Azerbaijan's financial markets regulator has suspended the licences of four branches of Nikoil Bank, a medium-sized lender, for incompliance with the principles of “healthy lending, violation of the ratio of monthly debt to borrowers' income, violation of law in cash operations and distortion in accounting”, Trend news agency reported on September 8.

Demand for foreign currency, especially dollars, has been mounting in Azerbaijan, prompting fears among consumers and banks of a further depreciation of the currency, which would push the enfeebled banking sector into a full-fledged crisis. Authorities have already revoked the licences of ten banks since January, in a bid to clean the banking sector of incompliant lenders. Azerbaijani banks have seen their asset quality, capitalisation and profits plummet as a result of monetary instability, which has plagued Baku since February 2015.

Declining oil revenues and pressure from falling currencies in Russia and Central Asia prompted the regulator to drop the manat's peg to the dollar in order to enable Baku to save fast declining foreign exchange reserves. Since then, the Azerbaijani currency suffered a major depreciation in December and has been gradually falling since May despite the central bank's monetary tightening in recent months.

Since April, the central bank has banned loans in foreign currency - borrowers in foreign currencies have disproportionately defaulted on their loans since the devaluation - but an inspection at several of Nikoil Bank's branches have revealed that the lender continued to issue such loans. Inspectors also found that the bank held foreign currencies in cashboxes that it was not selling to clients, artificially contributing to a foreign currency crisis in the country.

After this year's bank closures, there are now 33 lenders left in the country, and analysts expect for there to be further consolidation in the sector as 14 banks are believed to be at risk of being closed.

Demand for foreign currency in Azerbaijan remains high as trust in the manat is at record lows and people are scrambling to exchange the local currency for fears of a looming depreciation. At a regular currency auction on September 9, sovereign wealth fund Sofaz quadrupled its offer of foreign currency to $200mn, but still fell short of meeting the $403mn demand, abc.az reported.

Sofaz has held regular biweekly currency auctions since January in order to meet the lenders' needs for foreign currency and to thus stabilise the exchange rate. The wealth fund has sold over $2bn worth of dollars in these auctions since January. The central bank spent more than two thirds of its reserves, or $11bn, between November 2014 and December 2015 on supporting the manat.