financial sector : banking sector : non-bank financial institutions : multilateral sources of funding : ebrd activities in armenia

Banking Sector

Following the adoption in 1996 of fundamental banking laws, a reliable framework has been created for the operation of commercial banks. The Central Bank of Armenia (CBA) has adopted further regulations to enable implementation of the legislative changes and to ensure the compliance of existing standards with the new laws.
During 1999 the CBA continued to tighten regulatory requirements on the country's 31 commercial banks. From April 1999, obligatory reserves can be held only in domestic currency and limits on open foreign exchange positions were lowered to 30 per cent of capital, with a further reduction to 25 per cent from January 2000. Minimal capital requirements for existing commercial banks increased to US$ I million from January 2000, and will gradually rise to US$ 3 million by 2003.
Banking supervision has improved, with all banks adhering to International Accounting Standards (IAS) since a new chart of accounts was introduced in January 1998. Following a comparatively liberal policy towards banks not meeting prudential standards in the early stages of reform, since 1996, having established a new regulatory framework, the CBA has toughened up its act and is imposing penalties for violation of prudential regulations. Strong supervision will be vital to the future development of the banking system within an increasingly competitive environment.
The CBA is due to establish new banking regulations and concepts regarding:

1. improving the capital adequacy requirement through clear definition of capital, as well as through improvement and simplification of loan classification and loan loss reserve methodology; and
2. classification and appraisal guidelines to determine the overall quality of banks' investment portfolios.
   

Capacity of the Banking Sector

Although it has expanded greatly in the past five years the banking system is still small and experiences difficulties in attracting deposits. At the end of 1999 total bank assets amounted to AMD 191 billion (US$ 364 million), or about 19 per cent of GDP.
Deposits in commercial banks in-creased by 18 per cent in 1999 and made up AMD 157.8 billion (US$ 301 million). In mid 2000 deposits in commercial banks made up AMD 191.6 billion. At the end of 1999 the total capital of the 31 commercial banks amounted to about AMD 33.0 billion (US$ 63.0 million) and at the end of the first half of 2000 AMD 34.2 billion. Most lending is available at short maturities only and at high interest rates. By mid- 2000 real interest rates on loans with maturity of less than a year were less than 30 per cent.
Following a period of strong economic activity, at the end of 1997 the commercial banks were able to write off all pre1996 non-performing loans, which significantly improved their loan portfolios. Following the Russian crisis of 1998 some new non-performing loans were accumulated, but the level of bad loans made up 4.3 per cent of the total of loans at the end of 1999.
Agreement was reached in November 1999 on a single electronic payment system for the entire country.

Banking Privatization and Restructuring

As a result of banking system restructuring, the participation of Government officials in the banks' management was eliminated. The state shareholding in the banks' equity capital was significantly reduced, comprising only 2.4% at the end of 1999. The shares in the last one - Armsavings bank - will be sold by 2000, thus completing banking sector privatization. A strategy for the restructuring and privatization of the Armsavings Bank, the only state-owned bank, is being prepared. KPMG-Armenia (UK) is preparing the pre-privatization package, including an IAS audit and an estimate of advance portfolios. KPMG will also work out a strategic plan for the bank's rehabilitation. One option is to convert it into a postal savings bank and then privatize it.