AFTER BANKRUPTCY

In Azerbaijan, one of the most challenging chapters in the banking sector in recent years is gradually coming to a close. This process involves the winding up of troubled banks and the return of funds to their depositors.

The Deposit Insurance Fund (DIF), the body responsible for this process, continues to pay out protected deposits and return uninsured funds in accordance with a predetermined priority. In addition to these responsibilities, the DIF is also currently handling thousands of legal disputes and preparing for the new reality of the financial market.

The Fund's agenda includes digital payments, integration with myGov and AniPay, the establishment of a Security Operations Centre, and joint work with the Central Bank on an investment insurance mechanism.

Representatives of the DIC provided journalists with further details at the Dialogue and Cooperation Forum.

Almost entirely

The deposit insurance scheme currently faces a challenging situation. On the one hand, it must address the consequences of bank failures that have accumulated over previous years; on the other, it must adapt the system itself to the new challenges facing the financial sector. While the initial concern pertained to the reimbursement of citizens' funds in the event of a bank closure, the emphasis has now shifted to digitalisation, the diversification of financial instruments, and the enhancement of investor protection mechanisms.

As at 1 July 2026, 63,888 depositors at 19 banks currently in the process of liquidation had been paid ₼1.7 billion in compensation. The total value of deposits at these banks was ₼2.4 billion. Of this amount, ₼1.8 billion were protected deposits, i.e. those insured and eligible for compensation. Consequently, approximately 98 per cent of protected deposits have already been paid out to depositors.

Meanwhile, Aygün Baliyeva, Deputy Director of the Financial Department at the Deposit Insurance Fund (DIF), notes that the statistics on the number of depositors require a more careful reading. For instance, the 19 banks undergoing liquidation had 651,768 depositors on their books; however, more than half of them are not actually entitled to substantial payouts. "The balances in the accounts of 518,000 customers amounted to ₼1 or less. Therefore, although the total number of depositors appears high, the number of those who received payments is relatively small," she said.

Baliyeva has confirmed that compensation has been paid to 95-96% of depositors for deposits protected by the fund in each of the failed banks.

The situation is different in operating banks. According to the Fund's data, 83 per cent of retail deposits are insured, whilst 17 per cent are uninsured.

Meanwhile, the process of returning uninsured funds is ongoing. Please note that such deposits are not covered by guaranteed compensation and are returned to creditors in accordance with the order of priority established.

“Unprotected deposits are being returned on a priority basis. The Fund is currently continuing this process for 13 bankrupt banks. Unprotected deposits are already being returned for institutions such as Royal Bank, Ganja Bank, the Caucasus Development Bank, United Credit Bank, and several other banks,” said Baliyeva.

A significant portion of the compensation work has already been completed in relation to Muganbank and Gunaybank. According to Azer Amirov, Director of the Legal Department at the Deposit Insurance Fund, depositors at these banks have received around 98 per cent of their compensation.

A key obstacle

The payment of compensation is just one component of the liquidation process. Another aspect that requires considerably more effort is the recovery of the banks' assets.

To date, there are more than 1,800 cases relating to banks in the process of liquidation pending before courts of various instances. It is estimated that there are more than 300 cases currently awaiting appeal, with over 60 cases currently being heard by the Supreme Court.

For the fund, it is precisely these legal proceedings and enforcement procedures that remain a key obstacle. Amirov emphasised that the recovery of non-performing assets is a challenge faced not only by the fund as the liquidator, but also by operating banks in general.

Conversely, operating credit institutions possess distinct advantages, including the capacity to restructure debts, provide additional funding and utilise more flexible mechanisms for dealing with borrowers. A bank undergoing liquidation lacks such tools.

The repayment of large corporate loans is often the most challenging aspect of the process. Following the initiation of liquidation proceedings, companies typically transfer their accounts to other financial institutions. Consequently, their obligations to the bank undergoing liquidation gradually become secondary.

Amirov stated that the primary challenges faced by banks in the process of liquidation pertain to large business loans, while consumer lending is generally less problematic.

He cited the example of Demirbank, which was placed into liquidation at the end of 2017 due to a significant proportion of its customer portfolio consisting of microloans. The total amount of funds recovered from this bank exceeded those from other institutions undergoing liquidation. However, the recovery of corporate loans is a far more arduous process. Business clients use not only credit products at banks, but also guarantees, letters of credit, payment and cash management services, and other banking instruments."

According to A. Amirov, the situation is further exacerbated by legal proceedings, shortcomings in the preparation of loan documentation, the need to carry out valuations of collateral, expert assessments and the determination of the actual amount of debt. Even after a court ruling has been handed down, the process can be significantly protracted: debtors challenge the actions of bailiffs, which further delays the recovery of funds. As a result, the liquidation of a bank turns into a lengthy sequence of legal, financial and enforcement procedures, the completion of which often drags on for many years.

New directions

Concurrently, the Fund is implementing measures to enhance its financial stability. As at the end of June 2026, the value of its investment portfolio stood at ₼119.6 million, which is almost three times the figure recorded at the end of 2022.

The following is a breakdown of the currency composition of the FSV's investment portfolio: Sixty-two per cent of the total is in manats, 31 per cent in US dollars and seven per cent in euros. This distribution aligns with a core principle of the Fund's investment strategy, emphasising liquidity and risk management.

The deposit insurance system in Azerbaijan has already passed the formative stage and now faces entirely new challenges. For instance, investment insurance. "In light of these new challenges, we are exploring the development of new areas of insurance. At present, we are working with the Central Bank to develop a mechanism for investment insurance," said Amirov.

The inclusion of this mechanism on the agenda signals an expansion of the fund's functions — from ensuring the protection of bank depositors to potential participation in the creation of a more comprehensive financial security system. At the same time, the issue of deposit insurance for legal entities is being deliberated.

Amirov highlights that international practice offers a range of models under which insurance cover extends not only to individuals but also to entrepreneurs and organisations. However, the mechanical adoption of such models could give rise to new risks. "In other words, there are models that provide for compensation of only a certain proportion of their deposits. A more detailed study of these models and their formalisation at the legislative level is a possibility for the long term. Work is currently underway in this context, and challenges arising at various times are also being taken into account. We are currently analysing this issue and consulting with the Central Bank. I believe that a more balanced approach needs to be developed here," he added.

Sudden full insurance cover for frozen funds belonging to legal entities could create significant insurance risks, which, in Amirov’s view, requires a study and assessment of the consequences for the economy as a whole. After all, companies’ funds are not merely deposits, but a resource that must function within the economy.

In real time

The next stage in the development of the deposit insurance scheme is the transition to a digital format. The Deposit Insurance Fund (DIF) has already transitioned a number of payment transactions to online platforms and is continually expanding the range of electronic services it provides. In the future, compensation payments to depositors will be able to be made directly into their bank accounts in real time. To this end, the Deposit Insurance Fund is planning to integrate with a payment platform.

"We are currently in the process of establishing a connection to the AniPay platform. This will enable compensation payments to be transferred instantly directly into citizens' accounts. The matter of integration with such payment systems is currently under discussion. The current level of digitalisation, artificial intelligence-based solutions and electronic services are, in many cases, developing faster than the legislative framework. This may cause some issues when connecting to new systems. However, work to ensure the payment of compensation via electronic payment platforms is continuing," said a lawyer from the FSV.

Currently, payments can be made via Azerpost, MilliÖN and other systems using a FIN code.

Simultaneously, the fund is addressing technical challenges that emerge during the liquidation of banking institutions and the integration of various information systems.

For instance, in some cases it has been found that a single individual has been assigned several account identification codes. This is a consequence of problems that have accumulated over previous years.

"Recently, the number of such incidents has fallen significantly. However, it will take some time to restore the systems to a fully operational state and resume accepting payments. There may be a delay in processing payments from members of the public during the first 2–3 days. Previously, this period was considerably longer — customers were advised to try again after 3–6 months. ‘During this period, days in arrears and interest accumulated, which placed an additional burden on both debtors and the fund in its role as liquidator, and subsequently required numerous adjustments to be made," noted Amirov.

Concurrently, the FSV's electronic services are being integrated into the myGov platform. According to Farid Shirinov, head of the System Administration and Programming Division within the Fund's IT Department, this process is being implemented in stages and forms part of a broader strategy for the transition to digital technologies.

In this regard, the Fund is also establishing its own Security Operations Centre, which is scheduled for completion by the end of 2028 at the latest.

The establishment of the centre will facilitate continuous, 24/7 monitoring of the network, services and portals; the swift resolution of incidents; the prevention of cyber-attacks; and the countering of phishing threats.

Consequently, the deposit insurance scheme is evolving beyond its initial function as a safety net for bank deposits, becoming a more integral part of the financial ecosystem. It is becoming an integral part of a broader financial stability framework. This encompasses digital payouts, cyber-security measures, investment instruments and potentially new areas of insurance. While the fund's current phase is primarily focused on resolving past issues, the subsequent phase could see the establishment of a revamped system for safeguarding financial market participants.