Credit Rates Approaching the "Red Line": What Awaits Azerbaijan's Banking Sector?

Despite the fact that in recent months the average interest rates on new loans in Azerbaijan had been showing a downward trend, in June their growth was recorded once again.

As Baku TV reports, the interesting point is that during the same period, a decrease in average interest rates on deposits and savings was observed. Thus, the average interest rate on loans, which was 17.92% in May, rose to 18.3% in June. Conversely, interest rates on deposits, which were 7.99% in May, slightly decreased in June - to 7.96%.

It should be noted that loans are primarily formed from deposits. According to the latest data from the Central Bank of Azerbaijan, 45.2% of the deposit portfolio consists of funds from individuals.

So what is behind the increase in lending rates against the backdrop of declining deposit interest rates?

Economist Khalid Karimli explains that a decrease in deposit rates does not automatically mean cheaper loans.

"The thing is that the deposit rate is the cost of attracting resources for the bank, while the loan rate is the price at which these resources are provided to borrowers. Deposit rates can decrease for various reasons, including due to an excess of funds that depositors are willing to place in banks. If a bank does not need to attract additional resources, it can lower deposit rates. Therefore, even with low deposit rates, the cost of loans can rise under the influence of various factors," the expert noted.