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The Central Bank of Azerbaijan (CBA) approved the Strategy for the Development of Azerbaijan's Financial Sector in 2024-2026 as one of the first major economic documents in the new year.

The comprehensive document outlines plans for the development of the banking system, insurance sector, capital market and payment systems. Its main objectives are to expand financial access and inclusion, diversify instruments, improve efficiency in the sector, introduce corporate governance, and enhance transparency and sustainability.

Insurance Growth

CBA Chairman Taleh Kazimov previously noted that banks account for 96% of the country's financial sector assets, while non-bank credit organisations (NBCOs), insurance and investment companies make up only 4%. Now, according to the strategy, the regulator aims to significantly boost the non-banking financial market.

In the insurance sector, this will be achieved by promoting voluntary and compulsory insurance in the next three years, establishing insurance information and monitoring centres, strengthening corporate governance and introducing risk-based prudential regulation.

"The main strategic goals of the insurance sector are to increase the insurance confidence index from 66 to 80 per cent by expanding insurance coverage and effectively protecting consumer rights, increasing the solvency of insurers, as well as increasing the average insurance premium per person from the current 121 to 195 manats," Kazimov said in his opening remarks to the document.

The authors of the strategy project almost a twofold increase in the volume of insurers' premiums on voluntary types of insurance not related to life insurance - up to ₼630 million in 2027 from the current ₼350 million. Life insurance premiums (excluding endowment insurance) will grow even more - according to the regulator's estimates, they may reach ₼280 million (₼124 million in 2023), which is 2.3 times more than the current level.

As a result, the Central Bank expects the assets of the insurance sector to double in three years. Thus, if its current volume is ₼1.9b, it is expected to surpass ₼3.7b by 2027. The penetration of the insurance market will also increase significantly - it is expected to reach 2.15% of Azerbaijan's non-oil GDP by 2027, compared to 1.85% at present.

Capital market

The capital market is probably the weakest link in Azerbaijan's financial sector. Despite the adoption of various programme documents and plans for its development, it has not been possible to achieve the desired progress, although the market has shown some signs of revival over the last few years.

In this regard, the strategy sets the goal to achieve a real increase in its role in the financial system. For this purpose, the CBA has defined the main directions as the development of market infrastructure, strengthening confidence and stability of the market, expanding access to it and increasing the range of investment instruments. "It is envisaged to increase the share of the capital market from the current 10 to 14 per cent of non-oil GDP, increase the volume of investments by the population in the market from the current ₼150 million to ₼1 billion, as well as the development of an effective supervision system," the document says.

It is also planned to attract funds from the real sector through borrowing on debt capital markets, with the potential of such operations estimated at ₼1.5 billion per year. According to the CBA, in 2023, real sector enterprises raised ₼500 million in debt markets. Thus, the volume of such transactions may triple in 2024-2026. Moreover, the CBA believes that during this period at least one company will hold an IPO (initial public offering - no company has held an IPO so far).

According to the Central Bank's plans, by 2027, investing in the capital market will take only 15 minutes (compared to 1 day now). Moreover, by the end of 2026, digital transactions will account for at least 70% of the market (currently zero).

The strategy also states that by 2027, more than 50,000 individual depo accounts will be opened in Azerbaijan to encourage investor participation in the capital market (currently there are only 1,000 such accounts).

Non-bank financing

The strategy gives special attention to the development of non-bank credit organisations, for which it envisages expanding services and improving the supervisory system. It plans to create a new model of microfinance for self-employed, micro and small businesses, as well as to strengthen the institutional capacity of NBCOs and improve the business models of credit unions.

This will be achieved mainly by improving legislation on NBCOs, credit unions and credit co-operatives, risk management, corporate governance and other requirements in this area. Lastly, the consumer rights of these products will be fully protected.

"Making structural changes to NBCOs and credit unions is a costly and complex process and may require additional resources to achieve the intended goals," the paper's authors say.

They promise that during this period, they will also explore the possibilities of alternative sources of financing for NBCOs and microfinance institutions, and analyse the possibilities of increasing their share and participation in financing programmes.

We would like to add that as of the end of 2023, the volume of lending by NBCO reached ₼796.16 million - a 35% increase over the year.

Loans and payments

A separate section of the strategy is dedicated, of course, to banks, which are unlikely to lose their role as the driving force of the financial sector to other market segments over the next three years. The strategy will continue to support sustainable development in the banking sector, but at the same time it plans to expand accessible and responsible banking services, promote initiatives to improve efficiency in the market, strengthen corporate governance, transparency and competitiveness, and strengthen supervision, taking into account existing and potential risks.

In addition, the strategy envisages implementing measures aimed at increasing the banks' business loan portfolio. By 2027, up to ₼16.5 billion (₼12.6 billion by the end of 2023). Also in the next three years, the feasibility of introducing project and syndicated financing of business initiatives will be carefully studied, and the possibilities of implementing public-private partnership will be investigated. Agricultural lending, the most risky, but also very much in demand sector of the national economy, has not been overlooked either. The expansion of its financing opportunities with a special focus on micro, small and medium-sized enterprises has been promised.

In general, in order to realise all of the above, it is necessary to expand financing instruments; in addition to traditional loans, it is necessary to develop leasing, factoring and other currently available but little used products.

In 2024-2026, special attention will be paid to the development of digital financial solutions, large-scale promotion of innovations in this area and initiatives to strengthen cyber security. Thus, it is expected that by 2027 the share of non-cash payments in card transactions will exceed 70% (currently 55%). It is also planned to significantly increase the share of instant payments in the national payment system. Currently, it is only 0.39%. The CBA believes that by 2027 this indicator can be increased to 25% or more.

Another goal is to boost the share of non-cash payments in the retail trade network to at least 40% (up from 21.1% now).

The CBA also expects digital banking's share of customer transfers from current accounts to surpass 90 per cent by 2027 (compared to 80 per cent now).

As part of the development of the payment sector, the CBA plans to introduce innovative solutions, modernise the national payment system, create a favourable environment for market participants and establish an effective control system.

In short, the regulator's plans for the financial sector are quite ambitious. The main challenge is to achieve all this within the next three years. The CBA promises that it will closely monitor the progress of the set tasks.

REGNEWS

The Central Bank of Azerbaijan cuts discount rate

The Board of the Central Bank of Azerbaijan (CBA) decided to cut the discount rate from 8% to 7.75%, the lower boundary of the interest rate corridor from 6.5% to 6.25%, and the upper boundary of the interest rate corridor from 6.5% to 6.25%. The interest rate corridor was narrowed from 9% to 8.75%.

According to the Central Bank's estimates, annual inflation in Azerbaijan in 2024 will be within the target range (4±2%). "In general, the risks of inflation rising and falling are balanced. For this reason, we have kept our inflation forecast for 2024 unchanged. We expect that in 2024 annual inflation will be within the target corridor," the Central Bank stated.

According to the bank, annual inflation rate in Azerbaijan in 2023 was 2.1% and was at the lower end of the target range (4±2%). "In 2023, there was a drop in inflation for all groups of goods included in the consumer basket. In general, in 2023, annual inflation for food products was 0.8%, non-food products - 2.7%, services - 3.7%," the statement said.

As expected, the main event affecting monetary conditions since the last meeting was the execution of large-scale purchases of foreign currency for the budget sector. In total, in 2023, the Central Bank's purchasing intervention in the foreign exchange market amounted to $2.1b, and these were US dollars.

The purchase of currency created conditions for increasing liquidity of the banking system. In 2023, the monetary base in manat increased by 19.6 per cent, of which 14.6 percentage points occurred in December.