Armenia’s Financial Sector Stability Due to Central Bank’s Strict Fiscal Policies

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The American Times knows that unique opportunities are an investor’s primary point of interest, with financial stability close behind. Armenia has both, dramatic economic growth, in terms of former Soviet countries, rich mineral deposits, strong industrial resources and a solid financial system anchored by its central bank. Experience our exclusive Central Bank of Armenia leadership interview.

Investors often overlook jewels tucked away in locations that seem remote and out of the mainstream. Don’t make that mistake and miss tiny Armenia nestled between the Black Sea and the Caspian Sea. An ancient land that is making the leap into the modern western world. Armenia is celebrating a decade of WTO membership and a growing alignment with the European Union as demonstrated by its lifting all visa requirements and opening its borders to European citizens.

The Central Bank of the Republic of Armenia (CBA) has unusually broad powers in the Armenian financial sector. In addition to the functions we in the United States associate with a central bank, the CBA has oversight in insurance, pensions and most other financial activity. This scope makes entry into Armenia quick and seamless; all the entry and operating permits required for the financial sector are centralized within the CBA.

 …in 2012 we had a banking asset growth rate of 20%. The average global growth rate was only 3%.

American Times recently sat down with CBA Board Member Armenak Darbinyan and Andranik Grigoryan, Head of Financial Stability and Development for the CBA. We asked them to give us an overview of the bank and its role. 

Mr. Armenak Darbinyan, Central Bank Board Member

Mr. Darbinyan:We supervise the financial sector including protecting financial consumers; quite a broad sphere of activity. The bank has robust monitoring programs scaled over three-year periods and updated every three months. In addition our monitoring staff develops and implements inflation targeting goals. Over the past two years we have used this inflation framework. This year the target is 4%, plus or minus 1.5%. We are managing the process through our monitoring instruments and reacting to changes in the market during the current three-month inflation targeting period.”

Mr. Grigoryan:Let me give you a broad picture of the Armenia financial system. We have 21 commercial banks plus one Pan-Armenian bank which is more like a development institution, plus nine insurance companies. In 2006 CBA became a mega regulator covering all entities in the financial sector including pensions, banks, insurance companies, exchange banks, investment funds, pension funds, everything. They are all regulated by the Central Bank.

We have enjoyed an opportunity to create a financial system for Armenia from the ground up following Independence. We also had the opportunity to make the financial system very robust. The banking system makes up the biggest share of our financial sector, over 90%. We have attracted massive capital infusions from abroad into the Armenian banking system, more than 70%. Capital in Armenia is free of restrictions; for an investor this means free inflow and outflow of capital with no limitations on that capital. This helps to maintain a

Capital in Armenia is free of restrictions; for an investor this means free inflow and outflow of capital with no limitations on that capital

strong financial system and attract investors.Take for example HSBC and ProCredit, they are closing all subsidiaries in exchange for developing large companies. They are bringing operations from abroad and have decided to remain here because of the robust financial system. Their retail banks left Russia, one of the biggest markets but they stayed here in Armenia because they got the return that they wanted considering the risk. In addition to HSBC (UK) and ProCredit (Germany), we have Russian capital as well via VTB.” 

Mr. Andranik Grigoryan, Head of Financial System Stability and Development Departm

American Times: The presence of strong international players is indeed promising; but how do some of the domestic Armenian Banks fare in the current climate?

Mr. Grigoryan:Considering the size of the market, all of them are successful. We have 21 banks in a nation with a population of 3.2 million. They are quite successful. On average, the ROE on a global perspective is quite low. It is more than 11% in Armenia. For example, in 2012 we had a banking asset growth rate of 20%. The average global growth rate was only 3%; we had more than 8 times that growth rate in Armenia.

American Times: Do you think it is sustainable?

Mr. Grigoryan: “It is sustainable. If you compare the NPL ratio of the banking system, it is quite low. It is averaging around 3%. By the end of 2012 it was 3.2%. It is quite impressive. Even during the crisis. We are compliant with Basel 2 requirements. We have the road map to Basel 3 approved by the board. During the crisis, we had a sharp decrease in our GDP, but the financial sector was robust as was the Central Bank and the government. We didn’t spend even one cent to provide liquidity to the banking system.

American Times: Did any international donors assist in the financial crisis?

Mr. Grigoryan: There was no assistance to the financial system.”

American Times: When we met with the Deputy Minister of Finance, he spoke about pension reform. Can you elaborate?

Mr. Grigoryan: “This is one way of boosting the capital market. We have the American NASDAQ with Swedish OMX; they are a joint group. NASDAQ is operating our central depository and stock exchange. We have a road map for developing the market and pension reform is a part of the plan.

All employed people below 40 will participate in the system. They will contribute and whatever they contribute will be matched by the government. It is the system used by most European countries. Companies pay for their employees’ social security and employees pay up to age 63. They retire and get a pension.”

American Times: Any interest from the US?

Mr. Grigoryan: “Yes. We are open for business. It is a good opportunity for companies with an interest. They have easy entry through the Central bank, licensing, regulating and supervising, we do it all. It’s the place to be, we are one of the highest ranked banks in this region by the IMF and the WB.”