BAKU, Azerbaijan, October 15. Insurance against unemployment for consumer loans in Azerbaijan could reduce banks’ risks and capital requirements, potentially paving the way for lower interest rates in certain lending segments, Trend’s correspondent reports from the event.
Shahin Mahmudov, director general of the Central Bank of Azerbaijan (CBA), made the remarks at a news conference on Thursday dedicated to the presentation of the Financial Stability Report.
He said the proposed mechanism would involve insurance products offered by private insurance companies rather than the state unemployment insurance system. Insuring against the risk of a borrower losing their job could reduce the financial risks borne by banks.
“This is not about the state unemployment insurance system, but about insurance products offered by private insurance companies. Insurance will not be free, and its cost must also be taken into account. However, when part of the risk is transferred to an insurance company, the bank’s risk decreases. This could lower banks’ capital requirements and expand their capacity to provide more loans,” Mahmudov said.
According to the CBA official, lower risks could also affect banks’ lending costs. As a result, even after insurance premiums are taken into account, the overall cost of borrowing could decline in certain loan segments.
He emphasized that insurance premiums would not be the same for all customers or sectors of the economy. Pricing would depend on the risk of unemployment and other factors.
“The likelihood of job losses may be higher in some sectors. In such cases, insurance premiums could also be higher. Prices will be determined by the market. At present, we do not have sufficient data to compare unemployment risks across individual sectors,” he said.
Mahmudov added that loan interest rates are also influenced by banks’ capital levels, reserve requirements and other factors. Therefore, the extent of any reduction in interest rates would depend on the bank and the characteristics of the loan.
“From a regulatory perspective, we believe that the overall interest burden on loans could decline in several segments, even after insurance premiums are taken into account. However, this will depend on the bank’s financial position and risk indicators. On average, a reduction in costs is expected,” the CBA director general said.
Mahmudov also discussed the deposit insurance mechanism for protected deposits. He said changes based on the methodology of the Deposit Insurance Fund’s compensation framework were being considered. The aim is to adjust the coverage of protected deposits to market conditions and strengthen competition among banks.
According to him, under the new approach, the interest-rate ceiling for protected deposits would be determined with reference to movements in market deposit rates. This would allow the ceiling applied to protected deposits to change accordingly as deposit rates fluctuate.
“Previously, this ceiling was fixed. Under the new approach, market conditions will be taken into account. If deposit rates rise, the interest-rate ceiling for protected deposits could also change. This would help market principles function and strengthen competition among banks,” he said.
The CBA official said market-based deposit rates could also influence depositors’ choice of bank. Customers would be able to compare banks’ risk levels and the returns they offer before making a decision.
Mahmudov said discussions were underway on taking into account deposit rates from previous periods and an additional interest margin when determining the ceiling for protected deposits. The initial approach envisages using indicators for nine-month and three-year periods, with the additional margin set at around 2 percentage points.
He stressed that the final decision rests with the Deposit Insurance Fund and would be made in accordance with the relevant methodology.