make use of electronic payments in their operations, also expanding the coverage of mobile and e-banking services, which saves time and money by optimising their operations.
Given the rate of adoption of OpenBanking tools in Europe, the US and other developed countries, it is quite obvious that such technologies will become the leading trend in the global financial system. This, of course, requires Azerbaijan to make adequate efforts to accelerate the processes of digital upgrade of domestic banks and their operational convergence with financial tech companies.