TO PRIVATIZATION –– WITH DOUBLE THE CAPITAL

The high proportion of state banks in the market, which diminishes the ability of their commercial colleagues to compete, is a chronic disease of Azerbaijan's financial sector. But their status as state institutions often constrains the banks themselves, depriving them of the possibility of flexible manoeuvring in the market. Various options for resolving these problems have frequently been the subject of heated discussions between the government and international financial organizations. But the disputes have now come to an end. A recent instruction issued by Azerbaijani President Ilham Aliyev, entitled "Measures for the privatization of the open joint-stock company Kapital Bank", has set in motion the privatization of the second largest bank in the country. 

Process gets under way 

The instruction signed by the head of state envisages a plan for floating the current emission of bank shares, and without the participation of the state. To put it more simply, at the first stage 50 per cent of the bank's assets will be auctioned to private investors in five equal parts, and the funds raised will be incorporated into the company's authorised capital. 

"The state is setting itself the objective of modernising the bank, making it more efficient and also enhancing its capitalisation: after completion of the first stage of privatization, the bank's authorised capital could increase twofold or more," chairman of the board of Kapital Bank Rauf Rzayev said. 

A special commission has now been set up consisting of the State Committee for the Management of State Property, the Finance Ministry and the National Bank, which are to establish the value of the bank's assets and select potential investors having a good business reputation and meeting Azerbaijan's economic and security interests. The process of establishing these criteria could be completed in the very near future, and consultative assistance will be provided by the world famous auditing company Ernst & Young. After this work has been completed, a timescale will be announced for holding the auctions themselves. The second stage of privatization of Kapital Bank envisages the total privatization of the bank, and this could be implemented roughly by the end of 2008. 

But what aims is the state pursuing in privatising the country's second largest bank? And to what extent will these measures help the bank itself? 

Let's be frank: over all these years Kapital Bank has been kept afloat primarily by a number of preferential terms provided to it by the state. The bank handled pension accounts, refugees and forced migrants received benefits through it, and it serviced the accounts of the State Exchequer and of a number of other state departments. For example, just recently the Cabinet of Ministers took a decision to carry out all transactions for the distribution of 80m manats set aside in the budget for agricultural subsidies through Kapital Bank. Obviously, such an approach is a far cry from normal market relations, and the bank owes its prosperity to its status as a state institution rather than to the efficiency of its management or their knowledge of the market. 

Objective - to sell as dear as possible 

"Such a privileged position for the state banks is having a detrimental effect on the financial market in general," was the constant complaint of representatives of the European Bank for Reconstruction and Development, the International Monetary Fund and the World Bank, who frequently reminded the government of the need to privatise the state banks as soon as possible. And the international financial organizations for some reason always saw the International Bank of Azerbaijan (IBA), whose market share makes up nearly half of the country's total bank assets, as the first sacrificial lamb. 

But unlike its junior colleague, the IBA is quite an effective bank which does not need any particular help from the state. It has always been active in attracting people's money, obtaining targeted credit lines from foreign donors, and also developing international branch networks and taking part in financing capital-intensive production projects. So by the beginning of this year IBA's capital reached 1.78bn manats, and you can't say that about the assets of Kapital Bank, which currently total 149m manats. So the government's decision to privatise Kapital Bank first is quite understandable - the government is seeking to transfer into private hands a much less efficient, but still very valuable, asset. 

And the government intends to sell Kapital Bank as dearly as possible: in the last few years the management and system of administration have been reformed, 88 branches have been computerised, and FlexCube software is being installed, which will help transform the entire information and accounting system. The bank is a full member of the international payments systems SWIFT, Master Card Europe, VISA International, and of the "Hazri" system which operates within the country. The bank has 199 cash machines and more than 370 POS terminals, and the number of the latter will soon increase by a further thousand. All of these measures, plus the expected doubling of the bank's authorised capital from the additional emission of shares, should make it more attractive and increase the sale prices of its shares. 

There is no doubt that after becoming a half private, full-fledged part of Azerbaijan's financial system, Kapital Bank could go on to open up the full range of banking functions. It will gain the opportunity of attracting substantial loan funds both inside the country and abroad, and of taking part in the provision of credit to capital-intensive projects, thereby considerably reducing its dependence on state support.