Evaluation of the Impact of the Devaluation that
Occurred in 2015 on Credit Portfolios in the
Azerbaijani Banking Sector
Kamran Karimli
Abstract. This study provides a comprehensive analysis of the impact of the 2015 devaluations in Azerbaijan on the quality of the banking sector's loan portfolio, grounded in the findings of prior significant and credible research. The primary objective of the study is to empirically demonstrate the destructive effects of sharp exchange rate fluctuations on banks' profitability indicators, capital adequacy, and dollarization levels. The analysis reveals that the devaluations exacerbated currency mismatches, leading to a sharp rise in non-performing loans (NPLs) to 21% and total banking sector losses exceeding 1.33 billion USD. Furthermore, the study highlights the subsequent closure of several banks due to operational failure. Drawing on established research, panel data analyses covering the period 2013–2018 confirm a negative correlation between exchange rate shocks and the return on assets (ROA). The research also examines the structural contraction of the banking sector, the revocation of licenses, and the recovery measures implemented in the post-crisis period. Conclusively, the study proposes anti-crisis and strategic measures such as de-dollarization, the implementation of hedging mechanisms, and the strengthening of capital buffers to enhance resilience against future macroeconomic shocks.
Keywords: devaluation, banking sector, dollarization, non-performing loans (NPLs), financial stability, currency risk