Since the collapse of the Soviet Union, Azerbaijan has been forming its banking system that would conform to international practice, and in that sense, Azerbaijan’s banking system is relatively young. The Banks Law together with the Central Bank-issued rules is one of the key regulations relating to Azerbaijan’s banking system. The Central Bank of Azerbaijan (CBA)26 is the principal regulator of banks. It is also a policy-maker in the banking sector.

The capital requirement (cumulative capital – please see below) for a bank to be established is 50 million Azerbaijani manats (approx. USD 32,080,000). At the moment, there are over 40 banks in Azerbaijan with International Bank of Azerbaijan (IBA) being the largest by the size of its assets. The government of Azerbaijan (acting through the Ministry of Finance) owns slightly more than 50 percent of shares in IBA. There are over 34 non-bank credit organizations in Azerbaijan.


Under the Banks Law, banks can be organized only in the form of an open joint stock company (OJSC). It must be owned at least by three shareholders. The Banks Law allows the CBA to establish limitations on foreign ownership in local banks. The CBA, however, has not exercised this authority. At the moment, there are no limitations on foreign ownership in local banks. As banks are organized in the form of an OJSC, they may issue and publicly offer their shares.

In Azerbaijan the banking business is a licensed activity. The CBA issues a license to banks and branch offices of a foreign bank through the two stage process. As part of the first stage a person wishing to establish a bank (or a branch office of a foreign bank) must submit to the CBA, among other things, its identification documents, including charter and registration document, as well as the business plan. If the CBA approves the first set of documents (including the business plan), the founder must pay the charter capital and obtain corporate registration of the bank. In the second stage, the CBA approves the bank’s or branch office’s registration documents and issues a license.

The Banks Law defines the business of “banking” as engaging in all of the three following activities: (1) accepting deposits, (2) issuing “bank credits”28 (including loans) and (3) transfer of currencies and cash operations. These are the core banking activities. The Banks Law allows banks to engage in other financial businesses, including issuing guarantees, providing factoring and leasing services, acting as financial intermediaries and agents etc. Despite the Banks Law allows banks to act as brokers and dealers (including underwrite securities) in capital markets, subject to obtaining a license from the SCS, in practice the CBA is reluctant to allow banks to engage in these businesses directly. Instead, banks participate in the capital markets through their subsidiaries or associated entities.

One of the core banking activities is accepting and serving deposits of their clients. In Azerbaijan, deposits up to 30,000 Azerbaijani mantas (approx. USD 19,248) are insured by the Azerbaijani Deposit Insurance Fund.

As banks are organized in the form of an OJSC, the Civil Code-stipulated provisions on OJSC apply to corporate governance in banks. The Banks Law, however, sets out additional corporate governance rules, some of which are not quite in line with the Civil Code. On occasions difficult questions of interpretation arise. As with all OJSCs, general meeting of shareholders (GMS) is the supreme governing body of banks. GMS has the exclusive authority on certain important matters, such as reorganization, liquidation of a bank, distribution of dividends, appointment of members of the bank’s supervisory council etc. Banks must have their supervisory council (SC). The Banks Law lists matters which fall within SC’s authority. The SC has the authority to, among other things, determine the agenda of and convene the GMS. The GMS may delegate some its powers to the SC. A bank’s Management Board is its executive governing body. While the Management Board is a collegial body, in practice the Chairman of the bank’s Management Board has important powers in managing banks. Typically, it is the Chairman, who has the authority to represent a bank before third parties and sign agreements and other documents.

The Banks Law sets forth rules on declaring banks bankrupt and liquidation of banks.

Capital Adequacy Requirements

The CBA has established capital adequacy requirements, which aim to implement Basel Accords (Capital Adequacy Rules). In particular, these rules introduced the notion of tier I and tier II capital. Tier I capital includes payments received in exchange for ordinary and non-cumulative preferred shares, additional paid in capital, undistributed net profit for previous years. Tier II capital includes profit for the current year, payments in exchange of cumulative preferred shares, general reserves, certain subordinated debt etc. The Capital Adequacy Rules require that banks maintain their cumulative capital in the amount not below 50 million Azerbaijani manats. The “cumulative capital” defined as the sum of tier I and tier II capital less certain deductions.

Under the Capital Adequacy Rules, banks must maintain the leverage ratio of at least 8 percent. Leverage ratio is essentially the ratio of a bank’s tier I capital to the sum of its assets and off-balance sheet liabilities.

Non-bank Credit Organizations

Under the Law On Non-Bank Credit Organizations30 (NBCO Law), non-bank credit organizations must obtain a license from the CBA before they operate. The CBA is the principal regulator of NBCOs. It is fair to say that the legal rules regulating NBCOs, including the NBCO Law, are relatively flexible.

The NBCO Law distinguishes NBCOs, which may take security interest in cash deposited at the NBCO, and those that may not take such security interest. Under the NBCO Law, an NBCO can be organized in any legal-organizational form, including limited liability companies (LLC) and stock companies. Most are organized in the form of LLCs. The NBCO Law requires that an NBCO have at least head of its executive management, chief accountant, loan specialist and internal auditor. An NBCO may establish its branches and representative offices. An NBCO with no right to take deposit security may establish its branch and representative offices by providing a prior notice to the CBA.

Most NBCOs operating in Azerbaijan provide loans to customers. The NBCO Law allows NBCOs to engage in other activities, including providing factoring and insurance agency services, issuing guarantees, providing financial advice to customers. The NBCO Law specifically bars non-bank credit organizations from taking deposits.

The CBA has issued certain rules on prudential management in NBCOs. These rules are not as complex as those applying to banks. Currently, the CBA requires that NBCOs maintain their charter (stated) capital in the amount not below 300,000 Azerbaijani mantas (approx. USD 192,480).