NOT SUBJECT TO COMPLAINTS

Early this year, the domestic banking sector met with a serious problem caused by change in the monetary policy of the state. Most banks managed to keep their assets stable after the February decision of the Central Bank of Azerbaijan (CBA) to reduce the exchange rate of the manat. However, the most serious problem arose from the need to recalculate loans issued earlier in dollars and euros on the basis of the new currency rate. A significant proportion of the credit institutions' debtors were unprepared for that. The Constitutional Court of Azerbaijan recently passed its final ruling on this disputable issue. 

To understand the situation that has taken shape in the past few months, one should recall that the legislation in effect has never restricted banks and their customers in carrying out transactions in foreign currency. In particular, the Constitution of Azerbaijan guarantees the right of its citizens and non-residents to choose the currency in which to keep their savings. Customers of credit institutions can make cashless deals and carry out foreign trade transactions in foreign currency. There are no constraints on opening deposits in dollars or any bans on banks issuing loans in "foreign" money. This right certainly does not apply to retail trade, public services, lease and compulsory payments, such as taxes, social insurance and others. The use of foreign currency is not permitted there and payments must be done only in manats. 

Until recently though, the question never arose about the currency of bank transactions, whether they issue loans in manats or dollars. The national currency essentially strengthened after its redenomination carried out about 10 years ago was featuring marked stability. Despite the global crisis and other negative processes, the Central Bank held the rate within a rigid corridor of 0.78 manats per US dollar over the past few years, which made our currency the most stable one throughout the post-Soviet space. Accordingly, common citizens and businessmen would repay their loans issued in foreign currency and interest on them at a rate of exchange that was stable and good for them. 

However, there is another objective fact to be taken into account: the Azerbaijani manat is not convertible and therefore the country implements virtually all its foreign trade operations in dollars and euros and, to a lesser extent, in other reserve currencies. All operations with foreign donors and investors are carried out and, in particular, external credit lines are opened for Azerbaijani banks in foreign currency. Accordingly, this country's monetary and credit system is forced to keep a comparatively high level of "dollarization" up to this day. 

Thus for instance, according to data from the Central Bank, of 20.6bn manats issued in credits by 1 April 2015, loans nominated in foreign currency accounted for almost 41 per cent, or more than 8.4bn manats. Quite essential is also the volume of foreign currency loans in the consumer credit segment and this is quite an important point if we take into account the fact that households account for over one-third of all loans issued by Azerbaijani banks. 

Quite a considerable percentage of foreign currency in the aggregate loan portfolio has significantly exacerbated the risks of banks in the event of devaluation of the manat. Such a threat could already be felt last year - after world oil prices dropped by half. Quite recently, banks did not restrict customers in choosing a currency for their loans. At the end of last year however, acting pre-emptively, some domestic credit institutions began to issue consumer loans mainly in dollars and euros. 

However, the main threat to the banking system came from the customers' diminishing ability to pay, because the incomes of most entrepreneurs and the wages of an absolute majority of consumers in this country were nominated in the national currency, the manat, depreciated against the US dollar by almost 34 per cent in February this year. The liabilities of bank customers who had taken their loans in foreign currency increased accordingly. 

It is appropriate here to cite statistics of the Central Bank. According to the statistics, of the total volume of loans issued in foreign currency as of 1 April this year, more than 2.163bn manats were issued in short-term loans and overdue payments reached 6.5 per cent. It is noteworthy that short-term loans were to a large extent provided for the consumer segment, i.e. to the ordinary population. The situation was aggravated by the fact that retail credit terms vary essentially from bank to bank. In the case of foreign currency loans, the additional problem of interpreting the current legislation with regard to the concluded contracts has cropped up.

In the end, all these problems have created a serious conflict of interests between credit institutions and their customers. Banks insisted that the loans issued should be repaid at the new currency rate but part of the borrowers refused to recalculate their debts. 

The Constitutional Court of Azerbaijan has clarified this point at issue. Its recent session considered a number of articles of the Civil Code of Azerbaijan for compliance with the fundamental law of this country - its Constitution - and cleared up the interpretation of some clauses in Civil Code articles. According to a resolution passed by the plenary session of the Constitutional Court, the following two clauses of the Civil Code comply with requirements of Part III of Article 19 of the country's Fundamental Law. The first clause: "If one of the parties is a foreign individual or legal entity, the parties are entitled to determine a monetary liability in a foreign currency unless this is prohibited by the law". (Civil Code Article 439.1). The second clause: "A monetary liability subject to repayment in Azerbaijan shall be repaid in manats, except in cases where payment in a foreign currency is stipulated". (Civil Code Article 439.2).

The Constitutional Court judgement also ruled that the clause that "a monetary liability should be determined in manats" which follows from Article 439.1 of the Civil Code will not apply to relations arising from liabilities to banks because foreign currency, too, may constitute the subject of monetary liability on credit (debt) agreements. In accordance with Article 439.2 of the Civil Code, in case the principal debt and interest on a loan are stipulated in a credit agreement, they are paid in the currency envisaged by that agreement. If there is no such requirement in the agreement, the debtor has the right to pay the principal and interest on the loan in manats at a rate in effect at the moment of payment. 

Thus the Constitutional Court has passed an unambiguous ruling that loans and interest on them should be repaid to a bank in that currency in which they were issued to the borrower in case this point is stipulated in the contract. As regards debt liabilities denominated in foreign currency but, in accordance with the contract, repayable in manats, in this case, definitely, the rate of the currency at the time of repaying the money should be taken into account. 

If a loan was issued in manats, it will certainly be repaid in the national currency, too. In this case, the lender has no right to demand that the debtor should pay additional funds, even if the rate of the national currency has become much cheaper by the time of debt repayment. 

How do experts assess the current situation around debts in foreign currency and what economic measures should be taken to make life easier for the borrowers? In the opinion of Farhad Amirbayov, the head of the Baku Interbank Currency Exchange (BICEX), the recent ruling by the Constitutional Court on the issue of bank loan repayment is not a choice in favour of one side or the other. According to the expert, the main goal pursued by the court was to ensure observance in this country of contractual relations. In this case, it is the fulfilment of the contract concluded between the bank and the borrower. Accordingly, in the expert's opinion, in the light of this decision, entrepreneurs and citizens will have to pay more attention in the future to the preparation and conclusion of credit contracts. 

Milli Maclis [parliament] member Rufat Quliyev holds a similar point of view. According to him, many Azerbaijani citizens have a rather poor idea today of the legal aspects of the contracts they conclude. The population does not take notice of all contract clauses, for instance those specifying the currency in which they will have to repay the loan. 

At the same time, other components of the Constitutional Court's ruling should also be kept in mind. It is the Constitutional Court's advice that banks should take into account the population's interests and, depending on their own financial capability, take efforts to extend loan repayment periods, reduce interest rates and apply other preferences for citizens who borrowed loans in foreign currency. The banks can and must meet the population halfway, Rufat Quliyev thinks, and this is already taking place: some creditors have offered such preferences to their debtors by increasing loan repayment periods and lowering interest rates.