Table Of ContentTechnical Assistance Consultant’s Report
P roject Number: 43359
September 2013
Regional: Financial Sector Development in
Central and West Asia
(Financed by the Asian Development Bank’s Technical Assistance
Special Fund)
Armenia: Boosting Access and Development
Prepared by Patricia McKean, Geraldine O`Keeffe, and Silke Mueffelmann of Frankfurt
School of Finance & Management, and Arup Chatterjee and Lotte Schou-Zibell of Asian
Development Bank
This consultant’s report does not necessarily reflect the views of ADB or the government concerned, and
ADB and the government cannot be held liable for its contents. (For project preparatory technical
assistance: All the views expressed herein may not be incorporated into the proposed project’s design.)
A ’
rmeniA s
F s
inAnce ector
Boosting Access and Development
finance sector development / 2013
By Patricia McKean, Geraldine O’Keeffe,
and Silke Mueffelmann
of the Frankfurt School of Finance & Management
and
Arup Chatterjee and Lotte Schou-Zibell
of the Asian Development Bank
i
Appendixes
Contents
Foreword . ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..v
Abbreviations.................................................................................................vi
Executive Summary ........................................................................................vii
The Finance Sector: An Overview ............................................................................ 1
Macroeconomic Development .. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..1
Fiscal Sustainability........................................................................................2
Business Environment: Access to Financial Services.............................................................3
Micro, Small and Medium-Sized Enterprise Sector .. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..4
Finance Sector: Structure and Development .. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..5
Bank Performance .. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..7
Credit Organizations ....................................................................................8
Insurance Companies. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... .8
Securities Market ......................................................................................9
Pensions..............................................................................................9
Leasing Services ......................................................................................10
Loan Security ........................................................................................11
ACRA Credit Bureau ...................................................................................11
Deposit Guarantee Fund ...............................................................................11
Challenges and Risks. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...11
Sector Performance, Problems, and Opportunities. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... .13
Microfinance.............................................................................................13
Supply ..............................................................................................13
Banks ...............................................................................................14
Demand.............................................................................................15
Agriculture. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...16
Government Support ..................................................................................16
Constraints to Microfinance ............................................................................17
Options to Microfinance ................................................................................17
Electronic Banking and Mobile Financial Services .............................................................18
Background .. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... .18
Supply ..............................................................................................18
Demand.............................................................................................22
Government Support ..................................................................................23
Constraints to Electronic Banking and Mobile Financial Services. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...25
Road Map for the Development of Electronic Banking and Mobile Financial Services .............................25
ii
Armenia’s Finance Sector: Boosting Access and Development
The Insurance Sector .....................................................................................27
Market Analysis.......................................................................................27
Pension System.......................................................................................32
Regulation, Supervision, and Policy Issues ................................................................34
Options. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...35
Government..........................................................................................38
Securities Market Development ............................................................................41
Supply of Securities ...................................................................................41
Demand for Securities .. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... .51
Constraints to Securities Market Development. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...52
Road Map for Development of the Securities Market .......................................................53
Government Sector Strategy...............................................................................57
Status . ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...57
Development Goals.......................................................................................57
Specific Challenges in Development Goals ...................................................................59
Development of Capital Markets. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...59
Development of the Insurance Sector ....................................................................60
Development of Mobile and e-Banking ...................................................................60
ADB Sector Experience and Program; Trade Finance; and Micro, Small, and Medium-Sized
Enterprise Development. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... .61
Summary of Experience ...................................................................................61
Harmonization of Activities with other Financial Institutions......................................................61
Financial Sector Support ..................................................................................61
Nonfinancial Sector Support ...............................................................................61
Appendixes .. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..63
Appendix 1: Development Organization Projects .. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... .63
Appendix 2: Overview of E-Banking and Mobile Financial Services................................................67
Currency Equivalents (as of 31 December 2012)
Currency Unit - dram (AMD)
AMD1.00 = $0.0025
$1.00 = AMD403.58
v
Abbreviations
Foreword
Armenia’s finance sector, dominated by 21 banks and 1 development bank, was largely able to weather the
global financial crisis of 2008 on strong capitalization, sound liquidity profiles, and low integration with
international financial markets. It did so even though the collapse of remittance-financed construction and lower
commodity prices caused gross domestic product to contract 14.1% in 2009.
According to financial market development indicators, the country’s finance sector is competitively
disadvantaged, ranking 78th out of 144 countries in one overall financial market development index.
It is considered crucial that Armenia enhance financial support to micro, small, and medium-sized enterprises
(MSMEs), particularly providing medium- and long-term funding, to allow them to invest in technology and
capital and raise productivity and competitiveness. Bank loans are the dominant source of external financing for
MSMEs, and access to financial services remains a concern.
According to the Small and Medium Entrepreneurship Development National Center of Armenia, micro, small,
and medium-sized enterprises accounted for a share of about 43% of gross domestic product, up from 41.7% in
2008. The sector contributes significantly to job creation and employs about 42% of the labor force.
Armenia’s 32 credit organizations comprised the second-largest sector in the country’s financial system, with
assets of about 6.8% of the total as of December 2012, and rising fast. In addition, seven insurance companies
comprised 1.55% of total financial system assets at the end of December 2012. The securities market is
developing, but trade in equities and bonds represents only a small portion of finance sector assets.
This report takes a close look at Armenia’s finance sector, presenting the economic context in which it operates
and outlining the various approaches the country is taking to improving access to the sector for all Armenians—
rural and urban, rich and poor. This includes support for expanding microfinance, electronic and mobile banking
services, insurance, and the securities markets.
vi
Financial Sector Development in Central and West Asia: Country Assessment Armenia
Abbreviations
ADB – Asian Development Bank
AMD – Armenian dram
APEC – Asia-Pacific Economic Cooperation
ArCa – Armenian Card
CDA – Central Depository of Armenia
CJSC – closed joint stock company
CMTPLI – compulsory motor third-party liability insurance
CPI – consumer price inflation
EBRD – European Bank for Reconstruction and Development
EKENG – e-Governance Infrastructure Implementation Unit
EU – European Union
G2P – government to person
GDP – gross domestic product
GIZ – Gesellschaft für Internationale Zusammenarbeit
IAIS – International Association of Insurance Supervisors
ICPS – Insurance Core Principles, Standards, and Guidance
IFAD – International Fund for Agricultural Development
IFC – International Finance Corporation
IFRS – International Financial Reporting Standards
IMF – International Monetary Fund
MSMEs – micro, small, and medium-sized enterprises
NBFI – nonbank financial institution
OECD – Organisation for Economic Co-operation and Development
OTC – over the counter
P2B – person to business
P2P – person to person
POS – point of sale
PSP – payments system provider
SET – Stock Exchange of Thailand
SMEs – small and medium-sized enterprises
SMS – short messaging service
UCO – universal credit organization
UMCOR – United Methodist Committee on Relief
US – United States
USAID – United States Agency for International Development
WEF – World Economic Forum
The fiscal year of the government ends on 31 December. In this report, “$” refers to US dollars unless otherwise stated.
vii
Executive Summary
Executive Summary
A
rmenia is slowly recovering from an abrupt economic decline triggered by the global financial crisis
that started in 2008. While the collapse of remittance-financed construction and lower commodity
prices caused gross domestic product (GDP) to contract 14.1% in 2009, the economy picked up,
with GDP growing 2.2% in 2010, 4.7% in 2011, and 7.2% in 2012. Growth in 2012 surpassed
earlier projections, based on increased manufacturing, agriculture, mining, and services on one hand, and the
combination of budgetary restraints and timely hikes in policy interest rates on the other. Inflation was 2.6% in
2012 and is projected to be 3.6% in 2013, after slowing to 7.7% in 2011 from 8.2% in 2010. Recovery of the
Russian Federation economy, the source of most remittances to Armenia, helped inflows rise 14.1% in 2012.
Armenia’s finance sector is dominated by 21 banks (with 479 branch offices), and 1 development bank
(Panarmenian Bank), which as of December 2012 accounted for about 92% of financial system assets. Other
participants in the financial market, as of 1 January 2013, included 32 credit organizations (with 100 branch
offices), 7 insurance companies, 4 insurance brokerages, 143 pawnshops, 238 exchange offices, and 1 legal-
entity currency dealer. There were 10 payment organizations in total: 1 processing and clearing organization
and 9 money remittance organizations (5 of which also have a processing and clearing organization license).
There were also 9 investment companies, as well as NASDAQ OMX Armenia, the Central Depository of Armenia,
and 14 reporting issuers.
While the banking sector managed well through the global financial crisis in terms of capitalization and liquidity,
nonperforming loans rose, mainly due to an increase in foreign exchange lending. Rapid credit growth and
competition, leading to more flexible lending standards, could also be among the factors. Banks need to further
improve their risk management systems, concentrate on top borrowers, implement international best practices,
and separate management and ownership in decision making.
Micro, small, and medium-sized enterprises (MSMEs) contributed 43.0% of GDP in 2010, compared with 41.7%
in 2008, and twice that level in 1999. MSME exports increased to 17.7% in 2009. As of January 2010, MSMEs
represented 97.7% of registered legal entities and sole proprietors, reaching 132,923 in number. The SME
Development Index, calculated using a United Nations methodology, was 441.8 in 2010, a 7.6-fold increase on
2002. The MSME sector also contributes significantly to job creation, employing 42.2% of the active labor force.
Microfinance in Armenia has expanded quite extensively over the past few years, both by volume and territorial
coverage. Presently, microfinance consists primarily of lending activities, although a few banking institutions
offer depository and other financial services to micro entrepreneurs. Demand for business, consumer, and
housing loans is strong among many self-employed entrepreneurs and micro and small businesses. These are
currently underserved by the banking sector and other providers of financial services, which opens a market
for rural clients, since most of the financial products are in Yerevan. Armenia also offers great potential for
microleasing and microinsurance, especially in the agriculture sector.
Electronic banking (e-banking) exists in the form of plastic cards, internet-based e-banking channels, and
payment services provided through terminals, mobile, and online payment systems. With 3.9 million mobile
subscribers, Armenia is reaching more than 116% market penetration, a value suggesting that many users have
more than one SIM card.
viii
Armenia’s Finance Sector: Boosting Access and Development
Even with such a high percentage, mobile banking services are in the initial stages of development, with a few
basic services in the market. E-banking services are primarily available to urban customers, with limitations in
ATM, point of sale, and payment terminal networks preventing uptake in rural areas.
In remote and rural areas, internet access is low at 37% of households, impeding the uptake of online banking
in these areas. Countrywide access to the internet reached 45% by 2013.
Additional constraints preventing greater uptake of e-banking and mobile financial services include (i) the
difficulty terminal providers have in profitably serving rural areas given their current pricing structure,
(ii) capital requirements to obtain electronic money licenses and limitations on transaction amounts, (iii) cost
and dependence on a limited number of suppliers to integrate the core banking systems to e-banking channels,
and (iv) the lack of agent banking regulations.
Despite these constraints, the many enabling factors include supportive government regulations and an
innovative private sector, which combined have the potential to extend financial services to the unserved or
underserved.
The insurance penetration rate in Armenia is low, at 0.89% in 2012, as compared with 8.14% in the
Organisation for Economic Co-operation and Development countries and 2.62% in central and eastern Europe.
The rate is the ratio of the percentage of total insurance premiums in US dollars to GDP. Insurance penetration
is primarily the result of demand from large commercial enterprises and compulsory motor third-party liability
insurance, rather than voluntary purchases by the private sector and households. Slow development can be
attributed to a general lack of trust in the insurance system, regulatory factors, market structure, progress in
other segments of the finance sector, social and human development and cultural factors, and generally low
salary levels. While the introduction of compulsory motor third-party liability insurance seems to have provided
an impetus to nonlife insurers, this has generated limited premium revenue, despite widespread ownership of
cars. The transfer of the insurance supervisory authority to the Central Bank of Armenia, and the adoption of
new legislation, in tandem with rising incomes, creates potential for the sector to develop more rapidly.
Armenia’s insurance regulatory framework has progressed significantly and is adequate to the current state
of development. Yet several challenges remain: (i) the insurance culture remains weak; (ii) while there is
support for the insurance market among the middle class, a large percentage of the more affluent have not
yet integrated into the insurance system, and many poorer people do not consider purchasing insurance at all;
(iii) there is lack of consumer trust, with a legacy going back to the initial years when the insurance market was
largely unregulated; and (iv) policy coordination among insurers remains weak. The Association of Insurers has
adopted this latter role, but membership is insufficient to be beneficial.
The securities market is developing. The regulatory framework has evolved in the past few years and the
required capacity and technology is in place to trade equities and bonds, yet demand is small. A limited investor
base due to the absence of institutional investors, the dollarization of the financial market, a lack of confidence
in the local currency, and poor liquidity combine to constrain market growth. Strengthening the banking sector,
that is, developing interbank lending and money markets will be a critical success factor for securities market
development. Meanwhile, although planned reform of the pensions system will address some demand-side
challenges, the reforms may create other challenges due to the underdeveloped capacity of the local fixed-
income market since fund managers may be forced to continue investing in foreign currency. Given limited
availability of hedging tools, and bearing in mind that availability of derivative instruments is likely to require
regulatory changes, foreign exchange risks may increase.
To increase access to finance in rural areas, the holistic development of mobile financial services could be
pursued via a step-by-step approach to ensure that rural populations have access to affordable, effective, and
inclusive financial services using mobile phones. Support could be provided to (i) develop a framework for
the delivery of mobile financial services, (ii) review and develop a regulatory framework supportive of mobile
financial services, and (iii) implement pilot projects.
Description:(Financed by the Asian Development Bank's Technical Assistance Prepared by Patricia McKean, Geraldine O`Keeffe, and Silke Mueffelmann of
