The International Monetary Fund (IMF) recommends that Azerbaijan keep a close eye on the market share of each dominant bank and track any significant increases in their market share, reads a Staff Report for the 2023 Article IV Consultation of the International Monetary Fund (IMF), held by the head of the fund’s mission for Azerbaijan, Anna Bordon, in November 2023 in Baku, Report informs.
“In cases of elevated concentration levels, stress tests should be conducted to evaluate potential crisis or economic downturn repercussions on conglomerates and the broader financial system, as heightened concentration can intensify systemic risks,” the IMF noted.
The IMF offers to assess alternative channels to expand financial inclusion, especially for borrowers, and increase competition. For examples, digital financial services such as open banking and fintech platforms can facilitate access to various financial products and services tailored to the borrowers’ needs.
“These platforms utilize big data analytics to revolutionize lending by processing extensive consumer credit data which can make more informed lending decisions. Digital financial services also increasingly use AI and machine learning to assess creditworthiness of the borrowers in real-time. These technologies can generate accurate and up-to-date credit scores and supporting credit assessment. Online platforms and marketplaces can also foster competition by enabling borrowers to compare various banking products, including loans.”
Most importantly, IMF says it’s necessary to move to a more proactive approach to banking sector regulation and accelerate the initiation of risk-based and consolidated supervisions for large banks. A more proactive approach to banking sector regulation and the implementation of risk-based and consolidated supervisions for large banks will help identify vulnerabilities in large banks early, allowing for timely interventions to prevent financial crises, mitigate systemic risks associated with their dominance, lead to more efficient operations and create an environment more conducive to competition.
“The financial sector should assume a more pivotal role in supporting economic growth and diversification. Despite recent progress in the banking sector, the financial sector plays a limited role in supporting the economy compared to peer economies. It remains dominated by a few conglomerates, and financial inclusion is low. In recent years, interest rate spreads have risen, owing to increasing operating costs and profit margins. However, deepening the financial markets will be a gradual process of developing and strengthening institutions, market infrastructure, and regulatory frameworks. In this context, staff looks forward to the comprehensive assessment of the financial sector role in the economy that is being conducted by the authorities, including identifying and targeting areas of cost inefficiencies in the banking sector, such as the high level of operating cost, and supports the development of digital financial services such as open banking and fintech to foster competition and expand financial inclusion, especially for SMEs,” reads the report.
There are 23 banks operating in Azerbaijan. The country’s three largest banks include the International Bank of Azerbaijan (with assets of 13.668 billion manats [$8.039 billion] as of the end of 2023), Kapital Bank (8.659 billion manats [$5.093 billion]) and PASHA Bank (8.651 billion manats [$5.088 billion]). They are followed by Xalq Bank with assets of 3.082 billion manats ($1.812 billion) and Bank Respublika – 2.130 billion manats ($1.252 billion).