/By AzerNews/

By Aynur Karimova

Azerbaijan has taken real measures to revitalize its banking system by consolidating two banks and terminating licenses of six banks operating in the market.

Expert Vugar Bayramov believes that decreasing the number of banks operating in Azerbaijan is of great importance.

He told Azernews that consolidation was crucial for the Azerbaijani banking system where 43 banks were active as of December 31, 2015. "It is enough a big figure given Azerbaijan's economy and banking sector," he stressed.

The consolidation of banks will pave the way for improving their liquidity, he added.

"Today there are several banks in Azerbaijan, which face difficulties in fulfilling their obligations on deposits. The consolidation will allow these banks to fulfill their obligations before depositors and boost confidence in the banking sector."

Since the beginning of 2016, the Central Bank of Azerbaijan has terminated the licenses of the Caucasus Development Bank, Atrabank, Gandja Bank, Bank of Azerbaijan, United Credit Bank and NBCBank.

Earlier this week two other Azerbaijani banks - AGBank and DemirBank - have already signed a protocol of intent about merging.

Bayramov also stressed the importance to conduct the consolidation process in a transparent atmosphere and based on the independent decision of banks on merging. This process should go on a voluntary basis enabling the banks to make decisions by themselves.

"The banks themselves should take a decision on consolidation and this process should be conducted by stimulating the banks," he stated.

Bayramov also noted that the consolidation of the banks depends on the policy of the CBA.

"The CBA should prevent the banks from becoming a monopoly in the market. The consolidation of the banks should not cause merger of several monopolist banks, but rather increase rivalry in the banking sector," he said.

There were good examples of consolidation of banks in the country.

For instance, UniBank was formed by the merger of two commercial banks in 2002 - MBank and Promtexbank, where the EBRD acquired a 15-percent share, and 8.3333 percent is owned by the German Investment Corporation DEG.

Bank of Baku merged with IlkBank in 2005.

The consolidation in Azerbaijan’s banking sector is a sensitive issue as the population’s deposits have been placed in the merged banks. Therefore, the main issue to be resolved now is the insurance of deposits.

Azad Javadov, the Executive Director of the Azerbaijan Deposit Insurance Fund, told Trend on January 28 that the total amount of compensation to be paid to depositors of six banks, the licenses of which were terminated by the CBA, is 70 million manats ($42.9 million).

"We have no problems with the payment of compensation, because their volume is 70 million manats ($42.9 million), while the funds of the ADIF exceeds 130 million manats ($79.75 million)," he said.

Three banks - Muganbank, Rabitabank and Unibank - have already been selected the agent banks, through which the compensation will be paid to depositors.

"The amount of compensation on the population's deposits in Bank of Azerbaijan will amount to about 24 million manats ($14.7 million). The exact figure is yet to be determined. Bank customers will be able to get compensation through the Muganbank, and depositors of the bank in Nakhchivan - via the Rabitabank," Javadov added.

The payment of compensation will begin seven days after the declaration of bankruptcy of the bank.

"The first bank, the license of which was terminated, was the Bank of Azerbaijan, and the payment of the compensation on deposits in this bank will begin the next day. Gandja Bank will be the next, and then the others will follow," he stated.

Some 6,599 depositors of Bank of Azerbaijan will receive compensation from the ADIF, according to Javadov.

He further added that in case of shortage of funds for payment of compensations to the closed banks’ depositors, the CBA may render financial assistance to the ADIF.

Azerbaijani parliament adopted amendments to the law “On Complete Deposit Insurance”, on January 19. In accordance with the law, the deposits of population in the banks, which are members to the ADIF, have been insured for three years, regardless of the amount of deposits.

Currently, the maximum level of insurance coverage for deposits is 30,000 manats ($18,404).

However, this law will not be applied to the deposits of customers of these banks, as this law enters into force on February 1, 2016. Thus, the ADIF will return the deposits of the banks' customers in the amount of 30,000 manats ($18,404).

The consolidation of banks is likely to lead to financial recovery of the banks as this process is in the interests of both owners and clients of banks.

The consolidation will also allow stable banks, which have deliberately decided to merge, to increase their share in the market and to gain more revenues. This strategy would be more correct if targets growth of profit and market share.

The International Finance Corporation and the European Bank for Reconstruction and Development support the consolidation of banks in Azerbaijan, regarding it as a way leading to financial recovery of the banks.