From almost a zero level of trust in Soviet times and lack of stability in early years of independence, Armenia's banking system has shaped itself into one of the most viable sectors of the country's economy that the government says has also withstood the aftereffects of the global storm of recent months.
A total of 22 commercial banks and two dozen credit organizations today constitute the backbone of Armenia's financial sector, a sector that lubricated the wheels of the national economy throughout the six years of robust growth that ended this year with the onslaught of world financial downturn.
Tigran Sarkisian, who headed the sphere's regulator—Central Bank of Armenia (CBA)—for 10 years before being appointed prime minister in April 2008, says Armenia's banking system has proved "viable" during the crisis, too.
Prime Minister Sarkisian says that Armenia's banking system is "in good shape" and that Armenian commercial banks would manage to avoid problems that financial corporations have experienced in the West.
"The level of banks' capitalization is extremely high. So is their profitability and liquidity," said Sarkisian, speaking to media in late summer.
Armenia's unstable financial sector experienced a multitude of problems in the early 1990s, with many depositors of the savings bank bilked by the disintegrating Soviet state and then cheated out of their money by many rogue banks operating dubious financial pyramid schemes that mushroomed in the wake of the Soviet Union's collapse.
It was a period marked by many bank failures in Armenia and hence a low level of trust in the banking sector, but also a period when CBA tried in earnest to shape itself into a real regulator.
Some of the depositor confidence appeared to have returned in the past decade, encouraged by such measures as the introduction of a state guarantee for deposits of up to 2 million drams (about $5,400). Returns on savings deposits have been reasonably high, up to 10-12 percent per annum (long-term deposits). Loans, meanwhile, have been much harder to get, with qualifying conditions that make taking loans still prohibitive for most here.
Interest rates for personal loans are set between 11 and 24 percent per annum depending on the bank, type of loan and terms and conditions (such as down payment, credit history, sources of income, degree of credibility of a business plan, collateral property, etc). Usual repayment terms are between 18 months to 16 years (ranging from micro and small credits to mortgages for property and land purchase).
The banking system was developing at a quick pace in the years leading up to the current global crisis, which allowed Armenian authorities to float the idea of turning Armenia into a regional financial powerhouse. The idea, in particular, was voiced by President Serge Sargsyan shortly after he came to power in early 2008. (Sargsyan also voiced the idea of establishing a pan-Armenian bank that would finance projects of global Armenian importance. The bank is likely to be set up by the end of this year, according to latest reports.)
Meanwhile, critics have said that Armenia's banking sector has not been hit by the current crisis as hard as banking sectors in many other countries because it is poorly integrated into the international financial system—a circumstance that can turn from a curse into a blessing in conditions of the raging global storm.
Others say the banking sector in Armenia has failed to perform its function properly and therefore did not constitute a major player to drag other sectors down when the crisis hit.
CBA Chairman Arthur Javadian says Armenia's banking system today is completely different from what it was during the first years of independence.
"Like the rest of the economy, the banking system was also completely disabled after the collapse of the Soviet system. Actually an absolutely different financial system has been built on the remnants of the old," he says.
The Armenian banking system development began in 1996 with the adoption of a set of banking laws which built the ground for further development. The structural and qualitative developments resulted in a drastic decline in the number of banks—from 58 in 1993 to 22 in 2009. Javadian says that despite the decrease in the number of commercial banks, lending power has dramatically increased—to some $2 billion in private sector loans by the end of 2008.
Still, he admits, the Armenian banking system is rather small (banking system assets constituted 30% of GDP as of the end of 2008—and 69 percent of capital is foreign-owned), "though one can assert that a stable ground has been laid for its future growth and development."
Javadian says the banking system is often compared with the human body's blood vessels.
"The banking system is the vital infrastructure of the country, which gathers and disburses the necessary resources in the economy," he says. "In the world of global markets, where long distances don't impede quick deals, a well-equipped banking system is more than essential for a successful modern economy. Furthermore, a well-functioning banking system is even more important for developing economies and for Armenia particularly. In addition, in a country like Armenia, expansion of the banking system also has a critical role in fighting a shadow economy—a priority for our government as well."
Javadian says that the Armenian banking system has not been fully integrated into all global processes; particularly there has been little exposure to international financial markets, which is one of the reasons that Armenia was not hit by the first-round effects of the financial crisis.
"Yet, the second wave of the financial crisis hit the economy of Armenia considerably, hindering further economic growth, which, in turn, has had its certain negative impact on the banking system."
(It is a common occurrence that when an economy is on the decline, banks get affected by it, because more customers find it difficult to repay their loans, and banks also have fewer new customers from whom they can produce assets. During extreme crisis, banks typically prefer suspending their lending operations altogether. Generally there are also fewer good opportunities for investment and capital funds are fleeing, which puts a strain—a "negative impact" —on the financial and banking system as a whole and each bank individually.)
Javadian says that "banking system development is also linked to the development of other financial institutions (insurance companies, securities companies, etc.).
Since 2006 the CBA has been responsible for the regulation and supervision of the whole financial sector. One of the most important steps taken by the CBA was the clean-up of the insurance market from vulnerable and uncompetitive companies, as well as the revision of legal frameworks for it to comply with international standards. This resulted in the entrance of leading regional insurance companies into the Armenian market.
"The development of the insurance and pension industry is very important for the deepening of banking intermediation. For the insurance market improvement, the insurance culture formation in the mentality of the population is of a high significance," says Javadian, adding that in 2010 mandatory motor vehicle collision liability insurance will most probably come into force and that "this will facilitate the formation of an insurance culture and the extension of the insurance market."
But Javadian says: "The ‘Banking Culture' is still in the process of formation in Armenia. It was a rather difficult process to bring it to even the current level. The point is that the collapse of the Soviet banking system and the frauds of the first years of independence, due to lack of banking legislation and regulation, resulted in a drastic decline in public confidence towards the banking system. It took more than a decade to improve public confidence."
Perhaps the most valuable step towards building a banking culture was the introduction of a local non-cash payment system in 2001 with the issuance of local debit and international credit cards by Armenian banks. The latter, as well as the gradual increase in non-cash transactions, partly due to the steps taken by the government in this sphere, increased the percentage of the population dealing with banking services.
Another important step was the introduction of the institution of deposit insurance in Armenia. According to the deposit insurance scheme, all individual savings deposits up to about $5,000 are covered by deposit insurance. "This institution in a way helped to recover confidence and hence to encourage the public to use banking services," says Javadian.
Still, high mortgage and business loan rates and terms of their service have, in particular, left many without an opportunity to either buy property or start a business.
But those in charge say the situation might be changing.
Javadian believes the National Mortgage Company (NMC) started in July with the backing of the government will provide a new incentive to the development of the property market that has seen a dramatic shrinkage since the onslaught of the economic crisis. This, in turn, will promote housing construction, the engine of Armenia's robust growth in recent years, which was considerably slowed down by the recession.
"This will open a window of opportunities for commercial banks in terms of issuing mortgage loans at more reasonable terms, which in turn will boost the [property] market," said Javadian, while introducing the new company.
After providing mortgage loans, the financial organizations cooperating with the new mortgage lending structure and meeting its standards may submit applications to the latter on refinancing the given loans (paying the NMC nine percent annually for refinancing). This is believed to allow financial organizations to secure constant growth of their mortgage portfolio.
It is hoped that the NMC will boost the relatively young culture of taking a mortgage in Armenia by making terms of mortgage borrowing longer and mortgage rates lower.
It is also hoped that Armenian banks will gradually become more important in the lives of people than they are today and that they will emerge from the current crisis stronger.
A variety of banking choices
At present, Armenia boasts the presence of a good mix of commercial banks started with local and foreign capital. Some of them are startups, others are relatively established; some have greater shares in the market than others; some are more conservative than others. Generally, however, it is believed that the environment is characterized by healthy competition, which is ultimately believed to benefit the customer.
ArmEconombank was the first among state-owned banks of Armenia to be reorganized into a joint-stock bank and to be registered with the CBA in 1991.
The bank with license No. 1 has come a long way, playing a leading role in developing Armenia's banking system.
ArmEconombank OJSC Chief Executive Officer David Sukiasian says the bank is currently one of the system-forming links of Armenia's financial and banking system and continues to develop as a universal-type financial and credit institution, offering its customers a comprehensive package of banking services.
"A new banking system was forming in Armenia in the 1990s, with new control, new principles, rules and approaches. Many new banks with small capital would open and then close very quickly, leaving the sphere to the leaders," says Sukiasian, stressing the role of the CBA as the regulator in the accurate formation of Armenia's banking system. "Due to CBA regulation, no serious shocks have been registered in the country's banking system so far."
"The so-called ‘pawnshop' mentality of getting as much profit as possible was applied in the system in the past. But now banks work for the future, and they are more cautious and strict. Of course, the global financial crisis has had its impact on our system. Banks can use international resources when faced with greater difficulties. Nevertheless, all banks in Armenia today are within the normative field and even if some of them have problems, they will be regulated within a short period of time," says Sukiasian.
According to the bank's CEO, in choosing a bank a potential customer looks at numerous circumstances, including its reports, history, quality of service and cooperation with international structures. Sukiasian says being an open joint-stock bank, ArmEconombank ensures a maximum level of transparent corporate governance, which he says is another circumstance that would speak in favor of choosing such a bank.
ArmEconombank today has more than 1,400 shareholders. The major shareholders are Sukiasian brothers (53.5 percent) and the European Bank for Reconstruction and Development (EBRD—25 percent plus one share). The bank has 34 branches throughout Armenia and one in Nagorno-Karabakh (as well as a network of ATM). It currently works with nearly all major international structures, such as EBRD, International Finance Corporation, the German-Armenian Fund, Black Sea Commerce and Development Bank, German Commerzbank AG and others, participating in micro, medium and small business crediting, mortgage lending, and projects of renewable energy development. Financial resources attracted from the above structures totals more than $25.1 million.
Sukiasian says that while most Armenians still prefer keeping their money in cash, the quarter-to-quarter increase attracted from customers by ArmEconombank and the whole banking system testify to "the growing trust even in conditions of the continuing crisis."
Leading the way in banking for small businesses—especially farmers—has been ACBA, the Agricultural Cooperative Bank of Armenia (see this edition's article on agriculture), modeled on the French Crédit Agricole Bank.
From September 1994 to December 1995, ACBA formed "village cooperation unions," focusing on the provinces outside the capital and initially located in Armavir (Etchmiadzin), Ararat (Artashat), Shirak (Gyumri) and Vayots Dzor (Yeghegnadzor). It opened for business in Armenia in 1996.
Since its founding, ACBA was said to be unique in countries of the former Soviet Union, as it was established partially on the financing of more than 20,000 farmers who paid $10 membership fees to create accounts.
Over the past decade ACBA has developed new business beyond agriculture—maintaining its emphasis on support of farming, while incorporating the services of mainline commercial banking.
Banking on Armenia's success
Another pioneer in Armenian banking is HSBC as the first international bank to enter Armenia, in 1996.
HSBC Bank Armenia Chief Executive Officer Tim Slater says much has changed in the past 13 years, including the people's trust in the banking system as a whole, where HSBC has made a contribution.
"We were invited by the Armenian government to set up a bank here, and I think the reason for that was to act as a catalyst to help improve the Armenian banking system," says Slater, adding that before its arrival HSBC had insisted on certain changes to be made in terms of banking secrecy legislation, property and contract rights.
"I think there is still improvement that Armenia can make in those areas. But, nevertheless, in the last 13 years there has definitely been progress," says Slater. "The banking system today is more stable, and we have a good regulator with the Central Bank of Armenia."
Slater says banking in Armenia has become more competitive than it was in the 1990s and local customers, individuals and companies have a wider choice today. At the same time, he says, the banking market in Armenia has become more sophisticated.
"We used to take deposits and invest them in government treasury bills. Now we have greater confidence in our borrowers and ability to enforce security, if necessary. So, now there is a lot more lending to customers and companies," he says.
With its own style and ongoing efforts to improve customer service and products, today, HSBC boasts more than 40,000 customers in Armenia and eight offices in Yerevan. The bank has a wide range of customers. "Perhaps it appeals more to slightly wealthier customers, families or older people," says the CEO.
Also, he says, the perception that HSBC banks only big companies is not true.
"We do bank those. Many of them choose to bank with us. But we're also very interested in serving small businesses, whether they want to borrow, or just bank with us on a non-borrowing basis," says Slater.
HSBC lends to all sectors, particularly wholesale trade, retail trade, manufacturing, service industries, as well as property and construction.
About 27 percent of residential mortgages in Armenia are also provided by HSBC. Car loans and credit cards are also a big focus for the bank.
HSBC believes its success rests on several components, including strong customer service, security through HSBC Group's capital strength, and being international—three stakes that make HSBC unique.
As an international bank present in 85 countries, HSBC also appeals to large Armenian communities abroad.
"Almost wherever there are concentrations of Diaspora Armenians, HSBC is there," says Slater.
HSBC also takes pride in its Direct Banking services—namely the biggest network of ATM in Yerevan and the recently introduced telephone and Internet banking.
"That means wherever you are, as long as you have access to the Internet, you can make payments, check your account and find out your balance, make transfers between the accounts, maybe set up a time deposit, or make a payment to a third party. And you can do the same over the telephone," says Slater, adding that by providing telephone and Internet banking services, HSBC will appeal even more to Diaspora Armenians and Armenians in the provinces.
For its wealthier customers who have deposits equivalent to $100,000 or more, HSBC also offers the Status service providing them with a dedicated relationship manager, a platinum credit card, free travel insurance, and also a priority pass that enables customers to get access to more than 600 airport VIP lounges around the world.
Slater says this special service has proved very popular with wealthier Armenians both in Armenia and Diaspora. "It's about making them feel valued and making the customers feel particularly special with our customer service," he emphasizes.
Slater says generally HSBC, as a group, has performed significantly better than many other banks globally in the recent period.
He points to the record profit for HSBC Armenia in 2008, which was about $16.5 million on a pre-tax basis.
"When you've been in the business for 144 years, you've seen business cycles, ups and downs, recessions. We've seen the Great Depression of the 1930s, we've come through that. So, maybe that's why HSBC is reasonably conservative.
"But we've seen Armenia as a very strong country for the last 10 years, and now we are positioning ourselves for the return to growth, which will surely come in a couple of years' time."
Slater sees the banking system as a very important part in "oiling the wheels of economy." He expects the level of trust among people towards the banking system in Armenia to increase along with the government effort to fight the cash-oriented black economy and ensure that everybody pays their taxes. This, he says, will lead to more people "freeing money out of the pillowcase or mattress to put it in bank accounts."
Building a web of interest
One illustration of the change of trends in the banking culture is the availability of more reliable banking-related information online.
Pavel Sargsian, one of the founders of Banker.am, perhaps the most comprehensive Armenian banking portal, says the mission of the collective effort by several publications launched last year is to promote the development of Armenia's banking system. (One other comprehensive web resource on banking in Armenia is Banks.am, an Internet project of the Mediamax news agency launched in July 2006.)
The web-resource provides its visitors not only with a large collection of news, analyses, interviews with leading bankers and financiers, databases on banks and financial organizations in Armenia, but also with an opportunity to debate topics in a forum, learn of new developments, including through a game, and even read banking-related humor. Those in charge of the website say it makes the portal (available in Armenian, Russian and English) not only informative and useful, but also entertaining and universally comprehensible.
"Among those who visit our portal are not only bankers or professionals, but also those who would like to know more about the sphere," says Sargsian, who also mentions the development of Armenia's IT sector as one of the factors behind the progress in banking.