BAKU, Azerbaijan, December 29. Trend News Agency presents an overview of the main events in the financial sector of Azerbaijan for 2023.
Banking sector
One of the important events of the current year was the discussion in Azerbaijan's Parliament of the draft law on revisions to the Central Bank Law, in which it was suggested to allow the Central Bank the ability to conclude agreements and contracts. The Central Bank will be allowed to negotiate and finalize cooperation agreements with the central banks of other countries, international financial and credit organizations, and institutions, as well as clearing and other arrangements.
Azerbaijan and Tajikistan signed a memorandum of agreement this year. The goal of the memorandum is to organize research excursions for collaboration in the banking sector, exchange experience and information, discuss current challenges, conduct training, internship programs, and seminars, and provide technical advice.
In addition, the Azerbaijan Banks Association (ABA) and the Association of Banks of Hungary signed a memorandum of cooperation this year.
The memorandum envisages the promotion of cooperation between the parties, the organization of events, including joint educational and training programs, the exchange of information between member banks of both organizations, the development of correspondent relatioand and the and implementation of other activities related to the banking and financial sectors.
Moreover, a memorandum was signed between the ABA and the Banks Association of Turkey (TBB). The document is aimed at organizing joint activities as well as the development of the financial sector.
Also, ABA and the International Finance Corporation (IFC) signed a cooperation agreement. The document covers cooperation in the fields of environmental, social, and corporate governance and is designed to ensure financial sustainability in Azerbaijan.
Speaking about the discount rate, the Board of the Central Bank of Azerbaijan (CBA) decided to raise the discount rate from 8 percent to 8.25 percent in December 2022. The upper limit of the interest rate corridor remained at 9.25 percent, while the lower limit was raised by 1.25 percent (to 6.25 percent). At the first CBA board meeting this year, it was decided to raise the discount rate by 0.25 percentage points from 8.25 percent to 8.5 percent. The upper limit of the interest rate corridor was raised to 9.5 percent, while the lower limit was raised to 6.75 percent.
The Central Bank of Azerbaijan decided at its last meeting this year to lower the discount rate from 8.5 percent to eight percent, the upper limit of the interest rate corridor from 9.5 percent to 9 percent, and the lower limit from seven percent to 6.5 percent.
Besides, at the beginning of the year, the board of the Central Bank of Azerbaijan approved new norms for mandatory reserves for banks.
According to the information, the following mandatory reserve ratios will be applied: Mandatory reserves for banks on deposits in the national currency of individuals and private entrepreneurs are set at the level of 5 percent on deposits of individuals and private entrepreneurs in foreign currency and 6 percent on deposits of legal entities in national currency for a total amount up to 1 billion manat ($588.2 million). 5 percent on deposits of legal entities in national currency for a total amount of more than 1 billion manat ($588.2 million). 10 percent on deposits of legal entities in foreign currency for the amount equivalent to up to 750 million manat ($441.1 million). 6 percent on deposits of legal entities in foreign currency for the amount equivalent to more than 750 million manat ($441.1 million). 12 percent, on deposits attracted to precious metals, at the level of 5 percent.
Additionally, a new function has been introduced on the CBA e-services portal, which allows citizens to obtain information about their credit history from the Centralized System of Credit Register.
Also, it became known that the CBA is developing a strategy for the development of the financial sector, which reflects the priority issues in the direction of solving the problems of the financial sector.
In the first half of this year, the European Bank for Reconstruction and Development (EBRD) expressed interest in studying new infrastructure projects in Azerbaijan that meet the eligibility criteria in terms of the bank's policies and standards.
"These criteria cover a wide range of issues, from environmental aspects and sustainability aspects to procurement and finance. The list is extensive, and each project requires a thorough assessment. Therefore, after receiving such a request from the government, we will assess all opportunities on a case-by-case basis, in coordination with other international financial institutions and subject to safe access to the project site (as we understand, the mining of Azerbaijani territories by Armenian illegal armed groups is still ongoing)," explained Kamola Mahmudova, head of the EBRD's representative office in Azerbaijan at the time.
It has also been disclosed that the EBRD has signed investment contracts with three Azerbaijani banks in 2023.
"One of our key objectives in Azerbaijan is to strengthen local financial institutions so that they, in turn, can provide the private sector with easy access to the finance it needs to grow. We are also actively stimulating the growth of financial markets," said Nataly Mouravidze, head of the EBRD's operations in Azerbaijan.
Additionally, it was reported that the EBRD is ready to revise its strategy for Azerbaijan.
"Azerbaijan is working to create more opportunities for investors who want to take advantage of its rich natural resources, strategic location, and growing private sector. As outlined in the country's 2030 Agenda, today's Azerbaijan prioritizes market reforms, business-friendly governance, and trade liberalization," she stressed.
According to Mouravidze, the EBRD's next country strategy will take into account all these principles. The validation period is fast approaching, and the bank is already preparing to engage with authorities, clients, and partners.
"What I can confidently say at this stage is that the diversification and greening of Azerbaijan's economy, as well as our efforts to increase access to finance for local businesses, will remain the top priorities of our work in the country," she concluded.
This year, the Central Bank of Azerbaijan and the European Bank for Reconstruction and Development discussed the creation of a local credit agency.
It was also reported that the Black Sea Trade and Development Bank (BSTDB) is developing a portfolio of new projects in Azerbaijan. Moreover, BSTDB is negotiating with several financial institutions in Azerbaijan and hopes to expand its network of partner banks in the future.
What's more, BSTDB has released a portfolio of projects per country. According to the data, BSTDB's current portfolio of projects in Azerbaijan as of January 1, 2023, amounted to 12.649 million euros.
One of the significant events in the banking sector this year was the launch of commission-free money transfers from Türkiye to Azerbaijan. The Turan mobile application, operating for the first time outside Türkiye, started its activities in Azerbaijan. In addition, it was reported that the Turkish Turan Teknoloji A.Ş (Turan) financial company will establish money transfers by bank cards without commission from Azerbaijan to Türkiye.
Besides, it became known that Azerbaijan is developing new digital solutions in the field of money transfers.
The Asian Development Bank (ADB) was also reported to have started preparing a new strategy for the country's partnership with Azerbaijan for 2024–2028.
Touching upon the aspect of digital manat, it was reported that Visa and CBA are discussing the integration of digital manat into the Visa network. The sides are engaged in an open and constructive dialog to find suitable formats for interaction and cooperation, and the issues of conditional integration of the digital manat into the Visa network are now at the stage of discussion.
The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), part of the Islamic Development Bank (IsDB) group, admitted Azerbaijan as its 49th member state this year.
"Azerbaijan's membership opens the door for its private and public sectors to benefit from the risk mitigation and credit enhancement solutions offered by ICIEC to expand their exports and facilitate the inflow of foreign direct investment. Similarly, it allows exporters, banks, and investors from other member states as well as other countries to cover the political and commercial risks associated with their operations in Azerbaijan," commented Osama Qaisi, CEO of ICIEC.
In the outgoing year, it became known that the Central Bank of Azerbaijan would apply financial sanctions to credit organizations that violated the rules of calculation and maintenance of mandatory reserves.
According to the amendments, the CBA may impose a financial sanction in the amount of two times the average daily discount rate of the currency to be maintained on the unsecured amount of required reserves during the reporting period and three times the average daily discount rate if the violation is committed three or more times during the calendar year.
Also, one of the significant events was the abolition of daily limits on amounts transferred abroad by individuals (previously the daily limit was $1,000).
There has also been established a monthly limit of up to $20,000 in equivalent for transfers (regardless of the form) without opening an account or from an account, as well as the possibility for individuals to pay for transportation and hotel expenses associated with trips abroad by other persons.
Similarly, it became known that using payment cards issued in the territory of Azerbaijan, resident individuals outside the country during a calendar month established cashing of funds in the amount of up to $10,000.
It also became known that non-traditional players in the financial market of Azerbaijan will be able to issue payment cards.
The Central Bank of Azerbaijan (CBA) together with the International Finance Corporation (IFC) is developing a fintech strategy for 2024-2028, and it was also reported that payment and electronic money organizations operating in Azerbaijan are planned to be licensed by the first of May next year.
Also this year, it was reported that the Bank of Baku will repay the long-term loan of the Central Bank of Azerbaijan next year.
Speaking about the main events, the signing of a $10 million letter of credit contract between Azerbaijan's Rabitabank and the International Islamic Trade Finance Corporation (ITFC) should be mentioned.
The Bank noted that this historic agreement, the first of its kind in Azerbaijan, will play an important role in promoting trade finance in the private sector on the principle of Islamic finance.
It was also noted that ITFC is considering opportunities to expand the Islamic finance deal in Azerbaijan.
"Talking about the prospects of introducing Islamic financial instruments, we see a positive beginning in cooperation with Rabitabank and believe that it will actively explore and introduce Islamic financial products. The transformation of existing banks or the creation of specialized units for Islamic banking is, in our opinion, inevitable, as the mechanism of this financial system is feasible and meets the needs of the region. These steps can have a positive effect on the economic development of Azerbaijan and neighboring regions," Hani Salem Sonbol, the CEO of the ITFC, said.
ITFC shows interest in more active participation in financing important projects in Azerbaijan, which is in line with the organization's development plans until 2030. In addition, ITFC sees potential in deepening cooperation with Azerbaijan.
Talking to Trend, Hani Salem Sonbol, a member of the Islamic Development Bank (IsDB) group, said that the International Islamic Trade and Finance Corporation's (ITFC) flagship program Trade Connect Central Asia+ (TCCA+) will help develop ITFC's future cooperation with Azerbaijan.
"The TCCA+ program aims to achieve inclusive economic growth, regional economic cooperation, and trade facilitation among Organization of Islamic Cooperation (OIC) member countries, the Commonwealth of Independent States (CIS), and with the rest of the world. The flagship ITFC program aims to expand and develop trade among six countries: Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. Capitalizing on the potential of regional markets, the Trade Connect Central Asia+ program aims to unlock potential domestic trade opportunities estimated at $600 million in the target region over the next five years and to create billions of dollars worth of trade and investment opportunities with other regions covered by the OIC. The program, aimed at increasing regional exports and diversifying the export base towards higher value-added products, will contribute to economic growth. ITFC hopes to launch this program early next year," he said.
In addition, this year, the Asian Development Bank (ADB) and Bank Respublika signed a loan agreement under which the bank will be granted a manat loan equivalent to $20 million.
In the outgoing year, it was also noted that a Committee on Corporate Governance Principles for Banks will be established in Azerbaijan.
Speaking about future aspects in the sector, it is worth mentioning that by the end of March next year, Azerbaijani banks should prepare a new strategic plan based on the "Standards of Corporate Governance Principles for Banks" approved by the Central Bank of Azerbaijan (CBA) and submit it to the regulator.
According to the information, banks must also assess the level of application of the standards every three months and report their results to the institution.
This year, Tinkoff Business launched currency transfers to Azerbaijan, with business customers accessing incoming and outgoing payments in Azerbaijani manat (AZN).
As for new appointments, it should be noted that Shahin Mahmudzade was appointed advisor to the chairman of the Central Bank of Azerbaijan (CBA) this year, the World Bank appointed a new regional director for the South Caucasus, Rolande Pryce, and Alkis Vrienios Drakinos was appointed representative of the European Bank for Reconstruction and Development in the Caucasus.
In conclusion, the Central Bank of Azerbaijan (CBA) revoked the licenses of Gunay Bank OJSC and Muganbank OJSC this year.
CBA revoked the license of Gunay Bank OJSC because the total capital of the bank is less than the established requirement of 50 million manat ($29.4 million), and the adequacy ratio of the total capital is less than three percent. In the case of Muganbank, the size of the total capital is less than the minimum amount established by the legislation for banks, and the adequacy ratio of the total capital is less than three percent. The bank does not carry out its current activities reliably and prudently, as well as due to inadequate internal management and control procedures.
Insurance sector
The decision of the Board of the Central Bank of Azerbaijan (CBA) on determining the amounts of lump sum monetary payments paid by insurers willing to act within the framework of the "Green Card" insurance system and insurance premiums to be applied by insurers having the right to act within the framework of this system has come into force since January 1 of this year.
According to the decision, the amount of lump sum payment within the framework of a "Green Card" is set at 10,000 AZN.
Insurance premiums under "Green Card" contracts for motor vehicles registered in Azerbaijan and going to Türkiye and Iran range from 12 to 440 manat (from $7 to $258); going to Belarus, Moldova, Russia, and Ukraine, from 10 to 400 manat (from $5.8 to $235); and going to other countries, from 30 to 1,200 manat (from $17 to $705). Insurance premiums for motor vehicles registered in Georgia and Kazakhstan and going to Türkiye, Iran, Belarus, Moldova, Russia, and Ukraine are determined from 15 to 1,630 manat (from $8.8 to $958); for motor vehicles registered in Georgia and Kazakhstan and going to other countries, they are determined from 30 to 2,389 manat (from $17 to $1,405).
In addition, it became known that the Azerbaijan Compulsory Insurance Bureau has reached an agreement with the International Council of Bureaus on the sale of local insurance companies "Green Cards" to drivers of vehicles registered in Georgia and Kazakhstan.
Moreover, it became known that Azerbaijan plans to introduce an analog of the mechanism of bank deposit insurance for investment companies.
In conclusion, it should be noted that this year the Central Bank of Azerbaijan (CBA) canceled the licenses of Gunay Insurance OJSC and Nakhchivan Sigorta OJSC.
Financial market
This year, the Central Bank of Azerbaijan (CBA) adopted the "Cybersecurity Strategy in Financial Markets.".
The strategy is aimed at forming a sustainable cybersecurity environment in financial markets and includes activities on five strategic priorities:
I. strengthening the regulatory and supervisory structure for information security and cybersecurity in financial markets;
II. strengthening the culture of cyber risk management in financial markets;
III. Forming an information technology governance structure to strengthen the level of cyber security in financial markets;
IV. strengthening cyber resilience in financial markets;
V. Building a cyber security culture in financial markets. The Central Bank plans to continuously implement measures to ensure information security in the financial sector of the country, in particular to strengthen cyber resilience.
It also became known that in Azerbaijan there will be defined requirements for the realization of investment services (operations).
According to the Decree of the President of the Republic of Azerbaijan, Ilham Aliyev "On Amendments to the Law of the Republic of Azerbaijan "On Securities Market," dated July 6, 2023, № 947-VIQD, the CBA was recommended to approve the requirements for the implementation of investment services (operations) within six months and inform the President of the Republic of Azerbaijan.
Also, it was recommended that the CBA approve the procedure for conducting interviews with members of the executive body and supervisory board of persons licensed on the securities market, as well as managers of branches of foreign investment companies, within six months and inform the President of the Republic of Azerbaijan about it.
In addition, the Baku Stock Exchange (BSE) is currently developing a strategic plan for the development of the exchange market for the period from 2024 to 2026.
In addition to all the above-mentioned developments, the Azerbaijani manat remained stable against the US dollar this year.
It is worth noting that, according to the report of the Asian Development Bank (ADB), Azerbaijan is expected to keep the national currency pegged to the dollar at least until 2026.
The report emphasizes that this will be due to a significant reduction in pressure on the manat.
In turn, analysts of the Dutch ING (multinational banking and financial services) also predict that Azerbaijan will retain the manat's de facto peg to the U.S. dollar at the level of 1.7 manat to 1 U.S. dollar at least until 2026.
Analysts of the international rating agency S&P Global Ratings also expect this rate to be maintained until at least 2026.