AFFORDABLE DEPOSITS

Azerbaijan's banking system is undergoing dramatic and qualitative changes arising from the development of retail business, the accumulation of capital, expansion of the range of services and an increasing volume of borrowing from international financial institutions. This situation demands proper tariffs. Meanwhile, the market for deposits and credit in Azerbaijan continues to face certain institutional problems.

The problems in this sphere are related, first of all, to the fact that every bank defines for itself the category of customers it works with, and to the total lack of a money market between banks. One of the most important problems is the fact that there is a clear division between state-owned and private, and large and small banks in the banking sector.

Institutional and structural factors, which make it impossible to establish a normal money market and a market for credits and deposits, are reflected in the dynamics of deposit rates. This is also related to the rate of inflation in the country, the banks' own financial activity and the need to attract more money due to a growth in assets. This growth in assets may be caused by the banks' active credit policy, and in order to avoid breaching prudent levels of borrowing, since there are restrictions here, credit organizations have to come up with attractive incentives to bring in deposits from the population.

From mistrust to mutual understanding

It must be said that, initially, the country's banking system could not boast a high level of deposits as there was almost no trust in it. The reason was that there were various financial pyramid schemes, like Vahidbank and Amrahbank, and certain macroeconomic problems at the outset of the country's transition to a market economy.

However, serious reforms have been carried out in the banking sector over the last 10 years. Banks have become pioneers of the economy in introducing international standards of financial accountability and corporate management. The result of these reforms is that the number of deposits in the banking sector has increased by five or six times over the last six or seven years, testifying to a growing trust.

At the same time, there are still numerous shortcomings in the matter of establishing interest rates on deposits which cast a shadow on the deposit policy of the banking sector as a whole. Institutional and structural problems in this area are typical of countries with transitional economies, but they require a gradual approach. Although there is certain progress here, some problems originate in the non-banking sphere and are typical of a small banking sector which has not reached the necessary level of development.

For example, banks are not very active in exchanging money with each other. This is not carried out under market conditions, which is why interest rates on bank deposits in Azerbaijan are different from those in other countries. One of the main tasks of the financial system in a small market is to prevent any shortfall in the financial resources available to customers. In our country, this system is quite weak because the banks do not trust each other.

We have to say that, as a supervisory agency, the National Bank is taking all the necessary measures to rectify the situation in this sphere. On 1 April this year, the NBA introduced a new approach to the "interest corridor" to improve the nation's monetary policy. The minimum figure in the corridor pertains to money received, while the upper limit is the rate for money loaned. The re-financing rate of the National Bank is one of the parameters for the interest corridor. That is to say, the National Bank can give banks money at the maximum rate, which is 19 per cent today, but will receive money from them at the minimum 5-per-cent rate. This factor is already making it inevitable that banks will use each other's resources, which will develop the money market in the banking sector.

Inflation does not count?

Meanwhile, one of the main discrepancies between the deposit policy of some banks in Azerbaijan and generally-accepted market standards is that they ignore the processes of inflation. This is mainly characteristic of banks for which deposits are not the main source of income; because they are supported by borrowing from abroad and revenues from other bank operations.

The dynamics of growth in interest rates varies, but the average is 0.5-1 per cent in the republic. For example, interest rates on manat deposits increased from 10.39 per cent early this year to 11.2 per cent over the first six months of the year. The average interest rate on manat loans was 16.5 per cent in early 2007 and 15.6 per cent on 1 July. However, if a bank offers an interest rate of 24-25 per cent on deposits at a time when inflation is 16 per cent, this indicates serious problems in its business. The normal level is an upper limit of 18-20 per cent.

In this regard, before investing money in a bank, an investor has the right to inquire about its annual report, the state of its assets and revenues, whether it has a board of directors and when they hold meetings. Moreover, with the establishment of the fund to insure people's deposits, all banks which have NBA licences have had their financial situations thoroughly analyzed by the National Bank before being allowed to accept deposits. According to the stipulations of the fund, the interest rate on an insured deposit may not exceed 23.4 per cent. However, if banks accept such a deposit, they have to inform their customer that it is not covered by the insurance fund, while customers must be informed about the bank's membership of the fund.

Meanwhile, such a high level of interest rates does not mean at all that all banks must "mobilize" their efforts to increase the rates for deposits. On the contrary, in order to attract more deposits, banks must observe investors' interests and offer stable conditions.

However, we have to admit that only banks whose financial resources are not so dependent on deposits can afford such a "luxury" today. For this reason, the question as to the cause of the growth in interest rates on deposits has one answer - the demand for resources. And the situation in this sphere will stabilize only once the establishment and strengthening of the country's banking sector is complete.