Azerbaijan develops new strategy with focus on digitalisation of finances Anaysis by Caliber.Az

The efforts made in recent years to expand the infrastructure of non-cash payments stimulate Azerbaijan's banking sector to develop e-banking services and, in general, to increase the digitalisation of the operating environment. Mass application of fintech solutions today is an alternative trend, especially taking into account the expected introduction of the OpenBanking platform in the country soon. New development trends in the financial sector of Azerbaijan were discussed at the 6th International Banking Forum (IBF) held in Baku on November 24. During the event, the management of the Central Bank of Azerbaijan (CBA) announced the beginning of the preparation of a new strategy for the development of the financial sector in January 2023.

In recent years, the global financial system was under severe pressure of successive global crises - pandemics, energy, and inflation, accompanied by instability of stock markets, volatility of precious metals, and world reserve currencies. Tangible negative processes were also observed in the post-Soviet area due to the disconnection of Russian banks from the global SWIFT system, which complicated the financial relations of the Russian Federation with the international banking payment system and, consequently, with the CIS and neighboring countries.

Nevertheless, in spite of the negative external factors, the current year was remembered by an unprecedented rise in business activity against the backdrop of rising prices in the global energy market, as well as the noticeable increase in non-oil production and exports. All the abovementioned as well as large-scale construction projects on Karabakh revival formed a favorable environment for the banking sector of the republic, having increased the demand for loaned capital. Fortunately, the Azerbaijani banks did not face any problems from the anti-Russian sanctions imposed by the USA and the EU. Moreover, the external negative impact on the domestic financial system was largely leveled due to the competent policy of the CBA on the regulation of the discount rate, preservation of monetary stability, and the steadiness of the national currency - the manat, as well as the stability of the monetary market of the country.

"The assets of Azerbaijani banks have increased by 26% up to 43.6 billion manats since the beginning of the year. The profit and net profit of the banks are also growing: by the end of the first 10 months of 2022 the profit was almost 1 billion manats and net profit 673 million manats," President of the Association of Banks of Azerbaijan (ABA) Zakir Nuriyev said at the opening of the VI Forum of IBF.

According to another forum participant Vusal Gasimli, executive director of the Centre for Analysis of Economic Reforms and Communications (CAERC), the share of banking assets in Azerbaijan's GDP has increased from 26.8 per cent to 44.3 per cent over the past decade. "The volume of credit investments in the economy grew from 9.9 billion manats up to 17.1 billion manats, and the level of capitalisation and liquidity of the banking sector exceeds the norms twofold," stressed the head of CAERC.

At the same time, digital payments are growing in Azerbaijan, and reforms in tax regulation, as well as efforts of the regulator to stimulate the development of electronic banking services and the entry of new international payment systems into the local market, contribute to this. "Today 84 per cent of the country's banks use mobile applications, 77 per cent of the banks' clients' operations are carried out through electronic banking, with operations through mobile banking tripling. The volume of non-cash transactions inside the country grew 2.2-fold, amounting to about 20 billion manats, and the share of payments by payment cards exceeded 42 per cent, having increased by 12 percentage points compared to last year," CBA chairman Taleh Kazimov said.

Apparently, the acceleration of digitalisation processes in the domestic banking sector and the development of appropriate IT tools and infrastructure for the domestic payment system will be the cornerstone of future reforms of the banking and the entire financial sector of Azerbaijan. "Starting from January next year the Central Bank jointly with international organisations plans to start preparing a new strategy aimed at strengthening the digital transformation of the CBA and the entire financial sector," Kazimov said, stressing that in order to respond to various challenges and risks it is necessary to develop information technology in the banking sector and payment systems, and in this regard, together with the International Finance Corporation (IFC) a strategy of cybersecurity of the financial sector is also being developed.

Within the framework of this work, the strategy of cashless payments development is being prepared which will pay special attention to the implementation of block technologies in the banking sector. New packages of legal acts are being formed, and new concepts of payment systems will be introduced in the country in the nearest future. Not long ago the CBA specialists together with the Association of Financial Technologies (AzFina) worked out a draft law "On Payment Services and Payment Systems" aimed at ensuring greater openness of the market for the participation of international vendors and financial and technical organisations (FinTech). Also, specialists of the Central Bank and Britain's TheCityUK are preparing a draft "road map" of OpenBanking till 2026 envisaging implementation of certain measures to standardize the banks' infrastructure and create a legal framework, formation of a relevant working group, holding trainings, etc. It is expected that preparation of the legal framework for OpenBanking will also start in 2023, standards will be developed in accordance with the AISP and PISP requirements, and work will be done to establish appropriate mechanisms.

The OpenBanking platform is a catalog of API solutions for the banking sector and will allow the centralized development of mobile applications of the country's banks based on user preference, which will help attract new financial players, startup projects, developments in services to the domestic market, and all this should contribute to the development of the financial services market in the near future.

What benefits will clients of domestic banks get after the introduction of OpenBanking tools? First and foremost, it will expand customers' access to banking information by combining various information on cards, accounts, loans, and deposits at one or several banks through a single software interface. The free banking mechanism will give the payment systems and fintech companies access to the banks' data, and customers will be able to obtain more complete information, carry out transactions, open accounts and obtain loans, analyze their data and optimize their credit load and tax burden. All of this will facilitate financial accounting and automate payment processes, as well as bring much more. And with the introduction of the Open API system in banks, all this information will be available through third-party software interfaces. Respectively, with more convenient solutions available, bank customers will not have to use inconvenient applications, be limited by poor functionality, and pay high commissions.

The listed advantages of Open API/OpenBanking tools are especially attractive for the business community which is massively shifting to electronic payments and expanding the usage of mobile and e-banking services that allow saving time and money and optimising workflows.

Considering the rate of implementation of OpenBanking tools in Europe, the USA, and other developed countries, it is quite obvious that such technologies will become a leading trend in the global financial system in the near future. It requires adequate efforts from Azerbaijan to accelerate the processes of digital modernisation of domestic banks and their operational convergence with international FinTech structures.