Page 28 - Azerbaijan State University of Economics

Gorkhmaz Imanov, Ali Ahmadov: Estimation of the Optimal Size of Financial Depth
in Terms of Macro-Stability

Graph 2: Size of the banking sector, 2015 (Bank assets/GDP)

1.85
1.66
1.3 1.34 1.35

0.61 0.71 0.73
0.38 0.39

Source: WB and IMF

Size of the banking sector should be such that it provides effective services
according to economic, demographic, financial and geographic characteristics of the
country. In efficient and competitive banking system, supply is determined by
demand. Demand, on the other hand, is determined by fundamental factors such as
economic, demographic and geographic. For instance, demand for payment systems
within the country depends on GDP, population and size of the country. At the same
time, in several countries foreign demand also plays an important role.

According to banking sector indicators, Azerbaijan lags behind developed countries. In
terms of banking sector depth ratio, Azerbaijan’s banking assets to GDP (0.39) lags
behind countries in the region such as Turkey (0.71) and Russia (0.61) (Graph 2).

Graph 3: Average asset size, 2015 (total assets/number of banks)

14.9
12.2
7 8.5 9.3 10.4
4.5
0.5 1.2 2

Source: WB and IMF
The reason why Azerbaijan has a low value (0.5) on this indicator can be explained
both by having low bank assets compared to optimal value and having number of
banks that are higher than optimal value. In developed countries, size of the bank
assets is close or higher than GDP. The same trend is observed for average asset size
of the banking sector as well.

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