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Deposit Interest Rate Linked to Credit Risk in Azerbaijan Banks

A recent study has uncovered a significant correlation between the volatility of exchange rates and interest rates with credit risk in Azerbaijani banks.

Factors that Increase Credit Risk

The research, conducted by Shahriyar Mukhtarov, Serhat Yüksel, and Elvin Mammadov, analyzed the factors that increase credit risk among Azerbaijani banks. Using panel logit analysis, the researchers identified six variables as being stationary at level:

  • NPL (Non-Performing Loans)
  • ROE (Return on Equity)
  • Inflation
  • Unemployment Rate
  • GDP Growth
  • Deposit Interest Rate

Five other variables were found to be integrated of order one:

  • Total Assets
  • Total Loans
  • Total Expense
  • Capital Adequacy Ratio
  • Exchange Rate

Significant Factors in Determining Credit Risk

The analysis revealed that four independent variables are statistically significant in determining credit risk:

  • Capital Adequacy Ratio: A negative relationship was found, indicating that banks become more selective in lending when the capital adequacy ratio increases.
  • Unemployment Rate: A positive relationship was found, suggesting that high unemployment rates increase the likelihood of credit defaults. This is because individuals who are unemployed may struggle to repay their debts, leading to an increased credit risk for banks.
  • Interest Rate
  • GDP Growth Rate

Exchange Rates and Interest Rates in Determining Credit Risk

The research highlighted the importance of exchange rates and interest rates in determining credit risk. The volatility of these variables can increase the fragility of the economy, making it more challenging for banks to manage their credit risks.

Implications for Policymakers and Financial Regulators

The study’s findings have significant implications for policymakers and financial regulators in Azerbaijan. By understanding the factors that contribute to credit risk, they can develop targeted policies to mitigate these risks and promote a stable banking system.

Source: Shahriyar Mukhtarov, Serhat Yüksel, Elvin Mammadov, “Factors that increase credit risk of Azerbaijani banks”, Journal of International Studies, Vol. 11, No. 2, 2018.