MORE GUARANTEES

In a period of crises and financial fluctuations, it becomes especially pressing to safeguard savings in the bank. The increasing probability of bankruptcy and the growth in instability in banking operations, is making people more concerned about what they should do with their bank deposits - should they withdraw their money and keep it at home or continue to trust the financial institutions at their own risk. It has to be said that there have been serious changes regarding this issue in Azerbaijan over the last eight years thanks to the activity of the Azerbaijan Deposit Insurance Fund [ADIF] for Individuals [natural persons]. But, against the backdrop of the latest upheavals on the banking market owing to the withdrawal of two banks' licences and the news coming in about problems arising in the operations of a number of others, the experts are increasingly talking about the need to improve operations and this Fund.

Time to change

According to today's rules, in the event of a bank failing, the state guarantees to pay compensation for the deposits of individuals [natural persons] up to an amount of 30,000 manats in any single bank with a maximum interest rate of up to 12 per cent. It is therefore more reliable to spread your money around in several banks, since it is highly unlikely that several banks will close down simultaneously, and, on the other hand, this will allow you to reckon on getting your money back in any case. 

During ADIF's operations, depositors' accounts have been known to have been reimbursed in only one bank - the Royal Bank, whose customers were compensated with 14.7m manats, although six banks have been closed down during this period, two of them this year. The insurance did not apply to the remaining banks, since there was no need to compensate customers for their deposits in those banks. They either did not open deposit accounts to start off with or the bank itself had sufficient resources to pay its customers back. 

Thus, the Deposit Insurance Fund for individuals already has some experience, not only theoretical but also practical. Time does not stand still, however, and the international standards, on which ADIF's operations are based, have changed several times, so consequently it is time for the Fund to change its standards too. ADIF was set up in keeping with the 1996 directive of the European Union on Deposit Guarantee Schemes. This directive was revised in 2009 and then replaced by a new one in 2014. This means that the Azerbaijani legislation relating to the safeguarding of deposits needs to be revised in keeping with the new international regulations.

At the present time, at the request of Azerbaijan's Central Bank and ADIF, the World Bank is drawing up a separate project to improve the Fund's operations.

A need for simplification

So, what are these new European directives really about? At the present time, according to the "Law on deposit insurance, the depositors in Azerbaijan are to be repaid within 90 days of a bank having its licence withdrawn. The World Bank South Caucasus country co-ordinator for the financial and private sector, Angela Prigozhina, thinks that Azerbaijan needs to cut this compensation repayment term to a maximum of 21 working days, as adopted in the new EU directive. She has moreover said that in many countries the system has been improved to such an extent that the depositors can get their money back within seven working days. In Russia, for example, the repayment period is 14 days.

The expert believes that it is not only important to reduce the legal procedure, but to automate the processes so that the Deposit Insurance Fund can make the repayments more rapidly and efficiently. At ADIF, they noted moreover that, in the case of the Royal Bank's bankruptcy, the compensation payments were made in 14 days.

According to ADIF's statistics for the first six months of 2015, today in the banks it serves with a total of 7,147m depositors, 90 per cent of the depositors or 6.4m customers are covered by insurance, and deposits worth 2,122bn manats are entitled to compensation, which is 28 per cent of the total amount of deposits. The figures point to the fact that with these indices the country meets EU requirements. The experts also think that ADIF needs to upgrade the system of managing the Fund, its investment policy and so forth. At the present time, expert specialists are still working on this project.

Angela Prigozhina does moreover assert that the Fund is not suffering from any problems in its operations and is reliable and capable of carrying out its functions. At the present time, the Fund's insurance reserves amount to 103m manats. This money is not just lying around doing nothing. In keeping with ADIF investment policy, 85.5m manats of these funds have been invested in state securities with an annual income of 4.2 per cent. The "Deutsche Wealth Management International" company is managing 5m euros of the funds, which means that 11.4m manats remain freely accessible.

According to the current legislation, a bank which does not subscribed to the insurance system does not have the right to use the capital of individuals. So, the Azerbaijani depositor need not fear making a mistake, since all the 43 banks that remain on the market are members of ADIF.

Investment in property

Suggestions for improving operations have moreover been made with regard to yet another Azerbaijani fund, namely the Mortgage Fund. The latest statements by Central Bank Governor Elman Rustamov regarding a 250m-manat increase in mortgage funding before the end of the year confirm the government's desire to boost public access to housing loans. Since there is not only a social aspect to this issue, but it will also act as a spur to the construction industry, and that in turn means increasing activation of the economy, boosting jobs and increasing treasury receipts. Azerbaijan's Central Bank is moreover ready to inject additional resources into the mortgage market from its own reserves if safeguarded by a state guarantee.

An online mortgage system is already available for people to access loans, and all loan applications are processed online. This is how the system works: citizens apply online, choosing the bank, from which they wish the loan to be granted. In the course of a week, the bank, makes an appointment with the citizen, and, if all the requirements have been met, then all the necessary documents will be accepted from the citizen and the loan agreement will be drawn up.

Concomitantly, work is going ahead to simplify the conditions for being granted a mortgage and the mortgage interest rate for a member of the public is being cut (it is now 4 per cent whereas it usually used to be 8 per cent), and the amount that can be borrowed on a mortgage is to be doubled to 100,000 manats.

In its turn, the World Bank is proposing to expand the possibilities of the Azerbaijani Mortgage Fund by attracting more resources into it through selling its shares. This means turning a state company into a joint-stock company, in which it is preferable that the state owns 100 per cent of the shares for the moment.

According to A. Prigozhina, such funds can have a mixed form of ownership; they can be part state-owned and part privately owned. In this situation, everything depends on whether the Azerbaijan Mortgage Fund can be privatised at the present time. "We think that the present time is not the best time for this. Operations need to be improved and the extent of the Fund's activity needs to be expanded. On the whole, the Azerbaijan Mortgage Fund does have sufficient possibilities available, including diversifying its resource base," she noted.

Owing to this, for the moment the privatisation of the Fund does not appear to be a realistic process. She believes that the most rational thing to do in the initial stage of turning the Azerbaijani Mortgage Fund into a joint-stock company is to assess its market value and expand its possibilities for attracting new domestic and foreign resources.

The World Bank expert believes that the Mortgage Fund has enormous potential for further expanding its operations. Owing to this, the World Bank has set about implementing a big consultation programme together with the Azerbaijan Mortgage Fund to upgrade domestic operational procedures and make the Fund more efficient. The issue of which securities' tools can be developed is being discussed with the Azerbaijan Mortgage Fund and the State Committee for Securities, in order to provide opportunities for various emissions of funds, including to the Mortgage Fund and to attract additional resources.

In total, since 2006 when financing of the Azerbaijan Mortgage Fund started, 17,228 mortgages have been granted worth more than 695.6m manats. According to the estimates of the International Financial Corporation, the country's mortgage market could amount to 5-6bn manats. These studies have shown that population's capacity to pay for mortgages in Azerbaijan is as much as approximately 1bn manats. At the present time, the Fund is working with very cheap, subsidised resources, which are not unfortunately sufficient for everybody. There are those who need subsidised and cheap loans, because this is the only way that they can afford them. "But, taking into account the amount of mortgages that commercial banks are granting, it can be said that the population does wish to acquire housing with a mortgage, even if the interest rate is high," A. Prigozhina thinks.

 In short, the present economic situation both at home in Azerbaijan as well as world-wide, is creating a basis for improving the operations' structures, which are important for retaining financial stability in the country and for its population, and suggestions have been put forward, which may be regarded as timely and effective.