TRANSITIONAL PERIOD

No matter how strong the banking sector of Azerbaijan withstands the lockdown of the outgoing 2020, it becomes increasingly difficult to survive without additional state support. Therefore, the government has recently made quite a logical and justified step to extend the full deposit insurance system for another four months. Moreover, amid the repeated requests of both private investors and businessmen to the Central Bank and the Deposit Insurance Fund (ADIF), relevant amendments have been made to the system.

Time to adapt

According to the amendments to the Law on Full Deposit Insurance, the system has been extended for another four months until April 5, 2021. It was first introduced in Azerbaijan on March 1, 2016 for a period of three years. In 2019, the period of deposit insurances was extended for one more year until March 4, 2020, and then until December 4, 2020.

Admittedly, the effect of the system turned out to be quite positive - the banking sector managed to stay afloat in times of crisis, the volume of deposits in the national currency increased noticeably, rates have finally stabilized at real level, etc. On the other hand, this allowed the regulator to reduce its sensitivity to decisions on closing ‘toxic’ banks, such as  AtaBank, Amrahbank, AGBank and NBC Bank declared bankrupt this spring.

Elman Rustamov, Chairman of the Board of the Central Bank of Azerbaijan, noted that the introduction of a full deposit insurance system has yielded serious benefits. “Thanks to the law on full insurance of deposits, we could fully implement the recovery of the banking sector. Weak banks are excluded from the market. 43,000 depositors were paid compensation in the amount of ₼1.3 billion. Depositors must control banks, and they do so now,” Mr. Rustamov said.

Although the system has justified itself, experts, market participants, the regulator and ADIF agreed that it was irrelevant to extend the period of insurance of bank deposits under current circumstances, as it was no longer effective. “We have a situation when with full insurance of deposits, other parameters that used to play an instrumental role in choosing banks, such as the effective operation model, shareholder structure, comfortable service, etc., play an insignificant role for clients,” one of the local bankers noted earlier.

Moreover, the regulator and ADIF began developing a new model of the full deposit insurance system, planning to introduce it this year “softly and in stages”.

But... with the pandemic and global economic crisis, the banking sector, like all other elements of the financial market, is strongly affected by negative factors. It is clear that it is very risky for the market to make any innovations even at the psychological level during this period.

In this regard, it was decided to start introducing amendments to the deposit insurance system from April 5 next year, and the period before that was declared "transitional". During this time, the situation with quarantine will become clear, depositors will receive enough information about new nuances, and banks will have enough time to adapt to changes.

Important nuances

“CBA and ADIF have developed a strategy for the new deposit insurance mechanism, which was discussed at the meeting of the Economic Council. It was decided to apply the transition period until April 5, 2021. At the same time, a new deposit insurance mechanism will be applied for the transition period. It includes, inter alia, the rejection of the practice of full insurance of deposits, as well as a number of other changes," a press release from the Central Bank of Azerbaijan said about innovations in the deposit insurance system.

It must be said that the new amendments are quite principal and, according to most experts, should positively affect the post-crisis development of the banking sector in Azerbaijan.

Thus, the amount of compensations for deposit insurance will be increased from ₼30,000 to ₼100,000. According to ADIF’s Executive Director Tural Piriyev, insurance deposits (₼6.5b) will decrease by almost twice and will reach ₼3.5b. Thus, the system of full insurance of deposits will become a limited insurance mechanism.

At the same time, Mr. Piriyev underlined that the issue of raising the deposit insurance rate is not on the agenda for now. “Currently, the annual interest rate of foreign currency deposits in Azerbaijani banks is about 1-1.5%. ADIF insures deposits with an annual yield rate of up to 2.5%. If interest on deposits grows, then insurance rates can be revised,” Piriyev said.

Perhaps, one of the most important points of innovation is the partial insurance of deposits – maximum of ₼20,000 in bank accounts of individual entrepreneurs. The business community has repeatedly asked the regulator about this, and their wishes have been taken into account. It is noted that entrepreneurs of this category are especially sensitive to financial risks, and the loss of funds can lead to the loss of their business. In this regard, the inclusion of individual entrepreneurs in the deposit insurance system will support the government's policy on the development of small businesses and will serve to increase confidence in the banking system. To make it clear, the bank deposits of the population in Azerbaijan (including the funds of individuals engaged in individual entrepreneurial activity) decreased by 8.9% in January-October 2020.

In addition, the funds of citizens in the deposit accounts of notaries are fully insured. This has been done to ensure proper protection of the rights of consumers of financial services when making property transactions through notaries, especially when buying and selling real estate.

According to the CBA estimates, the novel mechanism fully protects 99.9% of deposits in banks. "This will provide full coverage of insurance for a significant portion of deposits, will improve the banking risk management system, enhance competition and stability of the banking system," CBA said.

Well, the innovations were indeed expected and in demand, so it is likely that the regulator's hopes will be justified. Until, of course, new global surprises...