DESPITE THE RISKS

The National Bank of Azerbaijan is predicting a fall in the growth rate in the banking sector in Azerbaijan in 2008. Against the background of the worldwide banking crisis, the NBA is recommending that banks show restraint in their growth policy and this applies in particular to banks that are planning double or treble growth this year.

The deputy chairman of the NBA board, Rufat Aslanli, said that this does not mean that the country will not have the full range of financial services. "Our policy is aimed at growth that brings more development and creates less risk."

European level

The country's economy is today creating the conditions for banking sector growth, as demand for financial services is growing. But every bank that draws up a three-year development strategy must pay attention to its institutional capacity and take account of risk. "However, if we look at the figures for the first two months of this year, we can see that the growth rate in the whole banking sector is no lower than last year," Rufat Aslanli said. "During this period banks' total assets grew by 9 per cent, while last year this figure was 4 per cent. According to our forecasts, the growth rate in the banking sector will be 60-70 per cent this year."

The leading Azerbaijani banks have basically already reached the minimum size of capital according to European standards and the National Bank no longer considers it relevant to review this requirement. The requirement is now 10 million manats, which is higher even than in European Union countries.

Capital covers possible risk to bank assets. Under international practice this is regulated by capital ratio which is the percentage of a bank's capital to the assets at its disposal. This requirement is 12 per cent in Azerbaijan today, while the Basel standard is a minimum of 8 per cent and the NBA does not plan to review it. "However, the existence of such a requirement makes the banks increase their capitalization where necessary as, if this requirement is broken, they will not be able to increase their assets," Rufat Aslanli said.

The average capital adequacy ratio of Azerbaijani banks is 20 per cent, Aslanli said, which is evidence of their sufficient capitalization. In some banks this figure is 15-16 per cent, and they are constantly increasing their capitalization. In 2007 the total capitalization of banks in Azerbaijan doubled and exceeded one billion manats. "While this year banks are maintaining growth rates of 50-60 per cent, based on the capital adequacy ratio requirements, banks' total capitalization will increase by 30-35 per cent on average," Rufat Aslanli said.

Loans not dangerous - yet!

The NBA board thinks that in the short and mid-term the Azerbaijani banking sector is not facing risk in repaying foreign loans. The central bank's confidence is based on the fact that more than half of the funds attracted - around 600 million manats - must be paid off in the coming year. "These funds were attracted by 21 of the 46 banks operating in Azerbaijan. The National Bank is carefully following this process, and it is clear today that the liquidity of these banks allows them to pay off their loans," Rufat Aslanli said. He added that approximately two-thirds of these loans were obtained by banks from international financial institutions.

However, the National Bank is not planning to disregard the negative experience in this sphere of banks in CIS states, for example Kazakhstan, and is continuing to take steps to toughen the norms for compulsory reserves for banks' foreign borrowing. He said that this process will cover 2007-08. "If the main debt for credit and interest rates on it are guaranteed by property, then prudential norms are applied to assess credit. We have slightly toughened these norms. We have also slightly increased requirements for provisioning banks' assets in order to reduce risk in the event of possible losses," Aslanli said.

It should be noted that Azerbaijan's overall foreign debt (both state and private sector) makes up 32 per cent of the country's currency reserves which is very low in comparison with other countries in the region.