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It's Time for Banks
To Fulfill Their
PurposeMany Problems Need Immediate Attention
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| By Fuad Alizadeh |
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The banking sector is considered to be the most stable and developing sphere in the Azerbaijani economy in spite of past scandals. This status has not come easy in light of past scandals about the misappropriation of money and credits lines. The necessity of "greasing palms" in obtaining credit was commonplace. However, the stable rate of national currency in Azerbaijan clearly demonstrates that the future in bright in light of restructuring and important regulatory changes. And all that is true but one can't stop with what has been achieved. There are still many unsolved problems facing this key sector of the economy and that is why it is important to strengthen control over the banking sector. Moreover, it is necessary take into consideration that much of the public does not yet have confidence in the financial system or regulatory structures. They remember having lost much and are still suffering over the "shock" of frozen assets under the former Soviet Saving Banking System of the USSR and the lost of their savings.
Nevertheless, it is better to look forward and not back. Many problems remain and lay ahead. The Azerbaijani government is still unable is not willing to find the financial assets to pay off debts under Soviet passbook savings accounts. Added to this mistrust, we can also include the first years of Azerbaijan independence, when the population suffered from the "financial pyramid schemes" such as the charities "Vakhid", "Khayal-bank" and other shady operators who used the same mechanism. Then the government didn't warn a trusting population of doubtful financial structures and manipulations. However, a new day has dawned, but people still do not fully understand or trust in the viability and outcomes of financial schemes and newly gained banking opportunities. And then there are those who still assume that the government is full control of the banking sector and will monitor and regulate it effectively in protecting them from further exploitation.
However, one important question remains, is the government fully capable of safeguarding the financial system from major fluctuations and gaining public confidence in the stability and overall integrity of Azerbaijani banks? Gaining confidence is paramount in order for the greater part of society to return their savings to commercial banks. Despite the current situation, it's clear that the management of National Bank of Azerbaijan has played a leading role in this direction to date. The bank's policy has been to concentrate on the development of viable corporate management structures and the strengthening of banks by increasing their total assets and providing regulatory oversight.
However, there is still considerable censure of bankers for creating "hothouse" conditions, which are more designed to increase their own bottom line, which does not reflect larger macro economic policy, then serving their mandates. An example of this is the maintenance of artificially high interest rates, which discourages many borrowers while being extremely profitable lending financial institutions. Existing commercial banks have concentrated on providing short-term credits at a high percentage rates. On November 1, 2003, the total of short-term credits amounted to 2321,9 billion AzM (74,2%) and only 806,3 billion AzM (25,8%) was derived from long-term credit transactions. This begs the question of what type of business is making such profits and can in turn pay the current commercial credit rates in excess of over 20% per annum.
The fact is that almost 90% of the money in circulation is held in cash. The November 2003 statistics indicate that 1871,7 billion Azm is circulating as cash and only 482,7 billion AzM is on account. The dominance in financial transactions of the "Uncle Sam" bond - the $100 bill - is no surprise given that the maximum denomination of national currency is the 50,000-manat note, a little more than $10. The result of this is that the population prefers to keep their savings in foreign currency, and national currency, the Azeri Manta, is used only for out of pocket expenses. The November 2003 statistics indicate deposits and savings in the banks have resulted in the return of 482.7 billion AzM (17.4%) in national currency and 2295.9 billion AzM (82.6%) from foreign currency accounts.
In light of such alarming indicators, it could be argued that the current situation is a result of a lack of banks and opportunities to work with advanced banking services. According to the information from the official press service of the National Bank of Azerbaijan (NBA) in November, 103 credit organizations received licenses to start banking operations, 46 of which are banks and 57 of which are non-banking credit granting organizations, while the number of subsidiaries reached a total of 294. In addition, a total of 26 credit organizations received permission from the NBA to operate with plastic cards. But in spite of the promising numbers, it appears that banks are in no hurry to extend modern banking services to their clients. This is especially true among commercial banks as they intentionally try to distance themselves from electronic systems for various reasons. The manager of one leading banks noted that despite the creation of the modern Internet system, many banks are not rushing to provide such services to their clients by means of the web. He considers such a system to be very dangerous as hackers could crack the security systems of banks. Nevertheless, in spite of all the advantages, he readily admitted that this is undoubtedly the direction that progressive banking services must develop.
The government too realizes that this is the way of the future. The Milli Majlis of the Azerbaijan Republic will soon be passing laws regulating this sphere of business, with upcoming legislative discussions on the topic of "Using of Electronic Digital signal" and "Digital Commerce" that is scheduled to take place. Taking into consideration the speed and dynamic of institutional and economical reforms in Azerbaijan and the political program of Ilham Aliyev, foreign businesses seem confident that it will only be a matter of short time before digital commerce gets its long awaited push for development. Given this situation, the NBA should demand that commercial banks not only increase their authorized capital stock to five million dollars but also to introduce modern technologies into their operational system and the expand the level of financial services provided to their clients.
The issue of authorized capital stock is an important one. To conform to International Monetary Funds (IMF) recommendations, the government must requirement commercial banks to increase capital stock to 5 million USD by January 2005. (The capital stock required since 1st July 2002 has been 2.5 million USD). There is still the possibility that the deadline of increasing of the capital stock can be extended for a period of 6 month - until 1st July 2005. Mr. Peter Voike, the Vice-President of the International Financial Corporation, visited Baku in May 2003 and he emphasized the need to strengthen the banks and to create a secure credit environment for businessmen.
The NBA intends to reduce bank rates for credit recourse, by the reduction of the bank rate. If the last year the NBA rate was 7% per annum (till September 2002 it was 10%), then in 2004 the NBA will continue its policy of reduction of rate refinancing with the annual growth of inflation to 2.5% to reduce the rate to 5-6%. Continuing the given policy in 2005, the rate will be on the level of 4-5%, and in 2006 it will be 4%. Correspondingly, businessman could get credits not on the rate of 15-20%, but on the rate of worldwide standards not exceeding 8% per annum.
The NBA has liberalized has also provided better conditions for the "participation" of foreign capital in the banking system of as of the New Year. It is envisioned that this step will speed up the flow of foreign investments to the economy and expand the use of modern banking technologies. There are 46 financial institutions now licensed to work with national currency and a total of 17 that are allowed to work with foreign exchange. It is envisioned that over time this number will increase and viable and strong banks will be able to work with either currency on an equal basis.
The immediate concern is now what is the most effective way to develop these projects and macro economic development at the same time. Otherwise, the opening of currency exchanges will continue to be one of the most profitable businesses for financial institutions. However, bankers and governmental regulators need to remember and cognizant that the primary function of commercial and central banks is providing consumer credits and loans at reasonable rates and fully participating as partners in the development and stability of a country and a free enterprise system. Azerbaijan banks are currently limited by their financial reserves and law and are not allowed to provide commercial credits for larger commercial project. Banking legislation puts a cap of 1million dollars as the maximum loan application to borrowers. This amount is inadequate and it is necessary for legislation to be enacted that will allow stronger and financially secure banks to operate according to the credit needs of their larger clientele and their proven ability to extend and service their customers.
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