Despite the prospects for oil wealth in the Caspian Sea at its coast, Azerbaijan has more banks than its market can support. The National Bank of Azerbaijan (NBA)'s latest "reform" led to the May 7 cancellation of five commercial bank licenses. Caspian Bank, Bay-Bank, Ulfat Bank, Universal Bank and Mec & R Bank all went into liquidation by Central Bank fiat, driving the number of banks in the country down by nearly 10 percent, to 46. The central bank referred to national solvency laws in justifying its decision. For some of the closed institutions, though, this information came as a surprise.
The decision shows that, while Azerbaijan's oil industry continues to arouse both international interest and stubborn charges of corruption, the central bank is working diligently to gain legitimacy. The NBA's press service ascribed the cancelled licenses to "regular violation of the norms on capital, wrong management of banking risks, absence of the necessary reserve funds, inability to maintain minimum authorized capital, [and] loss of solvency and liquidity." Some banks failed to meet these standards because they lacked capital; others had failing management.
According to the NBA, the country's lenders now fit into three categories. The first consists of banks that seem to be meeting norms, the second contains banks that are solvent but may not manage to store capital into the future, and the third consists of failed institutions. Some banks may have thought they could coast along in the second category, but NBA chief Elman Rustamov openly warned otherwise earlier this year. "The closing of some second-level banks [is expected]," he said. "But when it will occur is not known." After the swift cancellation of five licenses, observers expect more banks to shutter their doors in the next several months.
This may be more a matter of housecleaning than of politics or favoritism. According to NBA official Rena Melikova, all the banks had received warnings. "Due to numerous notifications from our side these banks knew for a long time that such an end might approach," she said. The NBA may also be keeping its eye on Azerbaijan's status with European Union officials. EU legislative expert Menno Aden has been visiting Baku while the country's Parliament discussed a new banking law. He seems to approve of the NBA's retention of the right to cancel licenses at its own discretion. "I believe there were indeed reasons for this step. There are too many banks in Azerbaijan and they haven't the capital necessary for productive activities," he said.
Indeed, some lenders came to the same conclusion by themselves. On March 7, international financial giant HSBC announced that it would close its Baku branch at midyear after six unprofitable years. "We don't see a large financial market in the country that would make it necessary to introduce bank business," local HSBC director Charles Mason told the Associated Press at the time. "There are more than 50 banks in Azerbaijan, and there isn't enough business for all of them."
HSBC's decision may have set the current consolidation in motion. The bank was one of Azerbaijan's most popular, paying around $1 million in state taxes and investing around $13 million into the economy. Its closure came as a shock not only to ordinary clients who lined up to collect their deposits on March 7 but also for many experts and economists. When native banks failed to collect most of HSBC's customers, further consolidation seemed hard to avoid.
NBA has embarked on an apparently vigilant course. As of May 1, it has reduced its discount rate from 10 percent to 7 percent per year, trying to encourage spending. It faces the danger that money tied up in the five failed banks will now flow outside the financial system, making it harder for NBA to promise sound deposits and competitive interest rates to potential customers. But Rustamov seems committed to strong medicine for at least the next few months. "There will remain in the country about 30 banks," he says. "Capital consolidation in the banking sphere and other [mid-term] reforms must serve to strengthen trust in the national banking system."
In the next few months, then, lenders will have the chance to merge on their own or search for outside investors. The NBA is likely to raise its minimum capital requirements again, while striving to avoid panics or bank runs. It will be up to the 16 banks Rustamov has effectively placed on the bubble to develop plans for staying solvent and valuable in this oil-rich but spending-poor country.
Nailia Sohbetqizi is a freelance journalist based in Baku.