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Credit Risk Assessment in Azerbaijan: Factors Affecting Bank Performance

Azerbaijani banks are facing significant challenges in managing their credit risk, with non-performing loans (NPLs) posing a major threat to the stability of the financial sector. A recent study conducted by researchers from Khazar University and Azerbaijan State University of Economics has identified key factors that contribute to credit risk in Azerbaijani banks.

Key Findings

The analysis, which covered 10 of the largest banks in Azerbaijan between 2010 and 2015, revealed that four independent variables significantly affect credit risk:

• Decrease in capital adequacy ratio: A decrease in capital adequacy ratio increases credit risk.
• Interest rate: A decrease in interest rates also increases credit risk.
• Total assets: An increase in total assets decreases credit risk.
• Unemployment rates: An increase in unemployment rates has a positive correlation with credit risk.

Recommendations

The findings suggest that Azerbaijani banks should prioritize increasing their capital adequacy ratio and total assets to mitigate the negative effects of credit risk. This is particularly important given the country’s high NPLs, which have been steadily rising over the past few years.

Importance of Understanding Credit Risk

Understanding the factors that contribute to credit risk in Azerbaijan is crucial for policymakers and regulators to develop effective strategies to address the problem. The study highlights the need for Azerbaijani banks to implement robust risk management practices to minimize losses and maintain financial stability.

Methodology and Implications

The research, which employed panel logit methodology, provides valuable insights into the credit risk landscape in Azerbaijan. It underscores the importance of addressing the root causes of credit risk, including the country’s high unemployment rates, to ensure sustainable growth and development.

By understanding the factors that contribute to credit risk, policymakers can develop targeted strategies to address the problem and promote financial stability in Azerbaijan.