ARMENIA- BANKING SECTOR

1 OCT 98
FM AMEMBASSY YEREVAN

BRIEF DESCRIPTION OF BANKING SYSTEM
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1. THE ARMENIAN BANKING SECTOR IS COMPRISED OF THE CENTRAL BANK, STATE-CONTROLLED SAVINGS BANK AND 31 PRIVATE COMMERCIAL BANKS WITH MORE THAN 200 BRANCHES ON THE TERRITORY OF ARMENIA. THE GOVERNMENT OWNS SHARES IN THREE OF THE COMMERCIAL BANKS, ARDSHINBANK, ARMECONOMBANK, AND ARMAGROBANK. THE SIZE OF THE BANKING SECTOR IS SMALL, ALTHOUGH IT IS ONE OF THE MOST ADVANCED AND EFFICIENT SECTORS OF THE ARMENIAN ECONOMY.

2. THE CENTRAL BANK OF ARMENIA CONDUCTS NATIONAL MONETARY POLICY, ISSUES THE NATIONAL CURRENCY, THE DRAM, AND LICENSES INDIVIDUALS OR ORGANIZATIONS ENGAGED IN BANKING AND MONEY EXCHANGE OPERATIONS. FOREIGN BANKS ARE REPRESENTED BY MIDLAND ARMENIA BANK (MEMBER OF HSBC GROUP, UK), ROSSIYSKY KREDIT - ARMENIA (RUSSIA), MENATEP-YEREVAN (RUSSIA), AND MELLAT BANK (IRAN). THE NUMBER OF PRIVATE BANKS HAS DECLINED BY OVER 40 IN THE LAST THREE YEARS AS THE CENTRAL BANK HAS PURSUED A POLICY OF TIGHTENING BANK CAPITALIZATION REQUIREMENTS TO PUSH THE WEAK AND UNDERCAPITALIZED BANKS INTO CLOSING OR INTO MERGERS WITH STRONGER BANKS. FACING CLOSE SUPERVISION BY THE CENTRAL BANK AND INCREASING COMPETITION, INCLUDING FROM FOREIGN BANKS, ARMENIAN COMMERCIAL BANKS ARE BEGINNING TO MEET INTERNATIONAL STANDARDS AND ARE CONSIDERABLY STRONGER NOW THAN IN 1995.

3. SIGNIFICANT ASSISTANCE TO THE DEVELOPMENT OF THE BANKING SECTOR IS BEING RENDERED THROUGH FOREIGN UNILATERAL AID AND MULTILATERAL FINANCING. USAID HAS HELPED TO ESTABLISH AN ELECTRONIC TRANSFER AND DATA EXCHANGE INTER-BANK SYSTEM IN ARMENIA AND LINK IT WITH THE SWIFT SYSTEM. THE CENTRAL BANK OF ARMENIA HAS JOINED SWIFT AND HAS PROVIDED NINE ARMENIAN COMMERCIAL BANKS (ARDSHINBANK, ARMAGROBANK, ARMIMPEXBANK, ARMECONOMBANK, CREDIT-YEREVAN, ARMENIAN DEVELOPMENT, INEKO, CONVERSE, AND SHIRAKINVEST) WITH LINKAGE TO SWIFT THROUGH A TERMINAL BASED AT THE CENTRAL BANK. SUBSIDIZED LOAN PROGRAMS, CONDUCTED BY USAID, THE WORLD BANK, AND OTHER ORGANIZATIONS ARE ADMINISTERED THROUGH SELECTED ARMENIAN BANKS, AND THUS HELP TO STRENGTHEN THEM. ALSO, MOST FOREIGN ASSISTANCE PROGRAMS HAVE COMPONENTS THAT DIRECTLY ASSIST ARMENIAN BANKS.

4. AS OF JULY 1, 1998, THE TOTAL CAPITAL OF THE COMMERCIAL BANKS WAS 19.0 BILLION DRAM ($38 MILLION), A LLO& INCREASE OVER JULY 1997. THE TOTAL CHARTERED CAPITAL OF THE BANKS BY JULY 1, 1998 WAS 14.4 BILLION DRAM ($28.8 MILLION). FOR THE FIRST TWO QUARTERS OF 1998, THE GROSS PROFIT OF THE BANKING SYSTEM WAS 1.2 BILLION DRAM ($2.4 MILLION).

BANKING SECTOR REGULATIONS
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5. THE BASIC LEGISLATION ON THE ARMENIAN BANKING SYSTEM INCLUDES THE FOLLOWING LAWS PASSED BY THE ARMENIAN NATIONAL ASSEMBLY (PARLIAMENT):

LAW ON THE CENTRAL BANK (PASSED IN 1993, NEW LAW PASSED IN 1996)
LAW ON BANKS AND BANKING ACTIVITIES (PASSED IN 1993, NEW LAW PASSED IN 1996)
LAW ON BANKRUPTCY OF BANKS (1996)
BANKING SECRECY LAW (1996)
LAW ON JOINT STOCK COMPANIES (1996)
LAW ON TURNOVER OF SECURITIES (1993)
LAW ON TRANSFERS BY PAYMENT ORDERS (1996)

THE MINIMAL CHARTERED CAPITAL OF BANK MUST BE 50 MILLION DRAM ($100,000).
THE MINIMAL AMOUNT OF TOTAL BANK CAPITAL MUST BE:
CURRENTLY $600,000 (EQUIVALENT IN DRAM)
EFFECTIVE 01/01/99 $800, 000 (EQUIVALENT IN DRAM)
EFFECTIVE 01/01/00 $1,000,000 (EQUIVALENT IN DRAM)

BASIC SERVICES PROVIDED BY ARMENIAN BANKS
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6. ARMENIAN BANKS DO NOT PROVIDE YET ALL THE TYPES OF FINANCIAL SERVICES GENERALLY PROVIDED BY WESTERN BANKS. IN ADDITION TO REGULAR OPERATIONS WITH DEPOSITS AND LOANS, MAJOR ARMENIAN RANKS ALSO OFFER THE FOLLOWING SERVICES: TRAVELERS' CHECKS, PROVIDE SERVICES IN FACTORING, AND SECURITIES TRADING. IN PARTICULAR, TWENTY-FIVE BANKS CONDUCT OPERATIONS WITH SECURITIES, MAINLY GOVERNMENT TREASURY BILLS. THE BANKS ARE MOSTLY ACTIVE IN THE PRIMARY MARKET AND, AS A RULE, PREFER TO USE THEIR OWN FUNDS RATHER THAN ACT AS INTERMEDIARIES FOR CLIENTS.

7. MOST ARMENIAN BANKS OFFER THEIR SERVICES FOR ADMINISTERING PAYMENT FOR FOREIGN TRADE OPERATIONS. METHODS OF PAYMENT INCLUDE ADVANCE PAYMENT, A LETTER OF CREDIT, AND OTHER INTERNATIONALLY ACCEPTED FORMS.

BANK CARDS
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8. AS OF JULY 1998, ONLY ARMAGROBANK AND MIDLAND ARMENIA BANK HAVE ISSUED DEBIT CARDS. FOURTEEN ARMENIAN BANKS ARE PROVIDING CREDIT CARD SERVICES. SEVERAL OF THEM, INCLUDING ARMIMPEXBANK, ARMAGROBANK, ARDSHINBANK, CREDIT-YEREVAN BANK, LEND BANK, AND CONVERSE BANK DISTRIBUTE VISA, MASTERCARD, OR OTHER CARDS IN COOPERATION WITH THE RUSSIAN BANKS IN MOSCOW AND SOME WESTERN BANKS. THE RECENT RUSSIAN CRISIS IS LIKELY TO AFFECT THESE OPERATIONS. ARDSHINBANK IS A MEMBER OF THE VISA-INTERNATIONAL ASSOCIATION. ARMAGROBANK AND MIDLAND BANK OPERATE ATM MACHINES. VERY FEW RETAIL/FINANCIAL INSTITUTIONS ACCEPT CREDIT CARD PAYMENTS, AND ARMENIA STILL LACKS THE INFRASTRUCTURE OR THE BUSINESS CULTURE FOR WIDESPREAD USE OF THE CREDIT CARDS.

NUMBER OF ATM AND POINTS OF SALES (POS) IN ARMENIA

NUMBER OF ATM'S
1996 1997 I/1998 II/1998
2 3 3 4

NUMBER OF POS TERMINALS
6 10 10 10

NUMBER OF ENTITIES ACCEPTING CREDIT CARDS IN ARMENIA

BANKS 14
HOTELS 4
STORES 12
OTHER ENTITIES 9

NUMBER AND VOLUME OF CARD TRANSACTIONS FOR QL, 1998

PLASTIC CARDS PLASTIC CARD TRANSACTIONS
CARDS
NUMBER NUMBER VOLUME IN
USD
A CARD 421 1,514 49,238
UNION CARD 70 56 24,572
VISA 29 171 169,132
EUROCARD/MASTERCARD 0 65 24,552
PLUS 270 3,381 575,166
DINERS CLUB 0 1 762
TOTAL 790 5,188 843,422

CARD TRANSACTIONS FOR THE FIRST HALF OF 1998

PLASTIC CARDS PLASTIC CARD TRANSACTIONS
CARDS
NUMBER NUMBER VOLUME
IN USD
A CARD 468 1,731 105,794

UNION CARD 76 50 43,808
VISA 48 288 252,316
EUROCARD/MASTERCARD 0 120 44,958
PLUS 627 6,405 1,033,654
DINERS CLUB 0 1 1,710
TOTAL 790 5,188 843,422

(SOURCE: CENTRAL BANK OF ARMENIA)

FOREIGN EXCHANGE REGULATIONS AND CONDITIONS

9. INFLATION AND EXCHANGE RATES

AT PRESENT, THE OFFICIAL EXCHANGE RATE IN ARMENIA IS SET BY THE CENTRAL BANK, BASED ON WEIGHTED DAILY AVERAGE RATES USED IN INTERBANK CURRENCY TRADING, BY CURRENCY EXCHANGE OFFICES, AND IN CURRENCY AUCTIONS CONDUCTED AT THE YEREVAN STOCK EXCHANGE. CURRENCY IS EXCHANGED AT NUMEROUS EXCHANGE OFFICES OWNED BY BANKS AND INDIVIDUALS. THE OFFICIAL AND MARKET RATES DO NOT DIFFER SIGNIFICANTLY. ALTHOUGH DRAM IS THE SOLE LEGAL TENDER, DOLLARS AND OTHER MAJOR CURRENCIES ARE AN ACCEPTABLE MEDIUM OF EXCHANGE AT RETAIL AND FINANCIAL INSTITUTIONS AND IN PRIVATE TRANSACTIONS.

10. DESPITE SLUGGISH EXPORT GROWTH AND A NEGATIVE TRADE B=NANCE, INFLATION REMAINS LOW, ACCOMPLISHED PRIMARILY THROUGH STRICT FISCAL POLICY AND DOLLAR INTERVENTIONS BY THE CENTRAL BANK. THE TARGET ANNUAL INFLATION FOR 1998 IS 10% WHILE IN JANUARY-JUNE 1998 THE ACTUAL RATE WAS 0.9%. THE EXCHANGE RATE IS ABOUT 510 DRAM PER N1, HAVING REMAINED LARGELY STABLE FOR OVER A YEAR, WITH THE EXCEPTION OF A BRIEF PERIOD OF INSTABILITY IN SEPTEMBER, LINKED TO THE RUSSIAN FINANCIAL CRISIS. IN NET TERMS TO DATE THE RUSSIAN CRISIS HAS CAUSED THE DRAM TO DEPRECIATE BY 2& TO ITS CURRENT RATE.

CONVERSION AND TRANSFER POLICIES
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11. IN 1994-1995, ARMENIA LIFTED PRACTICALLY ALL LIMITATIONS ON CONVERSION AND TRANSFER OF FUNDS. ON THE TECHNICAL SIDE, MOST BANKS CAN TRANSFER FUNDS ABROAD WITHIN 2-4 DAYS. ALMOST INSTANT TRANSFERS ARE AVAILABLE THROUGH WESTERN UNION, WHICH HAS BEEN OPERATING IN ARMENIA SINCE 1996. COMPANIES IN ARMENIA MAY CONVERT CURRENCY WITHOUT ANY LIMITATION THROUGH RESIDENT BANKS. THEY CAN OPEN HARD CURRENCY ACCOUNTS IN ARMENIAN OR FOREIGN BANKS THERE ARE NO TRANSFER LIMITATIONS. CASH EXPORTS ARE LIMITED TO $10,000 OR ITS EQUIVALENT IN OTHER CURRENCIES. ALL AMOUNTS ABOVE $10,000 HAVE TO BE TRANSFERRED THROUGH THE BANKS. FOREIGN INVESTORS CAN FREELY REPATRIATE THEIR PROPERTY, PROFITS, OR OTHER ASSETS THAT RESULT FROM THEIR INVESTMENT AFTER ALL DUE TAXES ARE PAID.

BANKING RESOURCES AND TERMS OF PAYMENTS

12. THE ABILITY OF THE BANKING SYSTEM TO PROVIDE LENDING IS LIMITED BY THE BANKS' LOW CAPACITY. VERY FEW BANKS CAN PROVIDE LOANS EXCEEDING $20,000. AT PRESENT, MANY PRIVATE BANKS LIMIT THEIR LENDING OPERATIONS TO SHORT-TERM LOANS IN LOCAL OR HARD CURRENCY AT A VERY HIGH RATE OF INTEREST: UP TO 50-70% PER ANNUM. THESE BANKS USUALLY DEMAND COLLATERAL OF EQUAL OR HIGHER MARKET VALUE, SUCH AS REAL PROPERTY, CARS, GOLD, ETC.

13. PROJECT FINANCING IS ALSO AVAILABLE THROUGH SOME MULTILATERAL AND COMMERCIAL FUNDING ARRANGEMENTS, INCLUDING THE WORLD BANK'S ENTERPRISE DEVELOPMENT LOAN AND U.S.-BASED KIRK KERKORIAN'S LINCY FOUNDATION PROGRAM. THESE PROJECTS ARE AIMED AT PRIVATE BUSINESS DEVELOPMENT FOR SPECIFIC CATEGORIES OF ENTERPRISES. THE FUNDS ARE EXTENDED TO SELECTED ARMENIAN BANKS AT BELOW-MARKET INTEREST RATES. THESE BANKS, IN TURN, WILL OFFER LOANS UP TO $1,000,000 WITH, ON AVERAGE, 15% ANNUAL INTEREST. THE LOANS MUST BE SUPPORTED BY A BUSINESS PLAN AND SECURED BY ADEQUATE COLLATERAL. THE WORLD BANK PROJECT EXTENDED $16 MILLION IN SUCH FUNDS, WHILE IN JULY 1998 THE LINCY FOUNDATION SIGNED AN AGREEMENT WITH THE ARMENIAN GOVERNMENT ON EXTENDING THE FIRST $15 MILLION OF $100 MILLION IN PLEDGED FINANCING.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)