Vladimir Myashin of RusRating/GlobalRating -

The level of sophistication in the banking sector signals the country's overall economic development. Active banking reforms in Azerbaijan have started showing results.

The banking system has to meet the challenge of becoming the main funding source for the economy in general and promote faster development of the non-oil sector. Though the growth of the banking sector is ahead of other macroeconomic indicators, its potential is still lagging behind the economic needs of the country.

Until recently, the main problem of the banking sector was the monopoly of the state banks and lack of competition among private ones. Over the last two years the monopoly of the state banks has declined, which signals the beginning of a new development phase in banking. Private industry now accounts for almost 60% of the sector.

Growing trust in the banking system in Azerbaijan also testifies to an increasing financial stability. A growth in retail deposits clearly shows that the public trust in banks has grown significantly. This is an important development, especially considering the current situation on the global markets. As of January 1, deposits grew by 33% higher from the year before and were 59.4% higher than on January 1, 2006. Deposits in local currency account for 53% and foreign currency deposits 47%. Retail deposits were 44.2% higher than a year ago and corporate deposits were up 24% from last year.

The Azerbaijan economy is developing at a high rate and is in need of more active bank participation to draw much needed resources and distribute financial flows in the country. The banks have a high growth potential since their part of GDP amounts to only 20%.

One of the main problems is the low capitalization of the banking sector compared with Russia, Kazakhstan, and Ukraine. The National Bank of Azerbaijan is conducting reforms in order to increase the minimum capital level for banks. The other main challenges in attracting more foreign capital into the country are corporate governance and lack of bank transparency. The latter should be improved in the near future, based on projected reforms.

Despite existing problems, changes over the past two years are bringing positive results both on the macro-economic level and in the banking system itself. The main accomplishments of the Azerbaijan financial markets are mortgage financing, record levels of gold resources and a flow of petrodollars. Financial institutions are increasingly cooperating with international organizations, primarily due to higher capital minimum reserves as required by the National Bank.

As of January 1, 142 credit organizations received licenses from the National Bank, including 96 to non-banking institutions. 44 out of 46 acting banks are private. 21 banks operate with the help of foreign capital, six of these contain 50%-100% of foreign capital while 13 have less than 50%. There are two foreign bans subsidiaries in Azerbaijan.

The political situation is stable and predictable. The political risk of significant changes is low.

The National Bank of Azerbaijan has the following prime goals:

• Increasing the capitalization of the banking sector

• Aligning banking legislature with international standards; anti-money laundering legislature is an important part of the process

• The de-monopolization of the banking sector- creating healthy market competition and equal conditions for all the banks

• Improving other quality indicators in the banking sector

• Improved corporate governance

• Transparency requirements- public access to full and complete information that helps clients make informed investment decisions

• The harmonious simultaneous development of all market sectors

Vladimir Myashin is an analyst at RusRating/GlobalRating

Send comments to The Editor