Armenia’s financial system development

On September 21, 1991, the all-national referendum proclaimed Armenia as an independent Republic.
In December 1991, the State Bank of the country was charged with responsibility and functions as a National Bank of the newly independent Armenian Republic.
On April 27, 1993, the Republic of Armenia Law on “The Central Bank of the Republic of Armenia” was adopted, and the National Bank was re-named into the Central Bank of the Republic of Armenia under governorship by Isahak Isahakyan who had been governing the State Bank since 1986.

Իսահակ Իսահակյան. ԽՍՀՄ պետբանկի հայկական հանրապետական գրասենյակի վերջին, ՀՀ ԿԲ առաջին նախագահ 1986- 1994 թթ.
Isahak Isahakyan - last Chairman of the Armenian Republican Office of State Bank of the USSR; first Chairman of the Central Bank of the Republic of Armenia (1986-1994).

July 26, 1993, the Central Bank of Russian Federation put the new 1993 series rubles into circulation in its territory. This meant that Russia came off the Soviet ruble zone, leaving the other republics with a destroyed financial system. Although some Republics of the former Soviet Union and Russian Federation signed an agreement on creating a common ruble zone in September 1993, and Armenia and Russia signed a bilateral agreement, these were not implemented. Turkmenistan in October 1993, and Uzbekistan and Kazakhstan in November 12-13, 1993 introduced their national currency into circulation. Armenia was the only Republic to keep the Russian ruble in circulation, and the country encountered a danger of unpredictable ruble inflow. In the meantime Armenia was in a blockade, suffering energy crisis, while military actions commenced in Nagorno-Karabakh. The economy entered the territory of hyperinflation.
On October 13, 1993, the Resolution of Supreme Council of the Republic of Armenia established a State Commission on Regulation of Money Circulation, aimed at developing and implementing complex measures to regulate money cycle. The Committee's co-chairmen included Tigran Sargsyan, Chairman of the Finance, Credit and Budget Committee of the Supreme Council, Isahak Isahakyan, Chairman of the Central Bank and Levon Barkhudaryan, Minister of Finance of Armenia. Mr. Barkhudaryan was charged with responsibility for situational decisions. The Commission adopted over 20 most critical resolutions from October 13 through November 22, 1993.
At the first briefing after the monetary reform Chairman Isahakyan said that the Central Bank would adopt a tight and restrictive policy and that the entire dram stabilization fund would henceforth be in the Central Bank. Initially, the gold and currency reserves of the Central Bank of Armenia were a total of USD 500 thousand only.
In 1994 Bagrat Asatryan was appointed as Chairman of the Central Bank, and held this position until 1998.

ՀՀ ԿԲ նախագահ Բագրատ Ասատրյան 1994-1998 թթ.
Bagrat Asatryan; Chairman of the Central Bank of the Republic of Armenia (1994-1998).

In 1994 the Central Bank drafted the first monetary policy of the Republic of Armenia.
The first fact of forgery (a zero numeral was added to a 10 drams par value banknote to turn it into a 100 drams banknote) was recorded in January 1994.
On July 27, 1995, Association of Banks of Armenia was founded, and Tigran Sargsyan was elected as President of the association. The primary goal of the association was to defend interests of member banks through lobbying. Presently, it is called the Union of Banks of Armenia.
In 1996 the National Assembly of the Republic of Armenia adopted the laws on “The Central Bank”, “Banks and Banking”, “Bank Bankruptcy”, and “Bank Secrecy”.

The Republic of Armenia Law on the Central Bank says that the primary goal of the Central Bank is price stability in the Republic of Armenia. To achieve this goal, the Central Bank elaborates, approves and implements the monetary policy program of the Republic of Armenia.
The other objectives of the Central Bank are:

  • making sure necessary conditions for the stability of the financial system, including the solvency, liquidity and normal functioning of the banking system of the Republic of Armenia are in place;
  • creating and developing an effective payment and settlement system;
  • issuing the currency of the Republic of Armenia, and organizing and regulating the money cycle;
  • protecting interests of investors in securities, organizing and safeguarding fair mechanisms of pricing in securities market, ensure fair, transparent, reliable operation and development of securities market; and
  • making sure essential conditions for protection of the rights and lawful interests of consumers of the financial system are in place.
    In March of 1998, Tigran Sargsyan was appointed as Chairman of the Central Bank of Armenia and governed the Central Bank until April 2008.
ՀՀ ԿԲ նախագահ Տիգրան Սարգսյան  1998-2008 թթ.
Tigran Sargsyan; Chairman of the Central Bank of the Republic of Armenia (1998-2008).

Period 2002 - 2003 was momentous for amendments and innovations introduced to the banking legislation. Particularly, on May 29, 2002, the Republic of Armenia Law on Credit Organizations was adopted. Under this law, the Central Bank was empowered with an exclusive function to carry out licensing and oversight of credit organizations in the Republic of Armenia.
In 2002 some changes and supplements were made to the laws on the Central Bank and on Banks and Banking. These changes vested the Board of the Central Bank with broadened authorities aimed to prevent circulation of illicit proceeds at banks and credit organizations operating in Armenia. Consistent with the legislative amendments, the Central Bank lodged an initiative to develop normative regulations that set forth measures and procedures for prevention of circulation of illicit proceeds of crime and terrorism funding at banks, branch offices of foreign banks and credit organizations in Armenia.
In 2002 respective change were made to the Republic of Armenia Law on Licensing. The list of activities subject to licensing included credit organization activities, money remittance, clearing and settlement of payment documents, processing of payments by cards and activities relating to issuance and marketing of payment cards and other documents. The Central Bank is the entity to license and oversee the aforementioned types of activities.
In 2004 some other laws were adopted; among them, the Republic of Armenia Law on Collections, on September 28; the Republic of Armenia Law on Payment and Settlement Systems and  Payment and Settlement Organizations, the Republic of Armenia Law on Currency Regulation and Currency Control and the Republic of Armenia Law on Guaranty of Compensation of Bank Deposits of Individuals, all on November 24; and  the Republic of Armenia Law on Combating Legalization of Criminal Proceeds and Terrorism Funding, on December 14.
In 2005 the package of changes in banking laws made it possible to introduce a system of corporate governance to the banks and other financial institutions, namely insurance and investment companies.
More public disclosure of information by banks and greater transparency of bank information to shareholders is in place, in order to ensure even a wider public access to banking products and services.
In the currency legislation area, the scope of price quotations, which is required to be made in dram solely, was further widened. The legislation also specified the places where foreign exchange transactions are allowed; it defined the scope of authorities of foreign exchange traders, and stricter requirements for violation of currency legislation were in place.
Early in 2006 the Central Bank was authorized to take on regulatory and supervisory functions for the Armenian financial sector. The purpose of a unified system was to create a single, independent and effectively combined supervision and regulation framework; to ensure a sustainable and normal-functioning financial system, and to make sure rights and lawful interests of users of financial services and products (banking, insurance, and securities operations) are protected adequately.
The Central Bank was the first institution among its peers in the CIS countries to have moved, starting from January 1, 2006, to a fully-fledged inflation-targeting policy. This policy provides that the primary goal of monetary policy, i.e. a low and stable inflation level is realized not only by following developments in the monetary base but also looking at other factors as well. In an inflation-targeting strategy, the primary tool is the refinancing (repo) rate which the Board of Central Bank of Armenia sets each month.
In 2006 the legal grounds for switching to a new strategy of inflation targeting were strengthened, thus new provisions were established to make the activities of the Central Bank more transparent.
The legislative amendments on the occurrence of the right of pledge against non-documentary securities were designed to further improve the securities market.
In 2007 changes made to bank legislation facilitated the clause of confidentiality when providing information containing bank secrecy to the criminal prosecution authorities.
In April of 2007 the Republic of Armenia Law on Insurance and Insurance Activity was passed. The law has been developed on the basis of EU Legislation. The law specifies classes and sub-classes of insurance, while the licensing and insurance intermediation procedures have been aligned with the EU directive requirements. In October the Republic of Armenia Law on Securities Market was passed. Based on the European model, too, the new law is aimed at more flexible and effective regularization of the securities market. The law permits commercial banks and credit organizations to provide investment services in the securities market without having to hold an extra activity license.     
In 2007 a new requirement under the Armenian Legislation set forth a provision that the Central Bank is to publish average market exchange rate rather than having to determine such a rate.
In June of 2008 Arthur Javadyan was appointed as Chairman of the Central Bank of the Republic of Armenia.
Over 2008 the Central Bank continued the legislative improvements in the Armenian financial sector.
The National Assembly endorsed an important package of laws, namely the Republic of Armenia Law on Mortgage Backed Securities, the Republic of Armenia Law on Assets Securitization and Assets Back Securities, the Republic of Armenia Law on Attraction of Bank Deposits, the Republic of Armenia Law on Consumer Crediting, and the Republic of Armenia Law on Financial System Mediator.     
Amendments to such laws as Circulation of Credit Information and Credit Bureau Activity; Money Laundering and Combating Financing of Terrorism; Accounting and Bookkeeping as well as the passing of the Republic of Armenia Law on All-Armenian Bank were an important accomplishment in terms of regularization of the financial system.
In 2009 a number of changes were made to the Republic of Armenia Law on Currency Regulation and Currency Control and to the Republic of Armenia Code of Administrative Violations and the Republic of Armenia Criminal Code.
In 2010 the National Assembly endorsed the Republic of Armenia Law on Compulsory Insurance against Civil Liability in respect of the Use of Motor Vehicles. The primary objective of the law is to make sure there are effective procedures in place that protect the rights of parties injured as a result of traffic accidents and call for payment of insurance indemnities.
Further changes and addenda were made to the Republic of Armenia Law on Guaranteeing Compensation of Bank Deposits of Individuals to double the amount of compensation to AMD 4 million where a depositor keeps only a dram denominated deposit in the insolvent bank; and to AMD 2 million where a depositor keeps only a foreign currency denominated deposit in the insolvent bank.
Changes and supplements were introduced also to the laws such as on Joint Stock Companies; Banks and Banking; Investment Funds; as well as to other relevant laws and regulations.  
In 2011, the National Assembly passed the following laws: “On Supplement to the Republic of Armenia Law on Income Tax”, “On Amendment to the Republic of Armenia Civil Code”. The changes and supplements to the laws are aimed to regularize certain tax and legal matters that arise in seizure of property as an item of collateral.
Changes and supplements were also made to the following laws: “Bankruptcy” and “On Enforcement of Court Rulings”.
In 2012, changes and additions were made to the following laws: “On Investment Funds”, “On Securities Market”, “On Guaranteed Compensation of Deposits of Individuals”, “On State Registration of Property Rights”, “On Profit Tax”, “Personalized Records of Income Tax and Mandatory Funded Contribution” (the law text rewritten), “On State Duty”, “On Value Added Tax”, “On Income Tax” and “On Limited Liability Companies”, and to the Republic of Armenia Civil Code.
In 2013, changes and additions were made to the following laws: “On Funded Pensions”, “On Administrative Offences”, “On Licensing”, On Insurance and Insurance Activity”, “On State Pensions”, “On Public Service Identification Number”, “On Compulsory Third Party Motor Vehicle Liability Insurance” and “On Minimum Wage”. Changes and supplements were made to the Republic of Armenia Labor Code and the Republic of Armenia Civil Procedure Code.
In  2014, changes and additions were made to the following laws of the Republic of Armenia: “On Securities Market”, “On Investment Funds”, “On Funded Pensions”, “On Insurance and Insurance Activity”, “On Combating  Money Laundering and  Terrorism Financing”, “On Bank Secrecy”, “On Minimum Wage”.
In June 2014 Arthur Javadyan was reappointed as Chairman of the Central Bank of the Republic of Armenia.
In 2015 changes and/or supplements were made to the following laws of the Republic of Armenia: “On Banks and Banking”, “On Investment Funds”, “On Insurance and Insurance Activity”, “On Securities Market”, “On Joint Stock Companies”, “On Guaranteeing Remuneration of Bank Deposits of Individuals”, “On Financial System Mediator”, “On Circulation of Credit Information and Credit Bureau Activity”, “On Credit Organizations”, On the Central Bank of the Republic of Armenia”, “On Enforcement of Court Rulings”,  and changes and/or supplements were made to the Civil Code of the Republic of Armenia.
In 2015 the Central Bank announced that it tightens the rules: the minimum threshold of total capital of banks is set to be AMD 30 billion since January 1, 2017. The bank capital primarily serves as a safety cushion to absorb exposures to bank. Greater equity means larger banks, while possible consolidation of banks and bank mergers as a result of the new threshold will push down service fees, facilitate reduction of interest rates by banks and will improve the quality of services provided. The change will also contribute to the innovation in the banking system, a broader spectrum of services, as there would be more opportunities for investments.

In 2015-2016 changes and supplements to the Republic of Armenia Law “On Guaranteeing Remuneration of Bank Deposits of Individuals” introduced new stipulations and limits to guaranteed deposits, as follows:

  1. If the depositor holds only a dram denominated deposit with the insolvent bank, the amount of the guaranteed deposit will be AMD 10 million;
  2. If the depositor holds only a foreign currency denominated deposit with the insolvent bank, the amount of the guaranteed deposit will be AMD 5 million;
  3. If the depositor holds both dram and foreign currency denominated deposits with the insolvent bank, and the dram deposit is more than AMD 5 million, only that dram deposit will have a guarantee cover of up to AMD 10 million;
  4. If the depositor holds both dram and foreign currency denominated deposits with the insolvent bank, and the dram deposit is less than AMD 5 million, the dram deposit will be guaranteed in full and the foreign currency deposit will have a guarantee cover of AMD 5 million less the dram denominated deposit remunerated.

To make depositor protection and compensation more affordable, the maximum period within which a depositor may claim compensation has been extended up to 3 years from a previously established period of 1 year. In case of bank consolidation/merger, the situation with the depositor funds subject to guarantee when the depositor holds deposits in both banks at the same time has been regularized. Now, a maximum period has been set up and the deposit invested with each merging banks during which should be considered as a separate deposit.
In the period beginning March 1, 2016 until December 31, 2017, the Deposit Guarantee Fund must pay depositor-claimed compensations starting from the 20th workday following the case of remuneration, within three (3) working days after the depositor’s request, unless otherwise provided for by law.

In 2016 changes and supplements were introduced to:

  • the Republic of Armenia laws on “Security Market”, “Commercial Arbitration”, “Bank Bankruptcy”, “Bank, Credit Organization, Investment Firm, Investment Fund Manager, and Insurance Company Bankruptcy”, the Republic of Armenia Code of Civil Procedure, and the Republic of Armenia Civil Code; these changes are aimed at improving the derivative instruments and other financial instruments of the domestic financial market,
  • the Republic of Armenia laws on “Security Market”, “Bank Bankruptcy”, and the Republic of Armenia Criminal Code and Criminal Procedure Code; these changes are aimed at providing an improved legislation on the fight against market abuse;
  • the Republic of Armenia Criminal Code and Criminal Procedure Code; the changes are introduced to prevent organizing, administering of, and involving people in, the financial pyramids; and
  • the Republic of Armenia Civil Code, Criminal Procedure Code and Criminal Code in order to handle the pledge-related issues more effectively

In 2017 amendment and supplements were made to the Republic of Armenia Law on Central Bank, Law on Legal Acts, Law on Budget System, Law on Housing Mortgage Credit, Law on Consumer Crediting, Law on Currency Regulation and Currency Control, Law on Bankruptcy of Credit Organizations, Investment Companies, Investment Fund Managers and Insurance Companies, Law on Banks and Banking, Law on Insurance and Insurance Activities, and to the Civil Procedure Code of the Republic of Armenia.

The above amendment has been made to:

  1. To align existing regulations with new constitutional amendment. In particular, financial stability was defined as the main objective of the Central Bank; the procedures and conditions for the appointment of Central Bank management bodies, the principles of cooperation with state bodies in the field of competition and statistics were brought in line with the new requirements of the Republic of Armenia Constitution; the internal audit regulations of the Central Bank were improved in view of best practices of international audit principles and so on.
  2. Simplify the procedure of information exchange between the controlling bodies; to exchange information without international treaties, while protecting the confidentiality of information.
  3. Make the protection of consumer rights and legitimate interests in mortgage lending more inclusive, as common rules for the terms and conditions of mortgage lending have been in place, as well as simplify the procedures for providing mortgage loans and subsequent servicing.
  4. Align the banking and insurance regulation and supervision framework with international criteria.

In view of the new requirements of the Constitution of the Republic of Armenia, the following changes with regard to the Central Bank objectives have been made to the Republic of Armenia Law on the Central Bank:
The main objectives of the Central Bank are to maintain price stability and financial stability in the Republic of Armenia.
In pursuit of maintaining price stability, the Central Bank has a function to undertake measures to ensure price stability. The Central Bank develops, approves and implements monetary policy programs to achieve the goal of price stability.
If the other objectives of the Central Bank contradict its main objectives, the Central Bank prioritizes its main objectives and carries on in fulfilment thereof.

Other goals of the Central Bank are:

a) provide conditions for the stability, liquidity, solvency and normal functioning of the financial system of the Republic of Armenia;
b) collect, survey and publish monetary, financial, balance of payments statistics, international investment position and external debt statistics;
c) create and develop an effective payment and settlement systems;
d) issue the currency of the Republic of Armenia, organize and regulate money circulation;
e) organize and regulate a framework for combating money laundering and terrorism financing;
f) secure conditions for protecting investors in securities; retaining a fair securities pricing system in the market; and for developing a fair, transparent and reliable securities market;
g) ensure necessary conditions for protecting consumers’ rights and legitimate interests in the financial system;
h) ensure free and fair economic competition in the financial system.

In 2018, amendments and additions have been made to:

  • Armenian laws on “Asset Securitization and Assets-Backed Securities”, “Investment Funds”, “Foundations”, “Joint Stock Companies”, and the Civil Code of the Republic of Armenia.

The companies dealing with securitization used to operate as a foundation; following a legislative change these companies are going to operate solely as a fund. The arrangement will rule out all previous regularization with regard to a status of foundations, while securitization funds will operate under the Law on Investment Funds to the extent that it does not contradict their specificities.
These amendments aim to:

  1. eliminate barriers to securitization processes that have existed so far,
  2. make sure existing legislation is aligned with current developments,
  3. achieve clearer and more effective regulatory solutions for investments.
  • Armenian laws on “Mortgage-Backed Bonds’ and “Bankruptcy of Banks, Credit Organizations, Investment Firms, Investment Fund Managers and Insurance Companies”.

The amendment came to regularize aspects of assessment and reassessment of real estate based on secured mortgage bonds. The list of assets that can serve a security for the issuance of mortgage bonds has been clarified.
These amendments aim to:

  1. create incentives for the development of the mortgage market in Armenia,
  2. start the institute of a centralized issuer and participatory issuer,
  3. increase the attractiveness of secured mortgage bonds issued in Armenia to foreign investors.

 

Armenia’s financial system in figures

Year Commercial banks/branches offices Credit organizations/branch offices Insurance companies/insurance brokers Pawnshops
1994 55
1995 38
1996 35
1997 30
1998 31
1999 31/178
2000 31/192
2001 30/240
2002 25/231
2003 20/232
2004 20/233 9/2 26
2005 21/267 10/2 23
2006 21/299 17/2 15/6 64
2007 22/347 21/40 10/5 62
2008 22/380 23/48 11/5 70
2009 22/391 27/55 12/5 117
2010 21/405 32/66 11/5 128
2011 21/442 32/78 9/4 137
2012 21/479 32/114 7/3 143
2013 21/485 33/126 8/2 148
2014 21/509 32/149 7/2 142
2015 21/521 32/176 7/3 151
2016 18/526 34/169 7/3 146
2017 17/526 35/208 7/3 116
2018 17/537 39/211 7/3 127
Year Exchange offices/currency dealers Money transfer companies/organizations engaged in processing and clearing of payment instruments and payment documents Securities market participants, i.e. market operators/investment service providers (excluding banks)/investment fund managers/pension funds
2004 2/20
2005 2/18
2006 288/7 3/1 2/20
2007 245/5 7/4 2/21
2008 238/1 11/7 2/10
2009 250/2 10/7 2/8
2010 254/2 9/6 2/8
2011 259/1 9/6 2/8
2012 238/0 7/4 2/9
2013 236/0 7/3 2/8/3/8
2014 241/1 8/4 2/8/4/8
2015 227/1 7/4 2/8/4/8
2016 215/1 7/6 2/8/3/8
2017 183/1 6/5 2/9/3/8
2018 213/1 8/6 2/11/3/8

(million dram)

Year Total capital Total assets Total liabilities Paid-up capital Non-residents’ share
Banks
1994 3612 28610 24998 1424
1995 7438 42679 35241 4669
1996 10674 69327 58653 8557
1997 17371 106667 89296 13792 4654
1998 26375 159929 133554 18894 7885
1999 33048 190845 157797 22933 10293
2000 33613 236316 202702 29548 12555
2001 20399 232570 212171 37687 18623
2002 13098 250619 237521 43046 21606
2003 46218 286539 240321 38849 17943
2004 64735 363630 298895 40135 20989
2005 94761 440674 345913 60298 30757
2006 120271 524517 404246 80108 35658
2007 171814 764390 592576 116487 63302
2008 235690 1024232 788542 152490 97508
2009 278215 1325807 1047592 188641 131218
2010 318951 1560472 1241521 203799 151013
2011 355926 2066723 1710797 233945 169761
2012 393589 2470631 2077042 244127 178242
2013 448545 2936222 2487677 255530 188871
2014 461377 3403493 2942117 282608 186355
2015 506572 3449592 2943020 356621 227931
2016 646095 3987045 3340950 450505 251021
2017 686274 4364375 3678102 463717 261785
2018 748847 4986448 4237601 505091 282819
Credit organizations
2004 3262 5988 2726 3358 1947
2005 4390 7871 3481 4765 2919
2006 8456 20589 12133 8389 5280
2007 12486 43375 30889 10936 7258
2008 18056 65817 47761 14142 9281
2009 26249 75823 49573 19800 9225
2010 35965 87195 51230 25942 9217
2011 46845 123851 77006 37093 13704
2012 62877 168531 105654 50300 16054
2013 77598 209842 132243 60783 18231
2014 109648 269157 159509 86179 19169
2015 132207 308628 176421 104290 10168
2016 182039 391979 209940 136106 10747
2017 257361 474751 217390 164624 10602
2018 294318 556452 262135 193379 15079
Insurance companies
2005 4426 9879 5453 4108 -
2006 5991 8704 2713 5598 -
2007 5347 8376 3029 4639 -
2008 7449 11682 4233 6616 -
2009 12304 16982 4678 10938 -
2010 12506 25614 13108 12116 -
2011 14105 31502 17397 11933 -
2012 14055 38351 24296 11430 -
2013 15968 50007 34038 14732 6276
2014 15758 43421 27662 14108 7285
2015 16782 41130 24348 14584 7286
2016 19465 46675 27210 15064 7517
2017 19244 49510 30266 15064 7517
2018 19204 51687 32483 16044 7765
Investment companies
2005 1032 7726 6694 - -
2006 1248 10530 9282 - -
2007 2065 8747 6682 - -
2008 2721 7728 5007 - -
2009 2936 15573 12637 1756 -
2010 3196 19556 16360 2515 -
2011 3230 21827 18597 2100 -
2012 3798 23609 19811 2767 -
2013 5168 27039 21871 2954 -
2014 4929 25411 20482 2971 -
2015 4131 28655 24522 2979 -
2016 6470 41571 35101 2940 -
2017 9830 64335 54505 3840 -
2018 10659 56594 45934 4159 -
Content Published 05/14/2019