Problems and Major risks in the Banking Sector of Azerbaijan

Abstract

Aim. The presented study aims to perform a comprehensive and in-depth analysis of problems and risks in the banking sector of Azerbaijan and to develop recommendations for improving the efficiency and reliability of its functioning in accordance with national interests.Tasks. The author shows the key problems and risks in the country’s banking sector, focusing on dollarization as the main risk; investigates the content and causes of dollarization; examines new trends, particularly the impact of the COVID-19 pandemic on the banking sector of Azerbaijan.Methods. A systems approach to identifying the major factors affecting the development of the banking sector in Azerbaijan serves as the methodological basis of this study. The author also uses the methods of scientific analysis, such as the statistical method, comparative, fundamental, and functional analysis, and expert assessment. The study reflects the ideas set forth in the scientific works of economists on the problems of the institutional development of the banking system in the country under consideration.Results. According to the results of the study, the patterns and current problems in the development of the banking sector of Azerbaijan after the devaluation of 2015 are identified. Its major risks and current state are analyzed, and the reasons for the dollarization of the economy as the main channel of risk for the banking sector of Azerbaijan are determined. In addition, the impact of the COVID-19 pandemic on this sector is analyzed.Conclusions. Positive and negative aspects are identified by performing a risk analysis of the banking sector of Azerbaijan. On the positive side, there are large strategic monetary reserves, a relatively low level of public debt, a single authority for regulating and supervising financial markets, basic risk management elements, and full deposit insurance. The vulnerabilities of the banking sector of Azerbaijan include fragile capital positions of the banking system, high credit risks of banks, low capitalization of banks, lack of legal mechanisms for regulating and selling non-performing assets, lack of effective tools for the rehabilitation and restructuring of banks, weak corporate governance in the financial services sector, low financial literacy, increased monetary and credit risks in the banking sector.