DEGREE OF CONFIDENCE

The banking sector of Azerbaijan has been suffering from the financial turbulence since 2016. Almost the sudden closure of several banks and the subsequent problems with their depositors have completely reduced the level of public confidence in banking sector forcing the participants and regulators to take increased precautions to prevent potential risks. As a result, 2017 has become a remarkable year in terms of expectations and survival of the banking sector under new conditions. The participants of the II Banking Forum mainly focused on adaptation to new period of development of the banking system believe that a couple of more reforms will contribute positively to local banks.

Secret consolidation

So, bankers and market regulators believe that they were able to adapt to current situation. In particular, President of the Association of Banks of Azerbaijan, Zakir Nuriyev said at the forum that during the nine months of 2017, the assets of banks decreased by 17%, the loan portfolio by 25%, deposits in manats by 12%. At the same time, net profit of 31 banks operating in Azerbaijan reached ₼480 million.

Ibrahim Alishov, CEO of the Financial Markets Supervision Chamber (FMSC), said that the banking sector experienced shocks and problems in 2015-2016. The main factor contributing to the crisis was the fall in oil prices, which began in the second half of 2014. As a result, the national currency, manat, was depreciated twice in 2015, which led to problems in financial and banking system. "The banks lost 60% of their capital, Central Bank revoked licenses of five banks that had insufficient capital, and 11 banks left the market in 2016," said I. Alishov.

His deputy, Director of the Strategic Services Department of FMSC, Asim Zulfugarov, added that there are problems with the capital of about 10 banks of Azerbaijan, but until the end of 2017 these banks will complete their capitalization program. He said that within the framework of this program ₼1 billion is aimed at increasing the capital.

"Only in 2017 injections into the equity capital of troubled banks amounted to ₼834 million. Thanks to this, the total capitalization of banks today exceeds ₼3 billion, and the capital adequacy ratio of the banking system of Azerbaijan exceeded 13% with a minimum requirement of 10%," noted A. Zulfugarov.

This notorious capitalization, as market participants themselves say, is the main reason for the start of the buzz around the consolidation of banks. Although no official papers have been signed yet, the media, citing internal sources in banking circles, publishes quite intriguing options for possible mergers, which, of course, are promptly refuted by the banks themselves. As one of the local bankers said, such information can cause serious mistrust of the bank from clients, so bankers carefully select words, or even refuse to comment on any issues about consolidation. Well, it is clear that the list of problematic ten banks is also not disclosed publicly, or they would have to be declared bankrupt ahead of schedule.

Free of charge and uncontrolled

Meanwhile, market regulators such as FMSC argue that this year it was possible to prevent a trend towards a significant outflow of household deposits from the banking system. While bank deposits of the population decreased by 22%, during ten months of 2016, in 2017 the decline was 2.4%. At the same time, for the last seven months, the population's deposits in banks have even increased by ₼361 million, and by the end of October, their volume is estimated at ₼7.3 billion.

However, this positive trend is spoiled by the fact that depositors of eleven banks, which closed in 2016 due to the revocation of licenses, have received only ₼748 million as compensation for insured deposits. That is, this year the banks failed to attract even half of the insured deposits lost last year.

It's no wonder, as almost every day, potential investors stumble on information about blatant criminal actions of the management of some closed banks. For instance, 41% of the loan portfolio of the former Bank Standard was "distributed" at a zero rate! As one of the experts joked, even in Islamic banks, there is at least a commission for the rendered service... Unfortunately, the population has not yet received clear comments why the bank has not passed an audit in recent years and how the regulators have not noticed such obvious violations.

Another serious problem is the International Bank of Azerbaijan (IBA), which reduced the market share (by assets) from 41% to 27%. According to I. Alishov, the final phase of IBA's recovery began. "This year, IBA's toxic assets of ₼4.3 billion were transferred to CJSC Agrarkredit. As planned, in 2018, the bank will be open to privatization," he added.

In addition to serious financial losses, this purely negative social factor also has a purely social factor. Javanshir Abdullayev, director of the Banking Training Center of the Association of Banks of Azerbaijan (ABA) said that over 14,000 people have lost their jobs in the banking sector in recent years.

No credits - no trust

Meanwhile, the Chairman of the Parliamentary Committee on Economic Policy, Industry and Entrepreneurship, Ziyad Samadzadeh, believes that the problems in banking sector are being solved rather slowly. "Firstly, it is necessary to reach a consensus in solving problems between the population and banks. We need to address issues with problem loans, determine their structure and make differentiation," he said.

According to the Central Bank of Azerbaijan, the loans of national credit organizations reached ₼12.44 billion at the beginning of October 2017, which is 26% less than the same period of 2016. At the same time, the volume of overdue loans reached ₼1.86 billion, an increase of 16.3% over the year, with a specific weight of 15%.

According to a recent report by EBRD experts, credit activity declined in 2016 and in January-August 2017 "because of turbulence in the banking system and lack of credit demand from the real sector."

"Currently, there are available free funds in the banking system (₼6.5 billion). 70% of these funds are at the disposal of financially healthy banks," said Elman Rustamov, Chairman of the Central Bank of Azerbaijan. According to him, these free funds are not used for lending to the economy. "We must focus on the reasons for this," added Rustamov. He noted that one of the main problems is a high level of inflation (average annual inflation at 13.7% in January-October). "Therefore, we pursue a conservative policy in this direction taking into account all possible risks," he stressed.

According to Z. Samedzade, the problem is that the population has lost confidence in the banking sector. "We need to return this trust," he added.

I. Alyshov was more positive noting that in September, the loan portfolio of banks increased by ₼62 million. "We see positive trends in lending. So far, this is particularly evident in the growth of lending in the communications sector by 27% and 12% in the agricultural sector," he added.

Consortium and benefits

Specific proposals are also available from the bankers. Thus, ABA is initiating a new system for the protection of creditors, some elements of which already work. In particular, the Credit Guarantee Fund will be established in the near future. The Institute of Financial Ombudsman has been operating since September, which helps to regulate disputes over contracts in the amount of $2,000. In addition, measures are required for de-dollarization in the banking sector, which as of October 1 on loans is 43%, deposits - 74.6%, deposits of the population - 71.8%.

Nurlan Babayev, head of the Legal Support Department of FMSC, believes that to solve the problem of non-performing loans, the banks should create a consortium, and the state should provide tax benefits. "According to our estimates, the volume of non-performing loans reached ₼2 billion. However, the total damage from troubled assets is not so much in the fact that the banks cannot return them, but because the bank is obliged to create reserves for bad assets. In other words, the total burden on banks caused by the growth of problem assets can reach about ₼4 billion. These funds could be spent on the development of real sector, which would help create new jobs," he said.

According to N. Babayev, the solution of this problem requires both the changes in legislation and institutional reforms. "Throughout the world, to solve the problem of non-performing assets, the authorities often introduce tax incentives," added the representative of financial regulator.

Banks themselves advocate for an even distribution of liquidity in the banking sector of the country, for which it is proposed to develop the interbank foreign exchange market. By the way, in this direction, the relevant decisions have already been taken: the commission (interchange fee) is reduced, which credit organizations participating in the servicing of bank cards pay each other in the process of making transactions. This decision was made upon an agreement reached between the ABA, processing centers and banks.

Despite all this big tangle of problems, 31 banks continue to work and, as already mentioned above, even earn profit. Accordingly, talking about some kind of global collapse is illogical. "Today we can observe small but a noticeable trend toward the development of the banking sector. We think that these factors will allow us to develop the banking sector even more intensively in 2018-2020," said Z. Nuriyev.

All stakeholders agreed that in order to achieve these goals, both the modernization of the legislative framework and the acceleration of the implementation of previously adopted laws are needed, as well as an early reaction to all the above-mentioned problems and proposals.

Unfortunately, the restoration of confidence in this sector is a process that takes much longer than its loss. This is quite realistic. After all, the banks were able to achieve this after the failures of financial pyramids at the end of the last century. So, the negative elements can be completely overcome if the banks make a step towards their clients.