Azerbaijan's financial sector to be restructured by year-end

By Azernews

By Nigar Abbasova

Head of the Financial Market Supervisory Body (FMSB) Rufat Aslanli stated that the restructuring of Azerbaijan’s financial sector may be completed by late 2016 or early 2017. 

Speaking at a banking conference in Baku on November 24, he said that the authority has already carried out stress tests and analysis of the situation in the banking sector to take measures aimed at preventing problems.

“Stress-tests in systemically important banks revealed that they are shock resistant. The fact implies that no fiscal or monetary load is projected in the sphere for 2017. However, we, as a regulator, defined certain regulating frameworks for systemically important banks,” he said.

 He added that the authority has also developed new legal and operational mechanisms to implement restructuring of financial institutions.

“Along with revocation of licenses, appointment of temporary administrator and further liquidation, the mechanisms also envisage the use of instruments, applied in world practice.”   

Capitalization of banks

Aslanli went on saying that the process of capitalization of banks will be completed by year end, mentioning that the FMSB has already held talks with shareholders of not systematically important banks, which experienced certain problems related to the shortage of capital.

“The talks were quite a difficult process, but they were held in intensive and constructive manner. Our main aim was to reach an additional capitalization of banks. Therefore we have tasked the banks to develop a new program of capitalization.”

He mentioned that a number of banks have already competed the process of capitalization, while others will carry out the process until year end.

 “As for the banks, where additional capitalization was impossible, their licenses were revoked,” he added.

The licenses of 10 banks were revoked in 2016 due to their failure to meet necessary requirements specified in the relevant legislation. Some 32 banks are currently operating in the country.

New legal platform

Aslanli said that a special legal platform is currently being developed to prevent any unauthoritative activity of bank management, mentioning that the punishment may even include criminal responsibility.

“The punishment envisages bringing of management to administrative, financial or even criminal responsibility depending on the extent of violations”.  He mentioned that the bill has already been prepared and submitted to the Government for discussion.  

The number of customers of local banks decreased by 3.5 percent to 5.515 million in January-September 2016, while the number of clients increased in September by 0.8 percent amounting to 44,723.   The number of client accounts reduced by 5.4 percent to 15.349 million in January-September 2016.

IBA privatization

The restructuring and further privatization of the International Bank of Azerbaijan (IBA) is still one of the principal issues in the banking sector of the country.

Aslanli said that the privatization of the financial institution is expected to be announced in 2017. He said the work implemented jointly Azerbaijan’s Finance Ministry is underway to complete the preparatory procedures.

Both local and foreign investors will be able to take part in the privatization process of the IBA, while main goal is to diversify, reduce the size of the bank’s assets in the first half of 2017.

 “About 40 percent of Azerbaijani banking sector's assets account for the share of the IBA, and it is a threat to the banking system. Therefore, it’s necessary to bring the assets size of the IBA to a level that will not threaten the banking system.”

The shortcomings in the management, investment and loan policy of the IBA in recent years, as well as financing of less efficient, risky investment projects worsened the bank's financial state, caused increase in the share of distressed assets and reduced its liquidity.

In July 2015, President Ilham Aliyev signed a decree on the measures for rehabilitation related to the preparations for privatizing the state-owned shares of the IBA.

To overcome the current situation, restore the bank's financial position and ensure its sustainability, the distressed assets of the bank were transferred to the state-owned Aqrarkredit CJSC non-banking credit organization. Bonds worth 3 billion ($ 1.74 billion) were issued under the state guarantee to ensure IBA's liquidity.

New mechanisms for ADIF

The FMSB head said that the country should quit the process of insuring deposits of population.

“Over the 10 years of its existence, the Azerbaijan Deposit Insurance Fund (ADIF) was able to accumulate funds worth 140 million manats ($ 81.65 million), which does not even account for 10 percent of the insured deposits,” he said.

He further said that a mechanism for crediting of ADIF by the Central Bank of Azerbaijan (CBA) was developed to provide the Fund with financial means. Aslanli noted that the mechanism was successfully tested during the repayment of deposits to the clients of Bank Standard.

Aslanli said that some 40-45 million manats ($ 23.3 – 26.4 million) is expected to be paid to the depositors.

“However, the existing mechanism of attracting funds from the CBA, increases liabilities of the Fund to the government. Therefore, we are developing new mechanisms to increase capitalization of ADIF.”  

ADIF has so far paid compensations worth 710 million manats ($414.09 million) to depositors of the recently closed Dekabank, Kredobank, Zaminbank, Parabank, Caucasus Development Bank, AtraBank, Bank of Azerbaijan, Ganjabank, Texnikabank and Bank Standard. 

Switch to Basel II and III

The regulator seeks to bring the regulatory frameworks in compliance with Basel II (facilitated and standardized approach to the risk assessment) and Basel III (new approach) standards. 

Head of department at FMSB’s office of strategic services Rustam Tairov, addressing the event said that the authority is currently assessing the possibilities of the banking system Basel II and III international standards.

“This is a long process, while our main objective is creation of new regulating frameworks based on the assessment of risks. Under the changes the authority will pursue a zero-tolerance policy. Moreover, the FMSB intends to strengthen the potential of banks on risk management”