Before the enactment of Azerbaijan's new Civil Code, the paper-based Azerbaijani payment system was a major contributing factor to the slowness and complexity of inter-bank transfers. Since the establishment of a commercial banking system in the country, the demand for electronic banking services has grown constantly. This demand was first recognized in law when Azerbaijan's new Civil Code was adopted, which authorized electronic banking and electronic signatures for the first time. That initial legislative step has set the stage for electronic banking that had previously been limited to the introduction of automated teller machines. Fortunately, the National Bank of Azerbaijan (the NBA) has used this new legislative basis to bring innovative technologies to Azerbaijan's banking sector.
The NBA's first public step was to adopt the Rules On Inter-bank Transfers by Banking Institutions in Azerbaijan on February 2 2001. Under the rules, bank account holders are authorized to issue payment instructions to their banks either physically on paper or electronically. For electronic fund transfers the NBA has now established:
- the National Inter-bank Settlement System (AZIPS – a $3 million project financed primarily by the World Bank); and
- the AZIPS National Settlement Centre.
Any commercial bank in Azerbaijan may now offer electronic banking services to customers if it is a member of AZIPS. AZIPS-based electronic payments in Azerbaijan are made through the SWIFT (Society of Worldwide Inter-bank Financial Telecommunication) system and processed through the AZIPS National Settlement Centre. This centre processes electronic inter-bank fund transfers by debiting the corresponding account of the issuing bank and crediting the account of the beneficiary bank in the amount of the electronic inter-bank fund transfers.
The rules are somewhat unclear as to whether the bank account holder's payment instructions to the issuing bank are electronic or in hard copy, as they require the payment instructions to be issued in two copies. This ambiguity, however, should be interpreted in favour of the electronic method as the both the Civil Code and the rules clearly authorize electronic signatures. In particular, member banks are required to use:
- electronic signatures; and
- cryptography and other ciphering devices to ensure the confidentiality of payment instructions.
After the electronic payment instructions are cleared by the AZIPS National Settlement Centre, they are electronically forwarded to a beneficiary bank via SWIFT. The beneficiary bank then prepares two print-outs of the issuing bank's payment instructions. While one of the print-outs is kept by the beneficiary bank, the other is forwarded to the beneficiary of the funds after it is signed by the beneficiary bank's representative and stamped with its seal.
Electronic payments are processed through AZIPS between 10 am and 4.30 pm. If the issuing bank's funds are not sufficient for its electronic payments at the end of the transaction day, the issuing bank is given an additional 30 minutes to credit its correspondent account to the amount needed for such electronic payments. The issuing bank's correspondent account may be credited through any means including:
- inter-bank loans; and
- lombard loans from the National Bank (overdrafts).
AZIPS' electronic fund transfers will expedite banking operations in Azerbaijan. At present, commercial banks in Azerbaijan handle a total of about 5,000 banking transactions each day. AZIPS increases that capacity to 15,000 transactions a day.
It is expected AZIPS' services will soon be made available to the National Treasury of Azerbaijan, the Ministry of Finance, the State Customs Committee and the Baku Stock Exchange.
Now that Azerbaijani law authorizes electronic payments in Azerbaijan, the demand for other types of electronic-based services is expected to increase dramatically. Although relatively new, many commercial banks are now ready to offer to their customers PC-banking, telephone banking and internet banking services. The draft Law On E-Commerce pending in the Milli Majlis (the national parliament) is also expected to help develop further electronic banking services in Azerbaijan.