The Bank of Azerbaijan grew $80 million in 2006, and is investing heavily in the Azeri economy.

It has GDP growth rates of 35 percent and its Caspian petrodollars are going straight into the coffers of the banking system. After 15 years of economic transition, its non-oil sector has grown to represent almost half of the country’s output. Suddenly, SMEs have found an ideal business ally in domestic banks. What country is it? Azerbaijan.

In Azerbaijan, the state was sole economic agent for much of the 20th century. To a large extent, it continued to regulate the market well into the 1990s. In order to further economic diversification, the banking system has had to change old habits. Muslum Mursalov, the Chairman of the Board at the Bank of Azerbaijan has not had an easy ride since taking over in 2007. Set up in 1993, his institution has had to break with the 70-year cycle of command economics. But then, it took Western Europe 300 years for laissez-faire principles to go mainstream.

“Banking legislation was changed twice, first in 1996 and later in 2004. The participation of foreign capital was limited, in part as a measure against inflation,” says Mursalov. Initially, strict banking policies in Azerbaijan were meant to preserve local competitiveness. By 2007, Mursalov says sound management and robust shareholders had managed to keep domestic banks afloat. Assets at the Bank of Azerbaijan, for example, grew $80 million in 2006, or 30 percent year-on-year. “We work closely with the Entrepreneurs’ Association, the Mortgage Fund and the Agriculture Department. Also, thanks to advertising and the sponsorship of a television show, our deposits grew by 3 million,” says Mursalov.

Today, the Bank of Azerbaijan is a proven economic agent in its own right. Mursalov says the millions invested in factories serve to open up new areas of activity. The Bank of Azerbaijan has sunk money into canneries, bus stations and infrastructure. With 16 branches, 5 of which are located in the regions, Mursalov reaches deep into the local SME tissue. “These branches play an important role in the development of regional economies. In Nakhichevan, we’ve invested more than $11 million in tobacco factories. Cigarettes are then exported to countries like Turkey and Iran,” says Mursalov.

MUSLUM MURSALOV Chairman of the Board, Bank of Azerbaijan

Armed with ISO quality certification, the Bank of Azerbaijan has begun to strategize for the future. The plan involves selling shares to foreign banks which will help send staff abroad for training. Strengthening its foreign exchange operations is crucial for Mursalov. So far, BNP Paribas is eyeing the possibility of a link-up. “Foreigners don’t know the country very well and perceive the region as underdeveloped. Selling shares to a foreign bank makes local banking easier. Initially, BNP Paribas will be opening credit lines valued at $5 million,” comments Mursalov. That may not be enough for large-scale projects like the Baku-Tbilisi-Kars railway. “We need to raise our capital by $50 million by end-2007,” he adds.

Led by the Bank of Azerbaijan, the number of deposit-taking institutions has shrunk by 5 to a little over 40. Officials now think the figure will drop to 20 institutions in a few years. In terms of territorial coverage, Kapital Bank is the uncontested leader. Since its well-publicized restructuring of 2004, assets and equity have grown 350 percent. Kapital Bank is one of three banks in Azerbaijan with international ratings. According to Moody’s, it is just one notch down from Azerbaijan’s sovereign ratings. Behind the robust figures is a dedicated team of professionals. Rauf Rzayev, the Chairman of the Board, thinks his bank has great potential.

“Kapital Bank had all the prerequisites to succeed. We had to change practically every aspect of the way we worked, bringing our standards up to international best practices. We now have more than 18,000 corporate customers and 4 million depositors,” says Rzayev. The World Bank opened a credit line for the implementation of FlexCube software. Introducing the new IT system took less than a year, when the usual time period is between two and four years. “We couldn’t afford a lengthy period of implementation as we needed to catch up with increased market demand,” says Rzayev.

As Azeri banks go global, the non-oil economy will gain more traction. Modernization has many paths. Kapital Bank is still proud about its quick upgrading of the state pension payment system, switching to plastic cards in less than two years. “Our mission is to be a bank of national importance and our credo states that we will play an active role in the execution of state projects,” says Rzayev.