Masuma Talibova, analyst at the Center for Analysis and Communication of Economic Reforms (CAERC), commented on the decision to extend full deposit insurance.

Under the directive of President Ilham Aliyev, full deposit insurance will be extended for an additional 9 months. A draft law regarding this extension has been submitted to the Milli Majlis and placed on the agenda for discussion. The law removes limits on insured deposits, meaning it will cover deposits of any amount.

According to the “Law on Full Deposit Insurance,” deposits in banks that are members of the Deposit Insurance Fund (all banks operating in Azerbaijan are included) are fully insured up to an annual interest rate of 2.5% for foreign currency and 10% for the national currency. In the event of an insured event, losses are compensated 100% by the Fund. Compensation depends on the deposit currency: deposits in manat are paid in manat, deposits in USD or euro are paid in the respective currency, and deposits in other currencies are converted into USD or euro at the exchange rate of the day.

Without full insurance, deposits would only be partially covered, with compensation limited to a cap of 30,000 AZN. If the law were not in effect, deposits above 30,000 AZN would only be insured up to 30,000 AZN, while deposits below this amount would be fully insured.

Analysis shows that the law has met expectations. After its enactment, risk levels decreased significantly, increasing public confidence in banks. Consequently, individual bank deposits have started growing again, reaching 8.8 billion AZN in October of last year, the highest in four years. Comparing deposit volumes annually since 2016 shows consistent growth: 1.5% in 2017, 10.8% in 2018, and 3.1% in 2019. Extending the law is therefore appropriate to maintain this positive trend.

Combined with other successful economic reforms led by President Ilham Aliyev, continuing full deposit insurance in 2019 increased individual deposits by 262.5 million AZN to a total of 8.6379 billion AZN. Growth occurred in both demand and term deposits: term deposits increased by 1.8% (101 million AZN) and demand deposits by 5.8% (161 million AZN). The number of deposit accounts grew by 6% compared to the previous year, and this trend continued into January 2019, reaching 396,500 accounts with a 2% increase.

Full deposit insurance and the stability of the manat have encouraged growth in deposits in national currency while foreign currency deposits declined. This trend is observed not only for individual deposits but across all deposit types. Total deposits in manat increased 1.2 times compared to the end of 2015, while foreign currency deposits decreased by 21%. In 2019, the share of manat deposits in the total deposit portfolio reached 39%. For individual depositors, manat deposits nearly doubled compared to 2015 (4,132.7 million AZN), while foreign currency deposits declined by 44% (4,505.2 million AZN). The share of manat deposits in the total portfolio of individual deposits reached 48%.

President Ilham Aliyev’s decision can be considered a mechanism to promote welfare at the individual, banking, and macroeconomic levels. Full deposit insurance, a system not implemented in any other country (where compensation is limited), initially reflects the state’s commitment to protecting citizens’ interests at the highest level, giving it significant social importance. Increased public trust leads to higher deposits, improving bank liquidity, making them direct beneficiaries of this reform.

Full deposit insurance protects existing bank deposit portfolios, attracts potential depositors, and encourages growth in deposit volumes. Concentrated liquidity in banks also promotes cashless transactions, enhancing transparency and accountability in the economy. Moreover, preferential terms for manat deposits help stabilize the currency, control inflation, and increase the volume of deposits in national currency.

Overall, full deposit insurance strengthens financial stability, banking system resilience, and has a broad, positive impact on the national economy and macroeconomic development.