What citizens can get from financial sector reform? Strategy with digital focus

Azerbaijan has been able to make significant progress in the digitalisation of banking services and the payment system in general by consistently expanding the system of non-cash payments over the past five years.

The important goals outlined by the Central Bank of Azerbaijan (CBA) are to expand capital markets, as well as the banking, insurance and payment sectors, introduce corporate governance mechanisms, strengthen transparency and mass application of fintech solutions, taking into account the plans to introduce the OpenBanking platform in the country.

All this will become a reality during the next three years. The CBA board has recently approved the “Strategy for the Development of the Financial Sector for 2024-2026,” expanding the opportunities for citizens and businesses to use a wide range of financial services and financial tools.   

Over the past period, the CBA has made a lot of efforts to reform the banking, payment, insurance and other segments of the Azerbaijani financial sector. The legislative framework was modernised. The non-cash payment system was expanded. The e-banking services were developed to maximise the digitalisation of the finance operating system in the country and protect it from online threats.

The peak of these reforms occurred in 2023. The CBA approved the “Cybersecurity Strategy in Financial Markets for 2023-2026” in May 2023. The Law “On Payment Services and Payment Systems” was adopted in July 2023. The “Development Strategy of the National Depository Centre (NDC) for 2024-2026” prepared by the CBA was approved in December 2023.

The CBA continued this work in the new year, completing the work on the final document covering all spheres of the capital market. The “Strategy for the Development of the Azerbaijani Financial Sector for 2024-2026” approved by the CBA Board is aimed at expanding financial inclusion, increasing the coverage of financial services, diversifying financial tools and improvement of the supervision system.

This document is intended to determine the promising market potential of each sector, optimise prudential supervision mechanisms and reduce the risks. The important tasks are to improve digitalisation and sustainable capitalisation of the financial market, as well as to enlighten the market participants and consumers.

As for the development of borrowed capital, the strategy is aimed at expanding the banks’ portfolio of business loans. The CBA’s target is to increase this portfolio to 16.5 billion manat ($9.7 billion) by 2027.

The services are planned to be expanded and the capitalisation of non-bank credit organisations is planned to be increased. The microfinance organisations have been placing their bonds at auctions of the Baku Stock Exchange, can deal with payment intermediation services, issue credit cards as part of amendments to the law “On Non-Bank Credit Oragnisations” since last year. After the adoption of a strategy, these options will become even more varied and active.

The small and medium-sised businesses (SMEs), individual entrepreneurs, that’s about 97 per cent of all taxpayers, will mainly get the benefit. Improving an opportunity to borrow funds of the SMEs and microbusinesses performs an extremely important social function, as more than half of the total working population of Azerbaijan is involved in this segment.

“It is planned to increase the population’s investments in the capital market from current 150 million manat ($88.2 million) to 1 billion manat ($588 million) in Azerbaijan, and in general expand opportunities for entering the capital market by expanding investment tools,” CBA Chairman Taleh Kazimov said by commenting on the goals of the new strategy.

He noted that these steps are aimed at increasing the share of the probable potential of capital markets in non-oil GDP from current 10 per cent to 14 per cent.

What will enterprises and ordinary citizens obtain? Citizens invest in real estate on a long-term basis in Azerbaijan. The bank deposits remain the main medium-term financial tool today. The participation of the general public in the securities market remains within the statistical error.

Accordingly, the implementation of the three-year strategy envisages simplifying the participation of small businesses and citizens of the country in the capitalisation of the stock market by using various financial tools, including the acquisition of state bonds, shares and other securities of joint-stock companies, shares in mutual investment funds, the establishment of private pension funds in the country, participation in transactions with derivative securities, etc.

Of course, for these purposes, the CBA still has to take several steps to reform the capital markets, develop the financial system, improve the legislative framework, and strengthen the citizens’ trust in the market.

The most important goals of the new strategy are the promotion of voluntary and compulsory types of insurance, the creation of an insurance information and monitoring centre, strengthening corporate governance and the introduction of risk-based prudential regulation in this sector.

The strategic goal for the development of the insurance sector is to increase the Insurance Confidence Index from 66 per cent to 80 per cent by expanding insurance coverage and effective protection of consumer rights, increasing the solvency of insurers, as well as increasing the total insurance premium per capita from current 121 manat ($71) to 195 manat ($114) in the coming three years.

Large-scale reforms within the strategy are also expected to be made in expansion of digitalisation and liberalisation of the national payment system, creation of a favourable environment for market participants and an effective control system. Special attention should be paid to the plans to modernise the country’s payment system as significant initiatives are planned to be made.

Thus, the strategy is aimed at using alternative monetary tools, including the introduction of the OpenBanking platform in the country for mass application of fintech solutions and expanding access to various payment systems through new digital platforms and tools.

Over the past few years, the work on a three-year “road map” for open banking has been carried out by specialists from the CBA and the British TheCityUK, and envisaged the implementation of projects to standardise the banks, create a legal framework, a corresponding working group, and conduct training.

The mobile applications of the country's banks will be developed on the basis of user preferences through the open banking platform. The new international financial players will be attracted, start-up projects and services will be used on the domestic market thanks to the open banking platform. This will contribute to the rapid development of the financial services market in the near future. After the expansion of fintech solutions in the country’s payment system, the population’s interest in digital monetary transactions will increase, which will help increase the average annual number of non-cash transactions per capita from current 93 to 200.

What benefits will clients of domestic banks receive after implementing OpenBanking tools? First of all, this will expand customer access to banking information by combining various information on cards, accounts, loans, deposits in one or several banks through a single software interface.

The free banking mechanism will provide payment systems and fintech companies with access to bank data, and clients will be able to obtain more complete information, carry out transactions, open accounts and receive loans, analyse their data and optimise the credit load and tax burden, facilitate financial accounting and automate payment processes, etc.

Moreover, after the introduction of the Open API system in banks (an ecosystem of many tools), all this information will be available through third-party software interfaces, reliably protected by blockchain technologies. Accordingly, bank clients will not use inconvenient applications, meager functionality and pay high bank commissions because there will be more convenient and cheaper solutions.

The mentioned advantages of the Open API/OpenBanking tools are especially attractive for the business community. Today there is a massive transition to e-payments. The use of mobile and e-banking services, allowing to save time and money by optimising work processes, is being expanded.