BAKU, Azerbaijan, October 15. Insurance against
unemployment for consumer loans in Azerbaijan could reduce banks’
risks and capital requirements, potentially paving the way for
lower interest rates in certain lending segments, Trend’s correspondent reports
from the event.
Shahin Mahmudov, director general of the Central Bank of
Azerbaijan (CBA), made the remarks at a news conference on Thursday
dedicated to the presentation of the Financial Stability
Report.
He said the proposed mechanism would involve insurance products
offered by private insurance companies rather than the state
unemployment insurance system. Insuring against the risk of a
borrower losing their job could reduce the financial risks borne by
banks.
“This is not about the state unemployment insurance system, but
about insurance products offered by private insurance companies.
Insurance will not be free, and its cost must also be taken into
account. However, when part of the risk is transferred to an
insurance company, the bank’s risk decreases. This could lower
banks’ capital requirements and expand their capacity to provide
more loans,” Mahmudov said.
According to the CBA official, lower risks could also affect
banks’ lending costs. As a result, even after insurance premiums
are taken into account, the overall cost of borrowing could decline
in certain loan segments.
He emphasized that insurance premiums would not be the same for
all customers or sectors of the economy. Pricing would depend on
the risk of unemployment and other factors.
“The likelihood of job losses may be higher in some sectors. In
such cases, insurance premiums could also be higher. Prices will be
determined by the market. At present, we do not have sufficient
data to compare unemployment risks across individual sectors,” he
said.
Mahmudov added that loan interest rates are also influenced by
banks’ capital levels, reserve requirements and other factors.
Therefore, the extent of any reduction in interest rates would
depend on the bank and the characteristics of the loan.
“From a regulatory perspective, we believe that the overall
interest burden on loans could decline in several segments, even
after insurance premiums are taken into account. However, this will
depend on the bank’s financial position and risk indicators. On
average, a reduction in costs is expected,” the CBA director
general said.
Mahmudov also discussed the deposit insurance mechanism for
protected deposits. He said changes based on the methodology of the
Deposit Insurance Fund’s compensation framework were being
considered. The aim is to adjust the coverage of protected deposits
to market conditions and strengthen competition among banks.
According to him, under the new approach, the interest-rate
ceiling for protected deposits would be determined with reference
to movements in market deposit rates. This would allow the ceiling
applied to protected deposits to change accordingly as deposit
rates fluctuate.
“Previously, this ceiling was fixed. Under the new approach,
market conditions will be taken into account. If deposit rates
rise, the interest-rate ceiling for protected deposits could also
change. This would help market principles function and strengthen
competition among banks,” he said.
The CBA official said market-based deposit rates could also
influence depositors’ choice of bank. Customers would be able to
compare banks’ risk levels and the returns they offer before making
a decision.
Mahmudov said discussions were underway on taking into account
deposit rates from previous periods and an additional interest
margin when determining the ceiling for protected deposits. The
initial approach envisages using indicators for nine-month and
three-year periods, with the additional margin set at around 2
percentage points.
He stressed that the final decision rests with the Deposit
Insurance Fund and would be made in accordance with the relevant
methodology.
