Կենտրոնական բանկ

Financial Sector Development in Armenia: Problems and Challenges

Conference on “Armenia: Challenges of Sustainable Development" in honor of Professor of Armen Alchian.

Nerses Yeritsyan, Central Bank of Armenia and AIPRG 
May 6, 2006, UCLA

Content

• Where we stand
• Future Plans and challenges
• Expected Outcome of Reforms
• Lessons Learned

Where We Stand

• General overview of the financial
• structure
• History of reformsAchievements
• Shortcomings
• Opportunities

History of Reforms-Achievements

Price stability has been maintained

• Capital account has been fully liberalized without side effects
• We have good financial system legislation and regulatory framework, which is in compliance with the best international practice
• We could built sufficient financial infrastructure, which is capable to meet current demand (real time electronic paym. and settl. system)
• Major and important consolidation in the banking system has been achieved. Banks mostly are sound and grow very fast
• Financial discipline prevails, as supervision and regulation is strong
• Unified supervision provides new prospects
• Lessons are learned and a good strategy forward is in place (Vision of the CBA at www.cba.am)

History of Reforms-Shortcomings

• There are capacity constrains both in public and private sectors
• Knowledge gap is large and the catch-up process in this regard is slow
• Investment capital inflows by foreign reputable investors has been limited, which could bring the culture of market economy and management, and also accelerate the learning process
• The financial structure developed disproportionately
• Consolidation process is not completed yet
• Banks and other financial institutions are short of capital to invest in new products and services, and thus competition is not sufficient
• Real Sector is not transparent and its savings are not yet available to the financial sector.
• Financial market players are satisfied (became complacent) and not interested in faster change

Shortcomings (continued)

Overcoming these shortcomings is a real challenge, but they also open new opportunities for the private sector and policy makers. Combined with global opportunities this may lead to a new policy framework that substantially and qualitatively change the pace of development in the financial sector and accelerate the catch up process with developed markets.

Opportunities

• Long standing price stability and double digit growths have improved household wealth value
• There is a large amount of private savings that have not been institutionalized and therefore could be brought into the financial sector (numbers)
• Aggressive global consolidation process, especially in the EU have raised the interest towards our region
• Large global liquidity is freed because of severe crises in emerging markets and are looking for new and more viable opportunities
• Real commitment by a couple of giant transnational financial players to partner with us in implementing our ambitious reform program,
• Surrounded with large neighbors that would never be institutionally strong

Future Plans and Challenges

• Changing attitude and behavior is necessary
• Right incentive structure and success stories might facilitate the process 
• Reform endeavors in different sectors 
• How the financial structure is expected to react to the reforms

Banking Sector Reform

• Accelerating further consolidation by bringing a couple of reputable foreign banks
• Changing ownership structure of banks through implementing corporate governance principles
• Opening up the opportunities in other financial sectors, under unified supervision
• Moving towards risk based supervision and providing incentives to banks to become more responsible
• Encouraging investment into new technologies and products

Insurance Sector Reform

• Will be fully foreign owned by “Blue Chips”
• Development of a business case is underway to approach them
• Domestic insurance companies will either consolidate faster than banks or closed down/ no tolerance as in case of banks, the best practice will not be compromised for them
• Mandatory insurance will be introduced with the entry of foreign insurance firms
• Pension reform will also encourage foreign entry 
• As part of public policy efforts we will improve statistics and the claim registration systems. We will also back these insurance companies to have fare court response

Capital Markets Reform

• Actively pursuing the regional capital market approach and will try to partner with a reputable European Stock Exchange (OMX)
• Current self regulatory structure will be changed and the stock exchange and central depository will be demutualised
• Focused capital market development will encourage the appearance of a couple of benchmark companies
• Different rating initiatives have been undertaken to facilitate the transparency process
• By demonstrating lost opportunities of not using well functioning capital markets, we will see moving from “family” ownership into corporate type of ownership

AML/CFT Regime

• Financial system’s integrity is key to expected foreign direct investment
• FIU is located at the CBA, and became fully operational
• By good relation building with the reporting entities and law enforcement, Armenia would maintain its reputation of being remote from ML/TF

Other Reforms

• Government debt market will be growing faster with new opportunities
• Pension reform is a serious engine to the development of the financial sector
• Financial sector supervision will enhance its effectiveness

Expected Outcome of Reforms

• Price stability will be maintained 
• Different sectors of the financial system will integrate and develop proportionately
• Armenian financial markets will be internationalized
• Business opportunities in the financial sector will become tangible for foreign reputable financial players

Lessons Learned

• Well designed outward policies are better way forward
• For a small open economy high quality foreign direct investment reduces knowledge gap faster and thus provides better access to FDI
• IT supported financial products, services and infrastructure should drive integration and internationalization
• Regional perspective should always be on the agenda despite the problems
• The speed of reforms is not as important, as implementing well thought , publicly debated and comprehensive (interms of design) reforms

Lessons Learned

• Different sectors of the financial system should be well integrated and cross sector risks well managed
• Better to put ambitious benchmarks, and achieve them gradually in a well sequenced way
• Financial contracts are the most sophisticated ones, and people may loose interest if reforms are implemented badly
• Long term benefits should be made countable to counteract short term costs of reforms
• Business conduct supervision is important to increase trust towards the financial sector
• Integrity of the system is a precondition for final success

Financial Sector Development in Armenia: Problems and Challenges