Recently, discussions on importance of enlargement of banking system in Azerbaijan have become more active. There are such opinions that number of banks in Azerbaijan, small country, is too more: “Let’s reduce number of banks and everything will be good”.
Currently, 45 banks operate in Azerbaijan and some think that reduction of number of banks by two times is sufficient for the country. At the same time, in order to substantiate this opinion, there are fundamentally lie abstract views, which are not based on the comparative analyze. In order to substantiate importance of how many banks should operate in this or another country, it’s needed to substantiate the facts. The facts that approve X number of banks don’t contribute to Azerbaijan’s banking system. If we ground on the figures, such facts do not exist. But, if we ground on latest reports, 45 banks operate in Azerbaijan, their total assets make AZN 29.1 bln, total capital – AZN 4.5 bln. In order to comparatively analyze, these figures are sufficient. If we compare CIS countries’ banking systems, we’ll see that Azerbaijan follows Russia and Ukraine for number of banks, Russia, Belarus and Kazakhstan for total assets and capital.
If we compare with the Eastern European countries, then the situation is almost unchanged. Azerbaijan follows only Poland for number of banks. However, bank indices are not so heart-warming. For instance, 28 banks operate in Bulgaria, however, liquid assets of Bulgarian banks reach $15 bln.
At the same time, the countries and their economies should be analyzed on the basis of comparative performances. Key comparative index in the analysis of banking systems is share of total assets in annual GDP. So, in Azerbaijan’s banking system, total assets make 49.3% of GDP, down compared to the Eastern European countries, and most of CIS countries. Regarding CIS countries, share of assets in GDP, Azerbaijan is behind the CIS developed countries and all Eastern European counties. The lowest index in this sphere in the Eastern Europe is in Romania – 70%. For this index, Azerbaijan is even behind the average index of CIS countries – 59%. At the same time, this is not heart-warming because of Azerbaijan leaves most CIS and the Eastern European countries for per head GDP.
This is a general view. However, does it cause small banks to be consolidated? No! At least, if there is a need to take such step, this is not due to current situation of the banking system. Let’s imagine that the Central Bank welcomes enlargement of banks. From the macro-economic point, nothing will occur – assets of small banks will be added to the assets of large banks. But, what do we mean saying “small bank”? Currently, Azerbaijan-based banks are required to reach their total capital AZN 50 mln. At the same time, capital adequacy index – this is a key index in assessment of banks in the world practice – exceeds norm 12%. Capital adequacy is a real ratio of capital to assets. This means that even small banks meet the Central Bank’s demand. These requirements are based on principles of international banking law and Basel Committee’s norms.
One more index characterizing the banks is the share of overdue credits in total loan portfolio. This index is 5.3% in Azerbaijan: this figure is high and low in some banks. This is lower than some Eastern European counties. And relevantly, there is no reason for consolidation small banks. Even, we do not note how this process is diffiduclt technically. This process can cause individual problems. It’s clear that Azerbaijani banker’s psychology is egocentric; he/she will not agree to share authority and incomes with anyone. For example, Azerbaijani businessmen, including bankers place shares to involve extra funds in their own enterprise, reject method of increase of minority partners. Therefore, probably, consolidation of banks will not be successful.
However, insufficiency of bank assets deletes all opinions that country’s banking system is normal. It’s impossible to solve the problem by reducing number of banks.
Problem of Azerbaijan’s banking system is not in the number of banks. The problem is that major part of economy and cash money is out of banking system. Despite e-payment of municipal services, tax and duties, stimulation of payments via bank cards are effective, they do not influence the problem. For instance, 90% of operations via bank cards are still cash money. Monthly operations with credit and debit cards reach $1 bln, and AZN 900 mln of this fund are cashed in a short-run. One more example: According to State Statistical Committee’s information for January-June, total personal incomes in a month make AZN 3.3 bln. This is a official statistics. A part of sum, which is in the card (pension, salary) is immediately cashed. A major part is spent for consumption, or accumulated as cash money. In any case, main part of incomes is out of banks. This is the visible and insignificant part of the issue. As we have not exact facts about how the business sector is far from banks, scale of cash accounting, we cannot speak more exactly. However, we can surely say that the situation here is also against the banks. There is a problem of switching of cash money circulation to non-cash money circulation via banks. Development of banking system depends on this problem. However, Central Bank is desperate in this sphere. Because population prefers cash money. Regarding Eastern European countries, it’s foolishness to say the population has not cash money. But, bank cards here are popular as a payment means. Everyone has bank account, not saving accounts, and this is the norm of the life. Therefore, banking systems’ assets in these countries exceed GDP. Regretfully, Azerbaijan should overcome a long distance to arrive in this point, but if it can arrive.
Ok, what? The indices are normal, everyone works and is satisfied with the situation. However, everything is not easy as it seems. The less money the banks have, the higher value they have. If the banks had much money, their interest rate would be lower. The situation in Europe is such. Even, the annual interest rates in the Eastern Europe make some percent. It’s possible to find loan with the annual interest rate of 10%, but this will be only for individuals and risky. Interest rates in business lending are very low. Interests for deposits are also low, because banks have sufficient money for circulation. Our banks operate under these conditions: loans can be given only through deposits, deposits are received with high interests, because it’s need deposit to give loan. Consequently, the price of deposit + administrative costs + bank margin = unbelievable loan interest. And this is one unsolvable problem of the Azerbaijani banking system. This problem should not be solved by consolidation of the banks.
Finally, I’d like to note one more comparison for those who claim that there are many banks in Azerbaijan. Currently, 834 banks operate in Russia, 1 bank for 205,000. Bulgaria has 28 banks, 1 bank for 264,000 persons. Does it mean that Russia or Bulgaria should shut down banks to be same with Azerbaijan? Neither Russia nor Bulgaria does not think about this. They understand that the issue is not related to a quantity.
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