New economic model for Azerbaijan’s banking system

/AzerNews/

By Gulgiz Dadashova

Azerbaijan’s banking system closed last year’s career with a credit boom; however since early 2014 commercial banks have almost halted all individual lines of credit.

In early 2014, the Central Bank of Azerbaijan undertook some macro-prudential measures to curb consumer lending growth, which consequently fell to 29 percent year on year in July 2014 from 40 percent in January.

CBA’s decision to impose new restrictions on loans for households and car loans played a recreational role in the loan portfolio of the banking sector. The decision was mainly aimed to strengthen the financial stability of the banking sector and direct the banks to intensify their activities in the field of lending to the economy.

Manager of the Baku Interbank Currency Exchange (BBVB) Farhad Amirbayov believes that further growth of Azerbaijan's banking system can be secured with the change of the existing economic model that is raw and monoculture export-oriented.

According to official reports, in 2013 the share of the mining industry stood at 74 per cent in industrial production. Despite this, the oil sector gradually is no longer the engine of economic development. "The banking sector sees a strong inhibition in the growth rate of consumer lending. The growth rate of" bad loans "stood at 22 percent (from September 2014 to September 2013). This comes as the figure was 5.9 percent in 2013, in 2012 - 18 percent, in 2011 - 28.5 percent. This suggests that the banking system of Azerbaijan took full advantage of the current economic model and continued growing within the framework of other model, " Amirbayov told Trend.

He said participation in the country's industrialization process can give a new impetus to the development of the financial sector.

More industrialization means more specialization in the banking system. This in turn can offer attractive investment resources to industrialists who are capable enough to provide the financial resources needed for the projects. This will significantly increase the market share.

Amirbayov noted that strengthening through consolidation is just one of the scenarios. Separation and disintegration are other main cases. This allows businessesmen to penetrate into new niches, focusing on a small number of products and services.

Experts believe that banking system and financial sector in general are not self-sufficient economic values. "The economy is theoretically divided into three or four categories. The first - is the agricultural sector. The second category is the industrial sector, which is often based on the agricultural sector. In many countries, industry is weaker than agriculture which in turn leads to slowdown of the development. For example, agricultural sector occupies only two percent of GDP in the US, about five per cent in Russia, while it is 5.3 percent in Azerbaijan.

The financial sector takes the third place in this list. Economists are now talking if derivatives (futures market instruments) should be included as the fourth category or not," Amirbayov said.

Thus, the gradual development of the agricultural sector and industry create a stable foundation for the growth of financial institutions.

Amirbayov said the financial sector is absolutely dependent on the first two pillars: the agricultural and industrial sectors. "Our banking sector has already used all available resources of the current economic model. Then it can grow only in case the economic model changes. The economy should cease to be a purely raw field,” Amirbayov said.

What are the consequences of the one-sidedness of the current model? For example, the mining industry, which has a 40 percent stake in the country's GDP is being funded almost entirely through foreign investment and needs a little local financial institutions. Part of the profits that this industry generates goes to foreign financial institutions, and not Azerbaijani banks. "To change this situation, loans in the national currency should be much cheaper. Now the loans are extremely large," the expert said.

Azerbaijan has announced 2014 as the Year of the Industry. Also a state program was approved for the development of industry in 2015-2020 based on the provisions of the Concept of "Azerbaijan 2020: Look into the Future."

The total volume of capital investments in Azerbaijan's industrial sector amounted to 5.35 billion manats in January-September 2014, which is 5.4 percent higher than in the same period of 2013.

The total volume of capital investments in Azerbaijan's industrial sector stood at 7.08 billion manats in 2013, which is 16.4 percent more than in 2012.

In general, he said, the banking sector is dependent on the processes taking place in the economy. "Demands are either absent or negligible for many types of banking products because of the simple structure of the economy. Industrialization would complicate economic relations, and increase financial instruments and products. This process obeys the empirical law Ashby. Industrialization requires different quality of integration within the international division of labor, primarily for regional cooperation,” Amirbayov said.

Currently, 44 banks, two of which are state-owned, operate in Azerbaijan.

Recently, Fitch Ratings has affirmed Azerbaijan's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-'. Azerbaijan's sovereign balance sheet was named as one of the strongest one in the world.

However, Fitch noted that the banking system remains relatively weak.

Banks’ activities in figures

Azerbaijan’s banks increased lending to the economy by 19.2 percent in January to September 2014, compared to the same period of 2013.

The CBA latest report says that the banks issued loans totaling 17.631 billion manats as of October 1. The figure amounted to 14.793 billion manats in January to September 2013.

The banks increased the consumer lending volume by 27.5 percent in January to September 2014 compared to the same period of last year.

The share of consumer loans in a total volume of the banks’ credit investments amounted to 41.1 percent or 7.253 billion manats. The figure was 38.5 percent in January to September last year.

The trade and services rank second (14.4 percent or 2.536 billion manats) in the total loan portfolio of banks. The construction and real estate rank third (13.8 percent or 2.434 billion manats).

Around 11.5 percent of the total lending volume to the real sector of the Azerbaijani economy was transferred to the industry and production. It was 2.021 million manats in nominal terms.

The banks also increased their lending to the industry in connection with the announcement of 2014 as the Year of Industry in Azerbaijan. The share of lending to the industrial sector accounted for 9.9 percent of total bank deposits in the country's economy in January-September 2013.

Around 3.3 percent (582.6 million manats) accounted for transport and communication, 4.6 percent (807.6 million manats) - agriculture and processing, 1.3 percent (221 million manats) - energy, chemistry and natural resources over this period.

The banks are actively lending business and the real sector. Currently, the share of these loans in the total loan portfolio of the sector is 73 percent. The portfolio of consumer loans has increased by only 8 percent in the first nine months of 2014.

Today, the consumer lending volume in Azerbaijan is growing, but at a slower pace rather than business loans.

The figure is less than the average level among the EBRD member-states which is 30 to 70 percent. The share of consumer lending is up to 40-45 percent on many developed markets, but in some cases it stands at 50 percent of the total loan portfolio.