WITHOUT RISKS AND LOSSES

In the context of the global financial and economic crisis, which has still not been eliminated, the problem of insufficient capitalization has become particularly relevant for the banking sector worldwide, including in Azerbaijan. Almost all countries with active markets of banking services began to present banks with requirements for capitalization, which should be adequate to the risks that are taken and ensure the ability of banks to compensate for unexpected losses. As is known, well-managed banks with adequate capitalization are the most resistant to losses and are able to provide financial resources to retail clients and business entities throughout the whole business cycle, including in periods of recession.

This trend, which is also observed in other CIS countries, was picked up by Azerbaijan too. After a five-year break, the regulator decided to increase the minimum requirement for the total capital of commercial banks in Azerbaijan fivefold. So, from 1 July 2007, the minimum for the banks was set at 10m manats, and from 1 January 2014, their capital was to be brought to at least 50m manats. However, in order to support the banking system, the Central Bank extended the deadline for another year.

This decision dispelled all assumptions and statements about the upcoming serious shrinking of the banking market. Thus, the CBA gave each bank the opportunity to reflect on the future strategy of its activities, offering at the same time an option for the consolidation of assets in order to stay on the market with a different status.

The director-general  of the Central Bank, Rasad Orucov, is sure that by the end of 2014, the banks, which control nearly 99 per cent of the assets of the entire system, will fulfill the requirement for the minimum total capital of 50m manats because today most of them already meet this standard or are about to complete this process.

Since the announcement of the new requirement for the minimum total capital - since the end of July 2012, the total capital of the banking system has increased by 80 per cent - from 2.1 to 3.8bn manats. The director-general of the CBA believes that this is a very good result, because before that, banks spent six years increasing their capital to 1.7bn ma-nats.

Today the capital of nine banks exceeds 100m manats, and the same number of private banks has assets of more than 1bn dollars, while in 2000, the assets of the entire banking system were about that amount.

And what will happen to other banks, which are unable to increase their capital by the end of the year? At present, various options are being examined - from the merger of banks to the search for additional opportunities for capitalization.

Although only a few months are left to the expiry of the deadline, the CBA has not received proposals for the consolidation of individual banks. Orucov did not rule out that they will make such a decision by the end of the year.

In any case, these banks have virtually no deposits of the population on their books now because they have no permission to take deposits. "In some sense, it is very difficult to call them banks. They do not carry any threat for the population and for lenders, which is very important. In this sense, the CBA, as a regulator, feels very comfortable because we are responsible for the safety of people's savings. Risks from these banks were reduced according to plan, and there is no threat to the population today," Orucov said.

Most importantly, the Central Bank achieved its strategic goal, and in terms of capitalization, the banking system of the country almost doubled. The CBA intends to stop here and is not considering further capitalization. But this does not mean that banks should wait for the next decision of the Central Bank. "The banks that want to grow will be forced to increase their capital individually and as part of their strategy," said the director-general  of the Central Bank.

The need to strengthen the capital position of banks arose in connection with the fact that compared with 2003, the scale of the Azerbaijani economy has increased threefold today. And with this scale, banks must have the necessary amount of capital to maintain a certain position on the market and competitiveness and to provide the public with a wide range of banking services.

It is clear that the capitalization of the banking sector helps increase the efficiency and transparency of the banking business, increases the interest of strategic investors in it and contributes to the further development of the banking system and its full integration into the international banking community.

Currently, the adequacy of the capital of the sector, i.e. the capital adequacy ratio is 18 per cent, which exceeds the CBA standard by six percentage points and the requirements of the Basel Committee by 2.25 times. This, according to Orucov, confirms the financial stability of the banking sector and expands the ability of banks to lend. Credit adequacy, in turn, provides an additional opportunity to get more obligations and lend more.

At present, Azerbaijani banks are able to lend 10bn manats more to businesses and the country's economy. "It means additional financial resources that were used for lending, which led to a decrease in interest rates," the director-general  of the CBA said. It also speaks about serious competition and opportunities to enter foreign markets to raise cheap resources.

In addition, the fivefold increase in the minimum capital requirement, as expected, was a positive signal to foreign investors. Foreign banks again began to show interest in coming to Azerbaijan. 

However, the names of these banks have not been disclosed yet as the negotiation process is not complete. But Orucov reported that the largest Turkish bank Is Bankasi still has plans to enter the banking market of Azerbaijan. Previously, several foreign brand banks such as German Commerzbank and American Citibank had already expressed their desire to be on the market, created representative offices and so on. Delays in the process of entry into the market are due to the internal problems of the banks that were caused, among other things, by the global crisis. However, the desire to enter the Azerbaijani market remains, and it is a matter of time.

As for the entry of Azerbaijani banks into foreign markets, it depends on the commercial strategy of each of them. At the same time, the Central Bank is ready to provide advice to such banks in terms of the impact of access to foreign markets on the stability of the financial institutions and banking system of Azerbaijan.

Thus, the regulator wants to have a relatively large number of major  players instead of the domination of one or two banks.

Each country chooses its own path for the development of the financial system, and Azerbaijan follows the path of strict and consistent regulation of the banking sector. Thanks to this policy, in a difficult period of crisis, the financial system of Azerbaijan turned out to be one of the most resistant ones in the post-Soviet area.