Why are banks closing in Azerbaijan?

There were 45 banks in Azerbaijan at the beginning of 2015. As of August 2020, only 26 remain.

There are numerous reasons why this occurred: from two waves of devaluation to credit crises. In addition, not only small, but also fairly large and well-known banks were affected.

The most recent wave of bank closings happened in April-May 2020. On April 27, it was announced that temporary external administrators were appointed for 4 banks – Attabank, AGBank, NBCBank and Amrah Bank – and on April 28, Atabank and Amrah Bank lost their licenses. On May 12, the other two banks lost their licenses as well. This brought the number of banks in the country from 30 down to just 26.

While the pandemic or quarantine is being cited as the main reason for closures or bankruptcies all around the world, the coronavirus did not, in fact, have a significant impact on Azerbaijani banks.

Why did four banks shutter their windows at the same time?

Before examining the reasons, a little background information on the role these for banks played in the local banking system. Considering the high level of centralization of the Azerbaijani banking system, the share of the market these banks held was rather small. In fact, the four banks together comprised only 5% of the banking market (the most being held by Atabank with 1.4%, and the least by Amrahbank with just 0.6%).

That is, for the banking sector as a whole it is not such a big loss. But if you look at the numbers from the point of view of losses of ordinary depositors, then the total volume of deposits alone is almost 700,000,000 manat, which is quite a lot during the crisis (and is practically equal to the first economic aid package from the government).

To understand the current situation, we need to go back a little, to March 2019. Within six days, between March 12 and 18, Atabank was involved in two lawsuits and was tried in the Baku Administrative-Economic Court No. 1. In both cases, the claimant won.

The reason for the claims was as follows. The plaintiffs claim that in September 2016, under pressure from the management of Atabank and the Azerbaijan tax ministry (the media have repeatedly written about the connections of AtaHolding and the former head of the ministry of taxes), two companies took loans in the amount of $ 61,180,000. However, they were not given the money, and the loan agreements were used to cash out funds.

Despite this, when it came time to repay, the companies demanded the sum be returned. The plaintiffs were naturally unable to repay the loans, which, in fact, they did not receive – let alone the interest on them.

During the trail, it was revealed that Atabank has issued many such loans, totaling at least 160,000,000 manat.

The problem was that, although there were no such loans in reality (that is, the loans were canceled by the court decision), they were formally counted towards the bank’s total assets.

Thus, the reports which showed that the bank was in a pretty good position, as it turned out, were not an accurate reflection of reality. And due to restructuring, they were unable to even pinpoint these loans as a “problem”.

But only those who participated in the legal proceedings or those who periodically check the court register knew all the details. Although the press did not report the story, rumors spread.

In October 2019, the situation has already changed dramatically. Some media sources started writing articles about the “collapse of Atabank”. All this noise could not pass unnoticed, and, despite the assurances of the bank’s management, people began removing their money from the bank. We do not know how much they took during the last quarter of 2019 (the bank did not provide this information), but before this period, depositors withdrew 25,000,000 manat from the bank.

As a consequence, the balance between the bank’s liabilities and assets began to teeter.

In December 2019, a banking management reform took place. After the 2015 crises, control over banks and credit institutions was transferred to the Chamber for Control over Financial Markets, but in December 2019 this structure was liquidated and its responsibilities and functions were given back to the Central Bank. And the Central Bank almost immediately published an announcement that “the recovery of the banking sector” would be one of the main challenges it would tackle in 2020.

The first bank to come under attack was Atabank. In January 2020, it was announced that an investigation was underway, and depositors were urged to insure their deposits.

After this, the head of the Central Bank Elman Rustamov announced that they are only waiting for the extension of the law “On full insurance of deposits” so that they can return their money to depositors, and after that they will revoke the bank’s license.

Despite the fact that Atabank’s future had already been decided, on April 2, the bank transferred 100,000 manats (about $59,000 dollars) to the Fund to Combat Coronavirus. Incidentally, in March 2020, the other three banks also transferred 400,000 manat (approximately $235,000) to this fund.

The only thing left to do was to extend the term of effect for the deposit insurance law. The law was approved by the president on April 25, and on April 27, the appointment of a temporary external administration of banks was announced.

This is where the “bolt from the blue” occurred. Although Atabank clients were ready and were just waiting for the official announcement (Rustamov said this openly in an interview on television), no one suspected anything about the other three banks. Few people grieved about NBCBank and Amrahbank, since they really only served the interests of a few choice clients, but the situation with AGBank was radically different.

AGBank is a fairly well-known bank with a wide network of branches and clients from both small and medium-sized businesses (despite the fact that the overall share of the banking market was not particularly high, it was actually those banks that attracted clients).

In order to understand what happened to these banks, experts and clients first turned to their financial statements.

The law states that banks are required to post both annual and quarterly financial statements. And unlike Amrahbank and Atabank, NBCBank and AGBank were consistent in this regard and posted their reports at the end of each financial period.

But it turned out that these financial statements were simply unreliable. The head of the Central Bank reports that the four banks provided the public with false information.

It turns out that these four banks issued 459,000,000 manat in problematic loans. Here are the figures for each of the banks individually: Atabank – 214,000,000, Amrahbank – 77,000,000, AGBank – 145,000,000 and NBCBank – 23,000,000 manat. In principle, for the last three banks, the situation was not too radically different from that presented in the reports, but here we are faced with another problem.

Rustamov said that banks also lacked the minimum capital to conduct their operations. Banking legislation states that banks need a minimum authorized capital of 50,000,000 manat, which they did not have.

In other words, if the Central Bank decided to help these banks, it would have to allocate 659,000,000 manat (for the problem loans + authorized capital for 4 banks). It was easier to liquidate them and transfer this money to pay off liabilities to depositors (in total, at the time of the banks’ closure, there were deposits totaling 670,700,000 manats).

Naturally, the Central Bank chose the second option. As a result, the number of banks was reduced to 26, and the labor market was replenished during the difficult quarantine period and 1,500 unemployed banking specialists were added.