Saturday, February 10, 2007

Banks and Armenia's Economy

Over the past couple of years, the banking sector in Armenia witnessed a rapid transformation and a string of mergers and acquisitions that may lay the ground for further expansion in Armenia's economy. With western ownership of HSBC, Cascade, Converse, and ACBA Credit Agricole Bank, and Russian (Vneshtorgbank) ownership of VTB-Armenia Bank, the landscape has been radically altered.

The maturity and depth of the financial sector is often what separate the wealthy developed economies from the poor developing countries. It is these institutions that regulate the saving/investment process and the relations between lenders (or savers) and borrowers. This financial intermediation is critical to the development of an economy; it is difficult to imagine what form savings may take place and how this can be tapped by businesses to finance their capital expenditures. It is also difficult to imagine how trade, international as well as domestic, is facilitated in the presence of a weak financial system.

Consider some of the many business services that banks may provide:

A. Credit Facilities for Capital Finance,
B. Bank Guarantees such as (1) Advance Payment Guarantees, (2) Tender Bonds, (3) Performance Bonds and others, and (4) Stand-by Letters of Credit,
C. Trade Services in the case of imports such as (1) Bills for Collection and (2) Post-Import Finance, or in case of exports such as (1) Documentary Credits, (2) Bills for Collection, and (3) Pre and Post Shipment Finance.

It is hard to imagine how trade and investments can take place in the absence of such services. However, it is equally difficult to imagine how the financial sector can grow and prosper in the absence of good governance, regulatory institutions, and most importantly trust. If we were to examine total bank deposits, Armenia would have the profile of a poor developing country when expressed relative to GDP. These deposits are about 10 percent of GDP; much smaller when we examine time deposits and other measures of intermediation relative to GDP. But this is much better than the 3 percent observed a decade ago, despite the rapid growth of its economy.

Indeed, the financial sector, and for a number of years, may have had a depressing effect on economic activity. Poor governance and weak institutions may have caused significant damage to the economy. Consider the following excerpt from the financial statement of Hellenic OTE, until recently the parent company of Armentel:

During 2001, an Armenian bank, Haycap Bank, with which ArmenTel had deposited US$4.8 millions, was placed under a conservatorship program. It is uncertain whether ArmenTel’s funds will be recovered. This amount has been fully provided for in our consolidated financial statements. Nevertheless, in order to recover its funds, ArmenTel has initiated a series of actions, including discussions with Haycap Bank’s creditors and legal measures intended to help secure ArmenTel’s position within the framework of Haycap Bank’s conservatorship program proceedings. In 2002, Haycap Bank initiated legal proceedings before Armenian courts against Armentel requesting compensation for losses and damages allegedly incurred as a result of the actions of Armentel. On February 18, 2005, the Armenian Economic Court ruled that Armentel should provide to Haycap compensation in the amount of US$ 5.2 million. On May 31, 2005, ArmenTel appealed against this decision before the Armenian Supreme Court.
Source: US Securities and Exchange Commission Form 20-F, pages 87-88
Not only Armentel may have lost $4.8 million in deposits, but it may have risked losing another $5.2 million in its zeal to recover its losses. Notwithstanding the black eye that Armenia gets for this, poor corporate governance impedes economic activity, and a weak judiciary is not very helpful. So it is gratifying to witness the recent arrival of "giants" at the scene who may contribute to the prosperity of Armenia, and challenge the system if need be. Their presence is bound to improve corporate governance, and deepen financial intermediation.

Armenia's banks today, in particular the foreign owned, are likely to be well governed and "strong." Equally important, they have introduced considerable innovations such as in business services, e-banking, credits cards, money transfers, among many others.

A recent paper provides a nice primer on the many obstacles that Armenia's financial system faces. It will be good to see empirical research in this area.


nazarian said...

Are there any plans by the Armenian legislation to introduce some kind of an insurance program for the depositors' funds held by the banks? As it is, if I were an Armenian citizen, I would be wary of trusting my hard earned savings to a bank in Armenia. A lot of people prefer to keep their money in the form of gold (to insure against inflation), other forms of 'keeping the money under the mattress'.

David said...
This comment has been removed by the author.
nazarian said...

Not bad. For an average citizen, $72,000 deposit insurance is quite good.

David said...

Sorry, gave you the wrong legal ref. It should be article 3(1) of The total sum guaranteed cannot exceed 2 million Drams (1 million in foreign exchange), and that's about $5,600.

nazarian said...

Wow, that's a ridiculously low amount. How do they intend to attract new depositors with this small insurance?

David said...

The idea is not to attract foreign depositors, but rather investors who will build factories, hotels, and so on.
The amount of the deposit insurance is quite high given the prevailing income levels.

David said...

I'll be happy to post your comment if you were to drop the personal attack -- those on policy and institutions (cba in this case) are fair game.

Artak said...

I wander what Janus had to say? Did he say something bad about CB or the CB bosses. You know what is interesting, nobody is a critic of Armenian CB. The banking sector in Armenia, as part of the economy,is about the same as in 2001. No growth in real terms. Same poor standards prevaile as none of the Armenian banks (including HSBC) are providing world class services. Meanwhile CB is ruling the sector as if its bosses own the market, not regulate.