THINGS HAVE TURNED FULL CIRCLE...

In 2004, the National Bank of Azerbaijan abolished limitations on foreign capital's access to the country's banking sector. This decision was reached in order to liberalize the banking system, namely, to encourage foreign investment in the country's banking sector, broaden participation of foreign banks in the Azerbaijani financial sector's projects, involve foreign banks in the process of the recapitalization of local banks, introduce modern banking technology and new banking products and services, attract well-known foreign banks to the privatisation of state-owned banks, encourage competition in the banking sector and improve the quality of banking services for individuals and businesses.

This list resembles very much the arguments in favour of the decision to grant a licence to the Azerbaijani branch of the HSBC bank. Precisely due to the above-mentioned considerations, the affiliate of the British branch was issued a licence in 1996. But just 6 years later, the bank announced its withdrawal from Azerbaijan, drawing a conclusion that was not very flattering to the country: that there were no prospects for the development of a serious banking business for the next 10 years.

However, in the same year, 2002, missions from the International Monetary Fund and World Bank concluded, upon conducting monitoring of Azerbaijan's financial sector, that the country's banking system was quite resistant to risks resulting from generally falling indicators. They proved that even if these indicators fall by 50-70% (the worst possible scenario), the banking system would not collapse and its assets would still exceed its liabilities.

Despite HSBC's excessive pessimism, Azerbaijan had to wait just a few years before the leading world banks opened their missions here.

Without limitations...

The limitations on access of foreign capital were in force in Azerbaijan from 1996. During that period, they were raised from 30% to 50% of the total incorporation capital of Azerbaijani banks.  By itself, this was not a limitation. Simply, at some point, the local market became uninteresting for foreign banking, and lifting the limitations alone would hardly change their attitude. Nonetheless, this decision has made it easier for local banks to attract foreign shareholders.

This is why there are now 21 banks in co-participation with foreign capital in the country. In six of them, the share of foreign investors ranges from 50% to 100%, and in 13 banks foreigners own less than 50%. In addition, there are two subsidiaries of foreign banks in Azerbaijan.

The foreign banks, or banks which are co-owned by foreign partners, occupy one third of Azerbaijan's banking market. And this share was taken in just four years, when the EBRD, German KfW (through its subsidiary DEG), the International Finance Corporation, SIDT, and the US-based investment fund Kazemir Partner Limited, bought shares in a number of large commercial banks in Azerbaijan.

According to the banking laws, local banks must request the National Bank's permission to sell a substantial portion of their shares, that is, 10% or more, to a new shareholder (regardless of its country of origin). The only exceptions are the foreign banks and holding companies which are included in the National Bank's list of offshore zones. These legal entities cannot be founders or shareholders of a local bank and cannot found subsidiary banks in Azerbaijan or open local branches or offices.

....But with careful selection

The National Bank of Azerbaijan already issues statements about the growing interest of foreign banks in entering the Azerbaijani banking market. "The Azerbaijani banking sector today is of great interest to investors: various foreign banks and funds. Naturally, we will be very careful when selecting applications because we want to see very authoritative and strong banks in the Azerbaijani banking sector, which can bring in not just finance, but also technology, a new corporate culture, and assistance in training professional personnel," said National Bank of Azerbaijan Board Chairman E. Rustamov.

The France-based Societe Generale and Kazakhstani TuranAlem Bank and Khalyk Bank have already stated their interest in making that step. TuranAlem plans to open a subsidiary in Azerbaijan, and Khalyk Bank wants to buy a local bank, an insurance company or other financial institution.

"The French corporate and investment bank Societe Generale intends to carry out its plan to enter the Azerbaijani banking market in the very near future," the bank's regional representative in Azerbaijan, Teyba Quliyeva, says. When buying the shares in already functioning banking institutions, Societe Generale follows a strategy of laying claim to a controlling share. In the opinion of the National Bank of Azerbaijan, Societe Generale is currently considering the possibility of opening a subsidiary bank or branch. Although the bank also considered the possibility of buying a share in an Azerbaijani bank, it encountered difficulties in finding a partner. Many Azerbaijani banks do not want to sell their controlling shares.

In addition, Russia's Vneshtorgbank is going to buy a share in the Azerbaijani AF Bank, and the Latvian Parex Bank, which operated a branch in Azerbaijan, has said that it wants to change the status of the branch.

Brands only!

The National Bank of Azerbaijan does not hide the fact that it welcomes the arrival in the Azerbaijani banking sector of international brands, which it once again demonstrated in November 2007 by issuing a permit to open a branch of the German CommerzBank and, in February 2008, by doing the same for the Turkish Citibank. The interesting development of last year was the issuing by the National Bank of Azerbaijan of a permit to the Georgia-based TBC Bank to enter the Azerbaijani market. The Georgian bank bought 75% shares in the SOA Credit non-banking credit organization.

But what made Azerbaijan so interesting for these financial institutions? First and foremost, the country's rapid economic growth in recent years and great economic potential. CommerzBank AG Board member Martin Blessing said this during his visit to Baku (CommerzBank's assets amount to $900 billion, and pure profits reached $3 billion last year). Blessing said that the bank's main function will be to encourage German investment in Azerbaijan and vice versa. "We have extensive experience of working in different countries of the world. Initially, our banks usually function as representative offices. After a period of work, depending on the success of the business, it is upgraded to the next level, that is to say, it starts to operate as a branch. I think that the same will happen in Baku. Let me note that the Baku office will be the seventh mission of our bank to a CIS country," M. Blessing said.

Citibank, too, has far-reaching plans for the country and will be ready to start banking operations by transforming its representative office into a branch. This was stated during a meeting at the National Bank of Azerbaijan.

As for the Georgian TBC Bank, which bought a 75% share in the non-banking credit organization SOA Kredit for $7.5 million, Badri Japaridze, deputy chairman of the Supervisory Board of the TBC Bank, said that the bank is going to transform SOA Kredit into a powerful financial institution which will offer its Azerbaijani clientele a variety of financial services and products. Following the deal, the incorporation capital of SOA Kredit was raised from $2.5 million to $10 million, of which $7.5 million represents the Georgian bank's investment. Furthermore, the TBC bank intends to apply to the National Bank of Azerbaijan for a banking licence for SOA Kredit.

So, the arrival of foreign banks in the Azerbaijani market is not a temporary phenomenon, as some experts noted sceptically, linking the trend to the country's growing oil revenues. However, this factor does play a positive role, both in this and other sectors of the country's economy. The fact that the foreigners who are already present in the country's banking sector are making long-term plans indicates that they intend to develop their businesses irrespective of the country's oil revenues. And this, in turn, gives a lie to government statements on safeguarding stability regardless of the oil factor.