|                                                                                                                                                                                     |  | Armenia's Emerging Banking System                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsCustomsCornerPublicationsSourcesof FinanceFinanceLinkLeadsand EventsExchangeRatesState ExportsOtherSources** |  | November 1998by George IsayanAlthough the banking sector in Armenia is small, it is one of the most advanced and efficient
sectors of the 
economy.  As of July 1, 1998, the total capital of commercial banks in Armenia was 19.0 billion
dram (US$38
million).  These banks are considerably stronger now than in 1995.  Of course, Armenian banks
do not yet provide
all the types of financial services generally provided by Western banks.  However, competition
and close
supervision by the Central Bank of Armenia are pushing more banks towards meeting
international standards. 
U.S. companies doing business in Armenia should become familiar with the capabilities,
regulations, and
limitations of the country's banking sector as part of preparations for entering the market.Armenia's banking sector is comprised of the Central Bank, the state-controlled Savings Bank,
and 31
private commercial banks with more than 200 branches on the territory of Armenia. The Central
Bank of Armenia
conducts national monetary policy, issues the national currency, the dram, and grants licenses to
individuals or
organizations engaged in banking and money exchange operations.A series of laws passed between 1993 and 1996 has established operational procedures and
regulations for
banks in Armenia. By law, the minimal charter capital of the bank must be 50 million dram
(US$100,000). 
Currently, banks must have a minimum of US$600,000 (equivalent in dram) in total bank capital. 
As of January
1, 1999, that amount must be US$800,000 (equivalent in dram), and as of January 1, 2000, US$1
million
(equivalent in dram).The government owns shares in three commercial banks: Ardshinbank, Armeconombank, and
Armagrobank. Foreign banks are represented by Midland Armenia Bank (member of the HSBC
Group,
UK), Rossiysky Kredit Armenia (Russia), Menatep-Yerevan (Russia), and Mellat Bank (Iran). 
The number
of private banks has decreased by over 40 in the last three years as the Central Bank has pursued a
policy of
tightening bank capitalization requirements and pushing weak and undercapitalized banks into
closing or into
merging with stronger banks.  Meanwhile, the Central Bank of Armenia has joined Swift, the
widely accepted
international system for wire transfers, and has provided nine Armenian commercial banks
(Ardshinbank,
Armagrobank, Armimpexbank, Armeconombank, Credit-Yerevan, Armenian Development,
Ineko,
Converse, and Shirakinvest) with linkage to Swift through a terminal based at the Central Bank.Basic Services and Bank Cards
In addition to deposit and loan servicing, major Armenian banks also offer travelers' checks,
factoring
services, and securities trading.  In particular, 25 banks conduct operations with securities, mainly
government
Treasury bills.  The banks are mostly active in the primary market and, as a rule, prefer to use
their own funds
rather than act as intermediaries for clients.  Most Armenian banks also offer payment services for
foreign trade
operations.  Methods of payment include advance payment, a letter of credit, and other
internationally accepted
forms.Very few retail/financial institutions accept credit cards, and Armenia still lacks the infrastructure
and the
business culture for widespread use of credit cards.  Fourteen Armenian banks, however, are
providing credit card
services.  Several of them, including Armimpexbank, Armagrobank, Ardshinbank, Credit-Yerevan
Bank, Lend
Bank, and Converse Bank, distribute Visa, Mastercard, or other cards in cooperation with
Russian banks in
Moscow and some Western banks.  The recent Russian crisis is likely to affect these operations. 
As of July 1998,
only Armagrobank and Midland Armenia Bank had issued debit cards.  Both banks operate ATM
machines as
well.Currency Exchange and Transfer
Although the dram is the sole legal tender in Armenia, U.S. dollars and other major currencies are
accepted
mediums of exchange at retail and financial institutions and in private transactions. At present, the
official exchange
rate in Armenia is set by the Central Bank, based on weighted daily average rates used in
interbank currency
trading, by currency exchange offices, and in currency auctions conducted at the Yerevan Stock
Exchange. 
Currency can be exchanged at numerous exchange offices owned by banks and individuals.  The
official and
market rates do not differ significantly.Companies in Armenia can open hard currency accounts in Armenian or foreign banks.  In
1994-1995,
Armenia lifted many limitations on conversion and transfer of funds.  Foreign companies, as well
as their Armenian
counterparts, may convert currency through resident banks without any limitation and face no
transfer limitations.
Most banks can transfer funds abroad within 2-4 days. Western Union, which has been operating
in Armenia
since 1996, offers almost instantaneous transfers.   Foreign investors can freely repatriate their
property, profits, or
other assets that result from their investment after they have paid all due taxes. Cash exports,
however, are limited
to US$10,000 or the equivalent in other currencies.  All amounts above US$10,000 must be
transferred through a
bank.Banking Resources and Terms of Payments
The lending ability of the banking system is limited by the low funding capacity of the banks. 
Very few banks
can provide loans exceeding US$20,000.  At present, many private banks limit their lending
operations to short-term loans in local or hard currency at very high interest rates: up to 50-70
percent per annum.  These banks
usually demand collateral of equal or higher market value, such as property, cars, gold, etc.Select Armenian banks participate in multilateral and commercial funding arrangements, including
the World
Bank's Enterprise Development Loan program and Kirk Kerkorian's Lincy Foundation Program.  
These
programs aim at private business development for specific categories of enterprises.  The
participating Armenian
banks, which  receive below-market interest rates, offer loans up to US$1  million with a 15
percent annual
interest rate, on average.  The loans must be supported by a business plan and secured by
adequate collateral.  The
World Bank project has extended US$16 million in such funds, while in July 1998, the Lincy
Foundation signed
an agreement with the Armenian Government on extending the first US$15 million of US$100
million in pledged
financing.For more information on doing business in Armenia, visit BISNIS OnLine at 
http://www.mac.doc.gov/bisnis/country/caucasus.htm#Armenia. Additional information on
financing is available
in the BISNIS document Sources of Finance, also available through BISNIS OnLine.George Isayan represents BISNIS in Yerevan.This report is provided courtesy of the Business Information Service for
the Newly Independent States (BISNIS)