CRISIS CAN BE A REAL CHANCE

Both the COVID-19 pandemic and the shock of war in Ukraine have demonstrated the crucial role a sound financial system plays in keeping economies functioning in adverse conditions. This is why regulators around the world bear a major responsibility during decision-making, as their decisions not only influence the financial sector but also have a multiplier effect on the macroeconomic situation in general.

At his first ever press conference, the new chairman of the Central Bank of Azerbaijan, Taleh Kazimov, announced that the financial sector was in for a rather interesting development path. He has already shared his views with the heads of commercial banks of Azerbaijan. He noted that the country’s banking sector is facing medium- and long-term challenges of expanding financial inclusion, global challenges, and supporting the country's economic development and other priority areas.

Pressure of sanctions

Tensions in all sectors of the economy, both regional and global, continue to persist as a result of COVID-19 and the Ukrainian crisis. Naturally, the financial and banking sectors are also under strong external pressure, as the sanctions against major Russian banks could not but affect the operation of Azerbaijani banks that work closely with them.

Since the start of the Ukrainian war, twenty Russian banks have been subject to various sanctions. The most significant ones include disconnecting a number of them from SWIFT, freezing assets in the US, banning settlements in US dollars with any US partners, buying foreign stocks and currency through brokers of these banks, etc. There is a separate item on banks in the latest, sixth package of sanctions against Russia. As put by the President of European Commission, Ursula von der Leyen, "We finally disconnect the largest bank of Russia, Sberbank, from SWIFT. It holds about 37% of the entire banking sector. But we are also de-SWIFTing other major banks in Russia." This will hit banks that are critical to the Russian financial system, she said.

What does this mean for banks in Azerbaijan? Local financial circles note that at present, apart from 5-6 banks, there are difficulties in their activities due to sanctions against Russia. For example, the Austrian Raiffeisenbank does not allow transfers from Azerbaijan (most of the correspondent accounts of Azerbaijani banks are in this bank) in US dollars and euros even to Russian banks that are not under sanctions. However, Russian banks do not accept dollar transfers either. Currently they only accept transfers in rubles. Overall, according to bankers, about 20 banks in Azerbaijan have this situation.

According to CBA Director General Farid Osmanov, the bank analyses and assesses the impact of Western sanctions against Russian banks on the country's macroeconomic and financial stability. CBA continues to conduct an analysis of the situation with the banks and holds discussions with the relevant structures and intergovernmental commissions.

CBA administration believes that there are no threats to interbank settlements in the country today. There are delays in making payments only due to the tightening of Compliance conditions by foreign banks providing correspondent account services. "Overall, there are no problems in inter-bank settlements," Osmanov said.

Banks’ potential to expand

CBA assesses the financial soundness of the country's banking sector at a high level. In doing so, it relies on indicators such as instant liquidity and total capital levels, which are double the regulatory requirements.

Over the past eight years the liquidity of Azerbaijan’s banking system has increased 4.3 times. By the end of 2021 it was almost ₼14b, or 31.8% more than in 2020. In 2021, liquid assets reached 36.1% of Azerbaijan's banking system assets (32.8% in 2020).

However, there are some problems. Banks hope to solve them with the appointment of the new regulator. "I have extensive experience in the banking sector. I know this sector well, I know its difficulties and challenges," Taleh Kazimov told reporters, adding that the regulator will actively work to improve competitiveness. "Today the country's banks are different in terms of institutional development, corporate governance. We are interested and intend to take measures to improve competitiveness not only in the banking sector, but also in the insurance sector and the securities market," Mr. Kazimov said.

Based on regulator's analysis of the level of risk management, business model, and corporate governance, banks will be empowered to access social services. The monopoly position of a limited number of banks in this area is a subject of dissatisfaction in the market.

One of the issues of interest to the banking sector is also the decision to bail out weak banks, increasing the minimum total capital requirement. The last time capitalisation requirements for banks were raised eight years ago. Since January 1, 2014, the minimum aggregate capital requirement for operating banks, as well as for the authorised capital of newly established banks, was increased from ₼10m to ₼50m. Taleh Kazimov assured that the CBA would do it if necessary. In the meantime, the bank will conduct a deep analysis and update the legal framework related to the financial sector.

There are also discussions on the introduction of new financial tools to improve the market and increase its involvement in the national economy, in particular through increasing the profitability of the national currency, manat.

As for high loan rates, which is the most painful problem for consumers of banking services in Azerbaijan, CBA promises to work to solve this problem. CBA Director General Vugar Ahmedov said that interest rates are now one of the important areas of monetary policy, currently, CBA is monitoring the situation and conducts the analysis. Preparation of proposals is underway. One of the steps taken by the Central Bank will be intensification of the interbank market, which in turn helps to streamline relations between banks and their customers, as well as lending.

"In general, the main objective of CBA’s monetary policy is price stability, which helps to regulate lower or higher lending rates. In this context, the discount rate has started to fall since 2018 and now reaches 7.75%. This allows for lower lending rates for both individuals and businesses. Over eight years, lending rates for individuals have fallen within 2-3 percentage points and within 5 percentage points for legal entities. In terms of the change in the monetary base, since 2018 it has increased by 65%. This allows us to expand lending to the economy," Ahmedov said.

Safety comes first

The crises have increased the role of innovations and new technologies in the banking sector. During the pandemic, the focus was on technologies related to distant working, while in relation to the war in Ukraine, the ability to collect, transmit and analyse operational information, and to transmit and receive real-time instructions to coordinate actions was most important.

In this context, the development of information technologies and communications is a strategic objective. Implementing the latest, most efficient and secure developments remains vital to the success of banking business. This means taking measures to ensure the security of information systems and communication channels, counteracting cyber-risks, and training highly skilled personnel to use these tools.

CBA has been closely involved in these processes. The Order of Information Security Management in Banks came into force on April 1.

Ilgar Aliyev, head of Information Security Group of the Association of Banks of Azerbaijan, says that according to the new rules the banks are making structural changes in digital processes. They expect distribution of powers, obtaining tools of control, strengthening of risk management and introduction of monitoring systems.

Mr. Aliyev added that business processes will also be adapted to these changes: "Banks are applying cyber-security tools to comply with the regulator's requirements.”

Apparently, the old saying that any crisis can be turned into an opportunity is still relevant. The steps taken by the regulator amid a very difficult external environment and negative trends experienced by some of its closest partners could therefore be fateful for market participants. We yet to see whether they will be happy with the upcoming changes amid the rapidly unfolding events in the global financial world.