S&P assesses Azerbaijan's banking reforms

Deposit dollarization in Azerbaijan has declined toward regional peer levels but remains significantly higher than loan dollarization, resulting in structural currency mismatches between foreign-currency liabilities and predominantly manat-denominated assets, Report informs referring to S&P Global Ratings.

"Azerbaijan has launched a series of reforms under its 2024-2026 Financial Sector Development Strategy, aimed at strengthening prudential regulation and bank supervision. The authorities are phasing in Basel III standards and piloting a risk-based supervisory framework, alongside initiatives to enhance governance, disclosure, and macroprudential oversight. Implementation remains at an early stage but, once fully operational, these reforms should help narrow gaps with international regulatory practices. Meanwhile, the banking sector has maintained a stable funding profile supported by a steadily expanding deposit base," reads the update. "Deposit dollarization has fallen to 29%, from 55% before the COVID-19 pandemic, supported by higher manat deposit rates and exchange-rate stability. However, it remains highly sensitive to confidence and, in a renewed foreign exchange pressure scenario, a rapid shift back into foreign-currency deposits is likely."