ELman RUSTAMOV Chairman of the National Bank of Azerbaijan

ith 60 years of oil reserves at a 2004 consumption rate, Azerbaijan has a lot of fuel. Given the velocity of transactions, Azerbaijan’s currency—the manat—is circulating fast. After years of duress, the economy can finally cash in on oil exports, worker remittances and FDI. The people can spend it on expensive cars and mobile phones. In the midst of this consumer boom, financial intermediaries are posting gains. Liberalization has been the byword since 1995. New banking legislation passed in 2004-05 is based on Basel Core Principles. Still, the transition has yet to come full circle.

“The transformation of oil wealth to economic development requires a banking system based on international standards,” says Elman Rustamov, Chairman of the National Bank of Azerbaijan (NBA).

Established in 1992, the NBA navigated the murky waters of the post-Soviet collapse, as well as the spillover from the Russian monetary crisis of 1998. The country regained its footing in the mid-1990s. In between, it had to scrap the old manat and introduce a new one. War had caused the exchange rate to tumble in the early days of independence. “The new currency has a beautiful design and people accept it with pleasure,” says Mr. Rustamov.

Despite 15 years of continuous work, the transition has to go through another set of steps. “We’re entering a new era. Our main goal is to develop a strong, diversified and competitive market economy by using the oil income optimally,” says Mr. Rustamov. The NBA is focusing on targeting inflation and bank consolidation. After all, a takeoff of the non-oil sector will not happen unless inflation is low, and it has surpassed 3 percent in the last ten years.

NBA officials have raised minimum capital requirements for banks from $5 million to $10 million, yet few have been able to meet the new conditions.
Where there used to be 240 banks, there are now 42. Mr. Rustamov thinks that they may still be too large a number for a population of eight million. The total authorized capital of the 42 existing banks, minus the state-owned institutions, reached $223 million at end-2005. Ideally, Mr. Rustamov would like to see a series of mergers between small and medium banks with the help of foreign financial institutions.

There are two state-owned banks in Azerbaijan that control almost 50 percent of the market: Kapital Bank and International Bank of Azerbaijan (IBA). IBA is responsible for 75 percent of banking operations, while Kapital Bank still holds the frozen individual deposits of Soviet days. Both institutions are slated for privatization. To prepare for their future sell-offs, they have spearheaded several reforms: issuing credit cards, expanding their ATM reach and introducing friendlier service.

Meanwhile, Azeri retail banks are aggressively courting the customer. The number of branch offices has exploded, even in the provinces where people proverbially stash their money under their mattresses.

In 2006, banks began to offer long-term mortgage at a discount rate of 12 percent. Compared to the market interest rate of 24 percent, it is a steal. Banking services have also improved, with more Azeris than ever before wielding a credit card. At supermarkets and shopping malls, the ATM is now part of everyday life. The priority is to create an enabling environment for retail and commercial banks that facilitates further economic reforms.

Major foreign players in the retail sector would be a boon for competition. The spike in consumer loans and the growth in deposits are luring banks from central Europe with experience in emerging markets.

With an appreciating currency, saving in manats is in fashion. But with bank deposits at 15 percent of GDP, there is still a long road ahead. “We’re aware of the risks we face and are familiar with the experience of other countries. We intend to follow best practices,” says Mr. Rustamov.