"THIS COUNTRY HAS SEEN NO CRISES FOR A LONG TIME"

According to the latest report of the rating agency Moody's Investor Service on the banking sector of Azerbaijan, following the devaluation of its national currency in February, the quality of local banks' assets may possibly deteriorate because most loans in foreign currency were issued to borrowers having no incomes in foreign currency.

Nonetheless, according to stress testing results, many of the rated banks have sufficient "buffers" to cover their losses.

The World Bank which, together with the IMF, held the second assessment of this country's financial sector, have their own vision of this matter. Angela Prigozhina, the WB Private and Financial Sector Coordinator for the South Caucasus, has told about this in an interview to R+.

- What is your assessment of the financial sector development in Azerbaijan, what weaknesses and risks can be seen against the backdrop of global instability? In what way is it different from the financial sectors of other countries in the region?

- We are very glad that the situation in the banking sector of this country has stabilized. Nonetheless, the situation in the region remains vulnerable and Azerbaijan is no exception because the economy of this country depends on changes in foreign markets. During the second assessment of the financial market of Azerbaijan held under FSAP (Financial System Assessment Programme), we suggested holding a whole set of additional changes at the legislative and regulatory levels to be prepared for any developments.

One of Azerbaijan's advantages is that this country has seen no crises for a long time.

This has largely helped the economy to remain stable, provide high growth rates and strongly enhance the population's living standards. Still there is another side. In the USA, for instance, financial or economic perturbations take place; the economy of that country often undergoes various stresses. An economy subject to permanent changes adapts to them more rapidly and develops immunity or at least creates a whole set of instruments to react to some changes or others. Meanwhile an economy that has been developing stably for a long time "forgets" how to withstand such changes. Azerbaijan has seen no shocks for a long time and therefore it has no internal motion enabling the country to be more innovative and react promptly to changes.

At the same time, Azerbaijan has a great advantage: a fiscal buffer and an experienced team at its Central Bank. Still there are countries having seen no crises since for a long time and having no professionals who have met with them. This is why, even having a stable economic situation and no domestic risks, it is advisable to hold stress testing, simulate crisis situations and have alternative action plans.

In addition, the global financial market has changed a lot since 2007-09. Changes are taking place throughout the world: countries are working to improve their financial supervision and regulation systems, changing their laws, consolidating the deposit guarantee funds and protecting consumer rights. All that is aimed to reduce risks of systemic crises, provide financial system security and diminish the influence of external factors on the economy.

- How efficient do you find measures being taken by the Central Bank of Azerbaijan (CBA) lately to lower risks to the country's banking sector?

- The CBA is taking correct measures to check the growth of consumer crediting in the country.

Firstly, the restrictions are aimed to reduce consumer lending and future risks to banks. When banks increase their consumer lending portfolio disregarding the population's paying capacity, they should take it into account that the population's debts will grow as well. Secondly, banks pay much attention to consumer loans because of their high profitability. However, it is necessary to stimulate the development of the economy by giving loans to enterprises. Of course, consumer lending largely helps to develop domestic economy but it also stimulates import whereas it is necessary to encourage export in order to increase economic growth rates.

It is necessary to have moderate rates of consumer lending growth in order to keep banking technologies abreast with consumer portfolio growth. In addition, a bank in Azerbaijan cannot sell its portfolio of liabilities. So it is necessary to develop legislation along these lines. Thus banks could relieve themselves of their growing consumer lending portfolio and start increasing a new portfolio.

This points to the fact that, simultaneously with growing consumer lending, it is necessary to develop risk control mechanisms and banking technologies.

One component lacking in Azerbaijan is a law "On individual bankruptcy". Banks should be provided with an easy procedure for loan repayment and repossession of collateral. At the same time, there must be mechanisms for consumer protection not only via the law "On protection of consumer rights" but also through the bankruptcy procedure. Some of these points are still missing from the legislation, so the CBA is taking efforts for consumer protection and it must impose restrictions.

We have a very proactive programme for cooperation with the CBA, the Ministry of Finance and the State Committee for Securities in consumer rights protection and financial services. The population's security and access to financial services are very important especially in the current situation. Under this programme being implemented with technical assistance from the government of Switzerland, we are helping the regulators to create the regulatory framework required for financial institutions to disclose information on their financial products. This is needed for the population to better understand the risks, obligations and advantages involved in buying some insurance policies, using bank loans and deposits. Correspondingly, they are needed for the regulator to have corrective measures to apply when financial institutions fail to meet the rules of customer ethics and their commitments.

- What reforms is it necessary to conduct to develop the financial sector of Azerbaijan?

- Under the FSAP assessment, a whole series of recommendations were suggested to further improve financial markets and the legislative and regulatory frameworks. This is why we, including during our last visit to Azerbaijan in early July, discussed with the CBA, Ministry of Finance and the State Committee for Securities, the likely fields of cooperation and assistance that we can render to fulfil FSAP recommendations and encourage further improvement of the legislative and regulatory frameworks in Azerbaijan. We also met Swiss government officials to discuss the possibility of mobilizing new grants for these purposes. These are very important aspects of social security. Each family has its savings and the need to use a bank account and a card to pay with when buying things or to withdraw cash from an ATM and pay during a trip.

Basic but must-have financial products, such as bank deposits, the possibility to transfer money, open an account, use a credit card and withdraw cash from an account are indispensable conditions for creating conveniences. Meanwhile many people planning their future increasingly feel the need either to buy a life insurance policy or use a loan in the future for funding education or other long-term investments including, for example, mortgage. As these financial products develop, they become available for people to improve the quality of their life and enhance their wellbeing and conveniences.

Regrettably, having no knowledge about these products and no understanding of how to calculate their budget, pay on liabilities and what currency or interest-rate risks may be there, people may find themselves in a situation of financial stress instead of improving their wellbeing.

It is very important for further reforms in the financial market to be accompanied with growing financial competence and security, including through special legislative rules obliging financial institutions to pursue an ethical professional policy and properly disclose information.

The increasing degree of economic and social development in society makes us wish for more, our appetites are growing. This means that we must be competent, financially and economically. This is why we give special attention to this issue.

- How can the rights of financial services consumers be protected? What efficient mechanisms are there for this purpose?

- In many countries, mechanisms are being created for consumer rights protection and for responding to complaints just from consumers of financial services. Azerbaijan has no such mechanisms. This is why we are discussing ways to improve this system and to support the development of these mechanisms more properly, involving professional associations or by setting up a separate body or arranging a special structure under the State Service for Antimonopoly Policy and Consumer Rights Protection to work with the financial sector.

Not all customers can take legal action today if they have insignificant complaints. In the absence of such a mechanism, all complaints have to be sent to the CBA. But the CBA is not a judge; its tasks are absolutely different. They can take up and sort out complaints in some one-off case or they can systematize the situation to see where major irregularities are, where further regulation of issues is needed at the legislative and regulatory levels. They are not supposed to consider complaints.

Given the complex character of financial products, special competence is needed to work with customers' complaints and an understanding of such products in order to respond to customers' complaints.

There are various models. We need a focused discussion on which model is suitable for Azerbaijan taking into account its culture, the level of development of its financial market and which of them will provide more confidence.

We are actively working today with the State Committee for Securities, the CBA and the Ministry of Finance and discussing additional measures that can be taken under the new cooperation programme.