The banking sector in Azerbaijan serves as the backbone of the country's financial system. Following independence, a two tier banking sector was created in 1992 comprised of the National Bank of Azerbaijan (NBA), that is the Central Bank, and the commercial banks, which represent 90% of the banking system in terms of assets. The commercial banking sector is dominated by the four specialized state-owned banks, which include the Savings Bank (Sberbank), the Agricultural Bank (Agroprombank), the Industrial Bank (Promstroibank) and the International Bank of Azerbaijan. Privately held banks established in recent years comprise the balance.

National Currency of Azerbaijan - manat

The state-owned institutions generally function as payment and accounting centers/intermediaries for government transactions rather than as lending institutions. When cash flows from government budget to state-owned companies dwindled sharply in pursuit of tight monetary/fiscal policies, this, in turn, created substantial inter-company arrears, of which a large portion were subsequently funded by the state banks. As such credits comprise a significant portion (about 75%) of bank loan portfolios, these banks, for the most part, are now strapped for cash and suffer from lack of liquidity. The International Monetary Fund (IMF) and the World Bank (IBRD) are currently providing technical assistance aimed at restructuring the public sector banks while reforming and liberalizing the financial system.

There were approximately 60 private banks operating in Azerbaijan in 1998, down from about 230 in 1994. These institutions are licensed by the Government of Azerbaijan, but the absence of a strong regulatory/supervisory body during the interim made consolidations inevitable, measures which are likely to continue. Although private sector banks have exhibited measurable progress to date, these banks remain highly fragmented and under-capitalized. They are generally single branch entities associated with a commercial enterprise, but are often lacking in experienced management and operating technology. It is generally accepted that private banks basically operate to serve the credit and non-credit needs of their major shareholders. As such, these institutions are not equipped to meet the growing demands of the local and multinational companies now operating in Azerbaijan and the newly emerging private sector. As banking and financial services are still a relatively new concept in Azerbaijan (with most banks having been established only 4-5 years ago) many of the institutions simply do not have access to the necessary skills to respond to the growing needs of this very important Republic. However, much progress has been achieved within the short span of time, and many institutions are coming to terms with their shortcomings by offering bank employee training, contributing additional equity capital, investing in technology and developing products and services to complement market needs. Although their market share in the whole of the industry is marginal (extending less than 10% of total loans to companies and consumers in 1996), private sector