Azerbaijan: deposit insurance system
| DOI | https://doi.org/10.1108/13581980910972250 |
| Published date | 24 July 2009 |
| Pages | 318-335 |
| Date | 24 July 2009 |
| Author | Afkan R. Isazade |
| Subject Matter | Accounting & finance |
Azerbaijan: deposit insurance
system
Afkan R. Isazade
Deposit Insurance Fund, Baku, Azerbaijan
Abstract
Purpose – The purpose of this paper is to investigate a deposit insurance program for household
deposits, which is designed to act as safety net in order to minimize or eliminate the risk of loss of
depositors’ funds with banks represents a primary element of this reform.
Design/methodology/approach – This research paper is scientific investigat ion aimed at
discovering and interpreting facts related to deposit insurance system in Azeri context. The goal of
the research process is to produce new knowledge, through the exploratory research, which structures
and identifies new problems, and the constructive research, which develops solutions to a problem.
Findings – The main finding is that the deposit insurance system in Azeri context as well
everywhere provides for the security of funds in the event of bank failure and, thus, contributes
substantially to the stability of the financial system in Azerbaijan. The deposit insurance system
supports the smooth functioning of the payment system and the credit mechanisms and facilitates the
exit of problem banks.
Practical implications – As a result of this research paper some changes may be made in local
legislation in order to defend the depositor’s rights in the most effective way in the case of bank
failures.
Originality/value – The originality of this paper is that it for the first time describes the deposit
insurance system of the Republic of Azerbaijan, its advantages and disadvantages. The paper is
addressed to the international business community, particularly those involved in all aspects of
banking and deposit insurance law.
Keywords Banks, Consumerprotection, Savings, Regulation,Azerbaijan
Paper type Research paper
The development of commercial banking in Azerbaijan since the late 1980s has been
difficult and complex because many banks, as well as other financial institutions, were
formed in order to exploit temporary opportunities (for example, speculating on
inflation and currency markets, currency exchange with high spreads, etc.). The latter
half of the 1990s witnessed the rapid consolidation of a group of larger banks oriented
primarily toward servicing the government sector including investments in the
government bonds (GKO). This period may be noted by extremely low liquidity and
payment discipline in the enterprise sector as well as by a weak system for defending
the rights of creditors.
Globalization and the development of international financial markets have also
influenced the further enhancement of the local banking system. The economist Turner
(2006) notes:
By 2004 and 2005, bank credit was rising very rapidly in many countries. Perhaps even more
importantly, the reforms that had their roots in the mid-1990s had led to a significant
overhaul of financial regulation in many countries. Financial markets domestically had been
further developed, and financial firms had become subject to more rigorous market discipline
than had been the case in the 1990s. An equally radical change is that the internationalization
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JFRC
17,3
318
Journal of Financial Regulation and
Compliance
Vol. 17 No. 3, 2009
pp. 318-335
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980910972250
of financial services and capital markets is now viewed in a more positive light than was the
case a decade ago. This change of mindset and ambitious programs of reforms appear to have
contributed to substantial structural strengthening of the banking system in emerging
economies.
The National Bank of the Republic of Azerbaijan (the National Bank) is charged with
regulating the money supply, circulating currency, and regulating the operations of the
commercial banks. Item II of Article 19 (The Monetary Unit) of the Constitution of the
Republic of Azerbaijan adopted on November 12, 1995 and entered into force on
November 27, 1995 and item 2 of Article 1 (The National Bank of the Republic of
Azerbaijan) of the Law No. 802-IIQ of the Republic of Azerbaijan on the National Bank
of the Republic of Azerbaijan dated October 12, 2004 (the Law on NBA) define the
National Bank as “in exclusive property of the state,” which has “a right to issue notes
and to withdraw them from circulation.”
As of October 1, 2008 142 credit organizations had received licences from the
National Bank, including 45 commercial banks and 97 non-banking institutions.
Article 1 (Principal Definitions) of the Law No. 590-IIQ of the Republic of Azerbaijan on
Banks dated January 16, 2004 (the Banking Law) defines a bank as:
[...] a legal entity, which attracts deposits or other repayable amounts from physical persons
and legal entities, as well as extends loans sui juris and at expense of own assets and
performs operations of remittance and payment operations based on instructions of its
customers.
Among local banks the biggest are the International Bank of Azerbaijan, previously a
branch of the Foreign Economic Bank of USSR, and the Capital Bank (CB), previously a
branch of the Savings Bank of USSR. At the same time, 21 banks operate with the
assistance of foreign capital, and six of these contain 50-100 percent of foreign capital
while 13 have less than 50 percent. Presently, a number of international financial
institutions have financial interests in commercial banks in Azerbaijan, including the
European Bank for Reco nstruction and Devel opment, Black Sea Trade an d
Development Bank, International Financial Corporation, Uralsib Financial
Corporation, KFW Banking Group and Sparkassen Financial Group. This level of
sophistication in the banking sector shows the country’s overall economic development
during this decade.
Growing trust in the Azerbaijan banking system testifies to an increasing financial
stability, which is an important development, especially considering the current
situation on the global markets. The main accomplishments of the Azerbaijan financial
markets are mortgage financing, record levels of gold resources and a flow of
petrodollars. On the February 5, 2007, Fitch Ratings Company upgraded Azerbaijan’s
foreign and local currency rating to “BB þ” from “BB,” with the outlook remaining
stable. The upgrade was made in compliance with strong and sustainable economic
growth, low government and external debt ratios and a growing current account
surplus, underpinned by rapidly increasing oil and gas production (VTB bank, 2007).
As of January 1, 2008 deposits had grown by 33 percent from the year before and were
59.4 percent higher than on January 1, 2006. Deposits in the loca l currency account for
53 percent and foreign currency deposits 47 percent. Retail deposits were 44.2 percent
higher than a year ago and corporate deposits were up 24 percent from last year.
Azerbaijan:
deposit
insurance system
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