Banking activities in Azerbaijan
In accordance with the decision of the Board of the Central Bank dated April 28, 2020, the banking licenses of ATABank OJSC and AmrahBank OJSC were canceled, and later on May 12, 2020, this cancellation was carried out for 2 other banks - AGBank OJSC and NBC Bank OJSC. Earlier, in 2016, the financial markets supervisory authority revoked licenses from 8 banks and took measures for financial recovery at the International Bank of Azerbaijan. Currently, there are 26 banks operating in Azerbaijan.
What is the reason for bank closures?
After appropriate verification procedures, the Central Bank decided to revoke the licenses of banks due to a liquidity shortage, when banks could not quickly pay off depositors who applied for their money, as well as having discovered in their activities a high-risk loan portfolio that was not covered by sufficient reserves, or other financial difficulties, or distortion of reporting, etc. Based on the results of the inspections, the Regulator imposes requirements on the credit institution to create additional reserves, which the bank cannot fulfill without incurring large losses, reducing equity capital below the minimum level and violating basic standards. The result is revocation of the license. Each bank is governed by a Board, which is headed by the Chairman of the Board. According to current legislation, the appointment of administrators, including members of the Management Board, is carried out after passing the certification of administrators and receiving a positive opinion from the Central Bank. However, in-depth knowledge of banking laws does not mean that the chairman and his deputies will fully comply with the rules and laws. This fact is also evident in the example of closed banks.
According to the “Rules for calculating bank capital and its adequacy” of the Central Bank, the minimum amount of the bank’s total capital should be 50 (fifty) million manats. The total capital serves to reduce possible losses that may lead to the loss of the bank's solvency, and to increase the confidence of depositors and potential investors in the banking system. Obviously, the total capital of each operating bank must be equal to or higher than this size. However, in practice, some banks do not comply with the Central Bank's requirements, resulting in regulatory capital requirements being violated, despite periodic written warnings from the Central Bank. In this case, responsibility lies entirely with the management of the bank, which is obliged, due to its fiduciary duties, to comply with the law and regulatory requirements of the regulator. Thus, the Central Bank, in order to ensure the adequacy of the total capital, analyzes banks on the basis of reports and information provided monthly by banks, and therefore does not always promptly identify whether the information provided by the institution is distorted or true. If any shortcomings are found in the report, then both the officials, that is, the management of the bank, and the bank as a legal entity as a whole bear responsibility. In connection with the identified shortcomings, measures are being taken against the above-mentioned banks in accordance with the law.
Author: Gumru Eyvazova, Senior Associate
GRATA International, Azerbaijan