Age-old question: currency of credit

By: Nigar Orujova

Despite fluctuations in the world currencies and unstable oil prices, people in Azerbaijan, as everywhere else in the world, continue using credits. Many people face a dilemma though – borrow in the national currency or foreign currency. Which is more profitable and reliable?

The recent devaluation of the manat at the end of February showed that taking loans in foreign currencies can be a perilous endeavor.

The share of non-performing loans and borrowings in the total loan portfolio of the banking sector in Azerbaijan has reached 5.88 percent, amounting to 1,213,300,000 manat in January-March. In the same period of 2014, this statistics showed 5.37 percent or 853,700,000 manat.

During the year, the share of overdue loans increased by 42.12 percent and during the month by 6.6 percent.

In Azerbaijan, there is no ban on performing banking operations in foreign currencies. Every citizen has the right to choose the currency in which to keep their savings, this is applied to both residents and non-residents.

Without violating the legislation, any transactions and operations may be carried out in a foreign currency.

However, loans should be returned to the bank in the currency in which they were granted to the borrower, as well as interest thereon. A situation with deposits is the same the bank must return deposits and dividends on them in the currency in which the deposit agreement was concluded.

Experts believe the population should decide in which currency to take on credit depending on their needs – but do not forget that loans should be repaid.

“Azerbaijan must prohibit commercial banks from issuing consumer loans in foreign currencies for a long time,” expert in economics Fuad Alizadeh told a local press.

In general, the Central Bank should limit lending directly in foreign currencies, he believes.

The concept of lending in dollars is in itself unlawful, he said. “Banks can take the credit for themselves in dollars and other foreign currencies, but this does not mean that they have to keep them in the retail trade and receive higher interest rates.”

Dollar deposits in different countries are made at very different interest rates, he noted, but this system is not working for Azerbaijan.

In turn, expert in economics, Ogtay Haqverdiyev believes loans in foreign currencies evolved into a continuous problem in recent years.

The lender and the recipient always have a contract signed by both parties, all points are clearly marked there. People should decide for themselves the currency of their credit, and their repayment too, but according to the current exchange rate, he said.

After the devaluation of the manat by almost 34 percent in February, customers who took bank loans in dollars, found in that moment that their debt had increased. However, those who borrowed in manat did not suffer any losses in this situation.

In May, the Constitutional Court considered expedient to delay payments on loans denominated in foreign currencies, the decline in interest rates and the use of banks for other benefits, depending on their financial capabilities.

Performing the obligations denominated in foreign currencies, but implemented in manats, the exchange rate at the time of payment should be taken into account.

This applies to cases when liabilities are in foreign currencies but repayments’s denomination are not specified in the contract. In this case the return of the money is carried out in manats. The calculation is performed at the exchange rate at the time of repayment.

In implementing obligations in manats lenders cannot demand the debtor to pay additional funds, if the exchange rate of the national currency decreased by the time they returned the loan. The borrower also cannot expect to reduce the amount of repayment in the case of appreciation of the manat against foreign currencies.

That is, the absence of a special item in the contract, the debtor pays the price set at the time of the conclusion of the contract.

The situation for those who took the credit in a foreign currency has brightened. However, those who will take credits in the future should bear this in mind.