A CREDIT STORY

Over the past three years, the banking sector of Azerbaijan has left behind almost all the difficulties, which emerged after a sharp cut of oil prices and led to the devaluation of the national currency, Manat.

Thanks to speeding up reforms in the non-oil sector of economy, banks have begun to pay more attention to the development of new modern products and technologies. On the one hand, these innovations help the sector to withstand the difficulties more firmly, and on the other hand, to regain the shaken customer confidence. The state is also interested in establishing closer communication between the banking and real sectors. After all, the overall atmosphere in the country depends on how harmoniously these two important members of the economic family get along.

More money is possible

Perhaps the main problem today is the growing share of banking sector in lending to the real economy. This is the goal of both market participants and the government. It is no secret that after the devaluation of manat in 2015, banks became extremely cautious about issuing loans and tightened the requirements for borrowers. However, in the end, this led to the accumulation of excess liquidity in banks, or free funds, which currently reach 5 billion manats. According to the Chairman of the Board of the Central Bank of Azerbaijan Elman Rustamov, in 2018 the volume of money supply in the national economy has grown by more than 8%. So, we have a paradoxical situation here, when the economy suffers not from the shortage of funds, but from the failure of these funds to work.

Anyone who more or less knows how a business works knows that a share of profit must be reinvested in the business to develop it. Otherwise this profit will be useless. Surely, the banks are also aware of this. Nevertheless, they still prefer to use their free funds not for loaning, which is the main function of banks but, according to E. Rustamov, for purchasing securities.

The problem of excess liquidity must be addressed in several ways. The chairman of the Association of Banks of Azerbaijan (ABA) Zakir Nuriyev admitted that the banks keep most of their free funds in foreign currency. If they issue loans, then mainly in US dollars, which ultimately creates a load of excess manats. "It is still possible to solve the problem if the conversion of dollars collected from banks into manats intensifies or swap operations in manats are carried out," Nuriyev said.

On the other hand, it is necessary to help banks overcome the fear of loaning. Otherwise, it turns out to be a deadly circle when the population does not trust the banks and refrains from investing in them, while the banks do not trust the population refraining from issuing the loans. It is impossible to solve the issue administratively, since the banks are private entities, which have the right to develop and implement their own strategy. But it is possible to stimulate the process.

Ideally, a nearly two-fold reduction in the CBA discount rate this year, from 15 to 9.75%, should have already shake up the banks. Unfortunately, this did not happen. Therefore, it is necessary to help the sector in terms of the risks involved in making decisions on loan products. After all, the real cause of fear is the significant volume of problem loans and the prospect of their growth.

Therefore, Azerbaijan Credit Bureau, established at the beginning of this year, is playing an instrumental role in this process.

Debtors' bureau

Azerbaijan Credit Bureau LLC (ACB) was one of the main factors contributing to the advancement of Azerbaijan's position (from the 125^th to the 22^nd in Getting Loans indicator) in the latest Doing Business report published by the World Bank. This indicator in fact has two sub-components, Credit Information Index and Credit Law Index. In both categories, Azerbaijan has made significant advances thanks to the improvement of the legislative base and the establishment of new regulatory bodies.

As noted by the General Director of ACB, Elchin Habibov, the registry contains information on 2.9 million citizens, including those with current loan debt. According to Habibov, a certain revival is observed gradually in the banking sector. Therefore, we can see a steady growth trend of credit borrowing. This process will go on. This facts contributes to lowering the proportion of problem loans in the total amount of borrowings. "Moreover, Azerbaijani banks have begun to invest heavily in the digitalization of underwritten loans, and I think the process will go on further in this direction," E. Habibov said.

In general, these processes will have a positive impact on reducing the cost of loans, and, accordingly, their interest rates. One of the objectives of establishing ACB was to reduce the costs of banks to collect information about the borrowers so that to influence the cost of loans. By the way, in addition to collecting information on borrowers' credit history, the bureau can provide banks with statements on payments for utilities and even for mobile communications of a potential borrower. "In 2019, we will transfer the workload to a new IT platform, which will significantly improve our services. We are also going to increase the number of services provided by our bureau," E. Habibov said. He underlined that in the developed countries, the credit bureau is one of the significant components of economic development.

On the one hand, the objective of ACB is to increase the responsibility of borrowers, and on the other, to reduce bank risks. But, as mentioned above, this body actually began operations only a few months ago. Therefore, the practical impact of its activities on the statistics on issuing loans will be visible in the future, only in 2019 at best.

Cashless legalisation

Traditionally, the main incentives for the growth of credit activities of banks and their participation in the real sector has been the economy and businesses. Revolutionary changes in taxation, most of which are set to stimulate the development of entrepreneurship and the legalization of the shadow economy, will play the key role in this context. It is no secret that banks have recently been suffering from the decline of consumer lending caused by hiding of real incomes of potential borrowers from tax authorities.

To solve this problem, in addition to fiscal reforms, serious steps are taken to increase the share of non-cash payments in the economy, forcing the actors to whitewash their financial transactions.

CBA expects that by 2021 the volume of cash transactions in the country will decrease from 74 to 40%. Alim Guliyev, deputy chairman of CBA, said at the 3^rd International Banking Forum that on average, the volume of non-cash payments would grow annually by 7%.

Z. Nuriyev believes that digitalisation can be one of the drivers to improve the banking system of Azerbaijan, as it will increase confidence between investors and banks and ensure transparency in the sector. Mr. Nuriyev noted that the banks had spent about ₼310 million on the introduction of financial technologies in 2012-2017. "Digitalization requires large investments from banks. However, the banks will receive a large income over the medium term. In 2017, the volume of transactions apart from interbank payment transactions was ₼210 billion, as opposed to 2010 when this indicator was only ₼85 billion. It is expected that by the end of 2018, this volume will reach  ₼255 billion," Nuriyev said.

Meanwhile, during the first nine months of 2018, electronic transactions made 25% of all transactions conducted from current accounts. But compared to the same period of 2017, this number has tripled (3.3 times). It is clear that the development of the digitalization of banks is progressing well. According to the acting COB of the Financial Markets Supervision Chamber, Ibrahim Alishov, 24 of 30 banks operating in Azerbaijan use the online banking system, while 25 banks use a mobile banking system.

In general, the banks have an intention to develop and to solve problems in the banking sector. Regulatory bodies are ready to support these intentions, and the government guarantees stability in the economy. All these factors can shake up and revive the relations between the banking and real sectors.