Azernews.Az

By Gulgiz Dadashova

The Central Bank of Azerbaijan (CBA) has regarded as unreasonable the suggestions of the International Monetary Fund (IMF) and other international organizations on downsizing of the International Bank of Azerbaijan (IBA), the country's biggest bank.

"There is no need for downsizing. I consider that these recommendations are wrong," CBA Chairman Elman Rustamov said while referring to the IMF recommendations made following its mission's visit to Baku in early March.

In its report the IMF suggested embarking on an up-front fiscal consolidation to pursue a sustainable non-oil fiscal position and provide room for private sector activity; shifting to a more neutral monetary policy stance, ending the central bank's role in direct lending to the real sector, and preparing, in coordination with other government agencies, for greater exchange rate flexibility over the long term. The IMF also recommended capitalizing the banking system while strengthening supervisory safeguards.

The IMF mission believes that the restructuring of the IBA operations and its governance structure should follow internationally accepted principles to pave the way for the downsizing and transparent privatization of the bank in due course. Therefore, a diagnostic assessment of the IBA should be undertaken by a reputable international institution or company, and external borrowing by this bank should be contained until a viable business model is in place, it said.

The IBA opposes the recommendations of the IMF, terming them unreasonable and contrary to the common vision of the fund to strengthen and capitalize the financial and banking system.

Statements and recommendations of IMF missions that are declarative, not deep and do not change on a yearly basis, have lost topicality, IBA Deputy Board Chairman Rashad Hajiyev said in early March.

Rustamov said the non-governmental part of the banking sector is growing more rapidly, one can observe that competitiveness is gradually improving, and the IBA is losing its market share.

"This process continues and it is inevitable. I think this is the correct dynamics. Another part of the banking sector sees serious competition, especially in segments where the IBA is not involved well, for example, in consumer lending. It looks like the market is more diversified, and the proportion of the International Bank is decreasing," Rustamov said.

He went on to say that a large share of IBA transactions fall to the performance of agency functions.

"The bulk of state loans, for example, for the State Oil Company of Azerbaijan (SOCAR), are funded through it. Therefore, the banks own such a large portfolio. If the agent's functions are removed, then the market share of the IBA will be further reduced, and all the talk will stop altogether," Rustamov said.

The IMF also assumes that the IBA has an unviable business model and needs major restructuring to be able to support the real sector. It says the IBA faces heavy risks ranging from large projects under construction to agricultural development that are not properly assessed and cannot be funded by short-term deposits. "An unreformed IBA would undermine the stability and efficiency of the banking system and result in high costs for the shareholders, including the government," the IMF report reads.

The IBA was established in 1992 as a successor of the Azerbaijani branch of Vnesheconombank. The IBA holds a dominant position in the domestic banking sector. The main shareholder is the Azerbaijani government, which owns a 50.2 percent stake and 49.8 percent is owned by private individuals and legal entities.

Over the past 12 years, the IBA assets have grown 25-fold, while its credit portfolio -- by 30 times, customer deposits 58 times, and share capital 148 times.

Meanwhile, the CBA reported that assets of the country's banking system had a positive growth trend in 2012, amounting to 13.946 billion manats (over $17.765 billion) at the beginning of 2013.

43 banks operate in Azerbaijan.