In the financial stability report of the Central Bank for the end of 2021, it was stated that the level of concentration in the banking system of Azerbaijan corresponds to the indicators of low and medium concentration.
Fakt Yoxla examined whether this claim was true.
Concentration reflects the distribution of banking sector resources among different banks and the level of monopoly in the banking sector. For example, if a small number of banks owns a larger part of the resources, the level of this indicator also increases and the existence of monopoly is confirmed.
In international practice, a special index is used to measure concentration. According to the methodology used to calculate the Herfindahl-Hirschman Index (HHI), the index ranges from 0 to 10,000.
The index in the range of 0-1,000, which is considered the low level of the indicator, indicates the absence of monopoly and the presence of competition. The index, which shows the "moderate level" and is evaluated in the range of 1,000-1,800, indicates the presence of competition, albeit relatively weak. If the indicator exceeds 1,800, it means that there is a high level of monopoly in the banking sector of any country.
It follows from the latest report of the Central Bank that the concentration in the banking system of Azerbaijan is at a moderate level, and this is actually claiming the absence of monopoly. According to the report, HHI 1,017, 1,741, and 1,567, respectively, based on the specific weight of the loan portfolio, deposit portfolio, and assets.
Based on the methodology, the HHI calculated by the Central Bank's loan portfolio (1,017), deposits (1,741), and assets (1,567) in the banking sector of Azerbaijan is correct at first sight. But there is one important point to consider.
The ultimate goal of calculating concentration is to identify risks for the banking sector. That is, as the monopoly increases, the risk increases. The logical approach in this matter is that if the banking sector is concentrated in the hands of a small number of, for example, 2 or 3 owners, or a business network, their bankruptcy for arbitrary reasons can bring the country's financial system to the point of bankruptcy.
What the Central Bank did not take into account in its calculation is that several of the main banks operating in the country and having a leading position belong to a single business network. Although these banks are formally separate, they bear the same risks stemming from their owners. If this factor is not taken into account in the calculation of the HHI index, the final calculation cannot reflect the real picture and cannot be considered reliable. Therefore, in the reality of Azerbaijan, HHI can reflect an objective picture if it is calculated based on the joint indicators of banks belonging to a single business network and sharing common risks.
Market share of Azerbaijani banks - 2021
As can be seen from the table, 26 banks are currently operating in Azerbaijan. The noteworthy point here is that three of the four banks with the highest share in the market by the volume of assets - Pasha Bank, Kapital Bank, and Xalq Bank - belong to the same business network. Two of these banks - Kapital Bank and Pasha Bank are part of Pasha Holding.
Leyla Aliyeva and Arzu Aliyeva, daughters of the president, are shareholders of Pasha Holding. The consolidated report of Xalq Bank also shows that Leyla Aliyeva and Arzu Aliyeva are the owners of this bank.
It turns out that although these three banks operate separately in the market, their owners are the same. In this regard, when calculating the HHI, the indicators of these three banks would be considered together rather than separately and would reflect the real picture more objectively.
When the market shares of Kapital Bank, Pasha Bank, and Xalq Bank are calculated not separately, but together, the level of the index is equal to 2,574 for the loan portfolio, 2,873 for the deposit portfolio, and 2,565 for the volume of assets. According to the calculation methodology of HHI, these indicators show that there is a high level of monopoly in the country's banking sector (the situation where the index is higher than 1,800).
Thus, competition in the banking sector of Azerbaijan is very weak, and monopoly is high.
Fakt Yoxla concludes that the claim of the Central Bank is a Manipulation of Facts.