FOR BANKS TO BE TRUSTED

A new, long-awaited agency appeared in Azerbaijan in August - the Deposit Insurance Foundation (DIF). Experts expect that the launch of the foundation's activity will give new impetus to the banking sphere and will increase competition on the market. In turn, this will increase the safety of bank deposits. In any case, the foundation will first of all serve the interests of depositors and will be a new stimulus for attracting clients to banks.

We should point out that such foundations are operating in 70 countries of the world. Their experience was studied before the establishment the Azerbaijani foundation.

In his first, exclusive, interview with R+, the executive director of the foundation, Azad Cavadov, describes how the DIF will organize its work:

- The main purpose of the foundation is to guarantee that deposit accounts will be paid to depositors if a bank goes bankrupt or if its licence to receive deposits is cancelled. Some of our compatriots still remember bitter experiences from the past when some banks and agencies pretending to be banks went bankrupt within one day and people lost their savings. The DIF is intended to assure people that their deposits are insured. Therefore, every bank is obliged to state in deposit contracts that it is a member of the DIF.

As you know, for the time being deposits up to 4,000 manats (including accumulated interest) in one bank are insured. But this does not mean that people cannot have several deposit accounts up to this sum in different banks in order to guarantee complete safety of their savings. This means that if a bank goes bankrupt, the entire sum of 4,000 will be paid to the depositor from DIF resources through the foundation and an agent bank.

By the way, the insured sum will be increased to 6,000 manats from 2008 and to 8,000 manats from 1 January 2010.

- Has the foundation started functioning?

- In accordance with the presidential decree signed on 9 February 2007, the deposit insurance foundation must start operations on 11 August this year. We have already done the necessary work and have started operating. As you know, a trustee council of the foundation has been established. The members of the council are the chairman of the board of the International  Bank of Azerbaijan, Cahangir Haciyev, the chairman of the supervisory board of Azerigazbank, Cinqiz Asadullayev, the chairman of the Economic Development Ministry Department of Economic Policy and Forecasts, Sahin Sadiqov, the head of a Finance Ministry department, Ziyaddin Allahverdiyev, the deputy chairman of the board of the National Bank of Azerbaijan, Rufat Aslanli, the director of the National Bank's judicial department, Rana Malikova, and the head of the market relations department of the National Bank, Isi Mustafayev. 

Simultaneously, a list of people who may substitute for the nominated members of the council has also been approved. The council members have a five-year tenure, but they can be replaced earlier. Cinqiz Asadullayev was elected head of the trustee council. The trustee council has already held two meetings and endorsed its composition. I was elected executive director of the Deposit Insurance Foundation. In addition, the foundation's budget was endorsed. According to our calculations, the budget will total 7m manats. The trustee council will meet at least once every three months.

I would like to remind you that the Deposit Insurance Foundation is an independent agency. Well-known international companies will audit the foundation's activity every year. Then we will submit the results of the audit to the president and the trustee council's member organizations. Thus, there should not be any doubts concerning the transparency of the foundation's activity. 

- How many banks have become DIF members?

- In accordance with the law, all banks that operate in Azerbaijan and have a licence issued by the National Bank of Azerbaijan to receive deposits from the population should become members of the Deposit Insurance Foundation. The National Bank provided us with the list of these banks, and on this basis we gave them DIF membership certificates. As of 13 August, there are 30 banks, covering 98 per cent of the country's deposit market.

As to branches and affiliated representative offices of foreign banks, they should join the foundation if there is no similar agency in their home country. For example, the branch of the National Bank of Pakistan has become a member of our foundation.

The membership fee for every bank is 10,000 manats. This fee should be paid out in a lump sum within 10 days of the bank being entered on the DIF's register.

- Do these fees make up the foundation's entire capital?

- Of course not. We are in discussions with the German government to grant (through the German Development Bank (KfW) 5m euros for the capitalization of the foundation. KfW will allocate a one-million-euro grant for the organisation of the foundation's work.

The second component of the capitalization of the foundation is calendar payments by banks. In a three-month period, these payments consist of 0.15 per cent of the average daily sum of the insured bank's deposits. That will make up 0.6 per cent in the first year of the foundation's activity. Taking into account the fact that banks in Azerbaijan hold deposits to the tune of 1bn manats, this sum totals about 6m manats. But, in reality, approximately 1.5m manats will be transferred this year because credit transfers for the fourth quarter of the year will be made 10 days after the quarter ends. In the second year, the sum will be reduced to 0.125 per cent (0.5 per cent per year).

These payments will be transferred to the foundation until the latter accumulates a sum equal to 5 per cent of all deposit accounts. We will invest the foundation's funds in state securities, notes of the National Bank, deposits and highly-rated financial instruments of central and successful banks. To determine these banks, we will consult foreign experts who will be selected by tender. We have already asked KfW to help us in this matter.

- When the law "On the Deposit Insurance Foundation" was being endorsed, there was a lot of discussion as to whether it was fair to establish equal deductions for all banks. Do you think this opinion has some merit?

- I think that the law is quite fair. A bank that has a large amount of deposits should pay a bigger sum. In general, I think that the establishment of the foundation is a well-timed decision.

- Do you think that an obligation to make quarterly payments to the foundation might affect the terms of bank deposits?  I mean, banks might try to recoup their losses at the expense of depositors.

- I think that is not in their interest. Even if there are changes for the worse for depositors, these changes will be minor. The opposite may happen, because now all banks have equal means of insuring deposits. That means that clients will now pay more attention to the terms of deposits rather than to the risk of a bank's bankruptcy. In this respect, some banks may change their policy to attract deposits.

- In your opinion, is there a risk today that any of our local banks may go bankrupt? In such a case, will the foundation have enough funds to pay depositors their savings?

- Risk always exist, but today it is under control, taking into account the current pace of the country's economic development and the fact that the National Bank is performing  a supervisory role.

As to whether we have enough funds, everything depends on which bank goes bankrupt, i.e. what amount of insured deposits that bank has. In any case, the foundation has the right to borrow funds from the National Bank and the state by issuing securities. In case the foundation does not have enough money to pay compensation and we have to borrow money, then banks will have to make additional payments.