WITHOUT FEAR OR DOUBT

Emil Mammadov, deputy chairman of the board of NIKoil, answers this and other topical questions.

- How important is the creation of the Deposit Insurance Fund for the development of the banking sector?

- Financial institutions and banks in particular were basically acting as agents in implementing the state's money and credit policy. Their work is extremely important for the country's economy, as they are involved in the payments system and play an active role as a mediator between depositors and borrowers. It should be said that the banking system is extremely sensitive to the problems of liquidity and solvency, as it issues credits to a wide circle of borrowers whose risk cannot always be evaluated straightaway. So what in particular is making the country form a system to guarantee financial security? The threat that depositors could suffer if a bank were to go bankrupt and the need to reduce the risk posed by a wave of panic. Remember the banking crisis in Russia that began on 17 August 1998. A year later, in 1999, the Deposit Insurance Fund was set up in Russia with the specific aim of returning and restoring popular confidence in banks. I would say that the creation of this type of fund should be seen as the proper regulation of any country's political and economic strategy. The creation of a Deposit Insurance Fund in our country aims to increase further the reliability and stability of banks and popular confidence in them.

- It can be seen as a way to protect the rights of depositors?

- Of course, the insurance of deposits protects the owners of insured deposits from the consequences of banks' insolvency. But it is not intended to protect banks from insolvency. The insurance of deposits spares their depositors the arduous task of monitoring and evaluating the banks and their assets. At the same time it promotes trust overall in the banking system. It reduces the likelihood of depositors taking an active part in panic withdrawals from banks in force majeure circumstances. 

- In what circumstances will it be possible to talk of the success of the system?

- If the country's national banking system is healthy. The system of insuring deposits will promote a stable financial system if it is part of a well-organized system to ensure the country's financial security. In order to earn the trust of the general public, the system to insure deposits must be well organized and comprehensible and accessible to the public. It must also be backed up by strong regulation and supervision, an appropriate regime for accounting and the disclosure of information and guaranteed observance of legislation.

It should be remembered that the system to insure deposits can cope only with a limited number of banks going bankrupt simultaneously. It cannot be expected to stand on its own against a systemic banking crisis.

- Are you satisfied with the conditions for membership of the fund?

- The current conditions offered by the fund take account of all the necessary factors and the wishes of the banks, which, it should be said, actively put forward plenty of healthy, constructive criticism ahead of the creation of the fund. Of course, the fund's work will be perfected, experience will be gained and the conditions will get better.

- To what extent are they in line with international practice?

- The system of insuring deposits exists in many countries and has the same purpose - reinforcing both the financial system as a whole and the banking sector. It's just the factors behind the creation of funds in various countries that may be different.

- How will the situation on the deposits market change? Won't this affect interest rates?

- Deposits from individuals are today the most dynamically developing segment of the banking services market. The fund to insure the public's deposits can only increase trust in the banking system and have a positive influence on the rate of growth in the system's deposit base. Unlike deposits from enterprises and organizations (as a rule they are made in the banks that hold the enterprises' current accounts), deposits from the public show no loyalty to an individual bank. As a result, the growing incomes of individuals are becoming the subject of fierce competition between banks. Of course, the banks often manipulate their interest rates to increase the number of deposits, although the interest rates depend on a large number of factors. The presence of the Deposit Insurance Fund on the market cannot by itself have a major influence on rates. As the country's economy gains strength and the banks' capitalization and the flow of cheaper resources to the banks increase, the interest rates should fall.