The new headquarters of HSBC Armenia opened in central Yerevan in April 2007. Foreign banks representing more than a dozen countries are active in the Caucasus country and new large investments are expected in the coming months. (Onnik Krikorian for EurasiaNet)

EurasiaNet has a news commentary by Noyan Tapan’s Haroutiun Khachatrian on the booming banking sector in Armenia. According to him, even more multi-million dollar investments in the sector are expected in the coming months, and one local analyst says banking in Armenia is among the best in the Commonwealth of Independent States (CIS).

Yerevan’s Garegin Nzhdeh Square illustrates the transition involved. The square’s sidewalks are packed with street traders, one of the clearest signs that Armenia’s “shadow economy” lingers. The lines of people at three nearby automatic bank tellers waiting to pay utility bills or get cash, however, suggests a parallel trend: the old Soviet image of banks as just a place where extra money could be stored is beginning to fade.

Armenia’s ongoing high rate of economic growth (12.1 percent for the first six months of 2007, according to official statistics) largely explains the trend. In 2000, average monthly salaries stood at roughly $55, while today they average $205. With incomes rising, residents are turning to bank loans, with interest rates ranging from 15-22 percent, to expand their purchasing power still further.

Since 2004, the banking sector has expanded at a rate of between 10 to 20 percent a year to stand currently at more than $1.6 billion. In the first six months of 2007, banking assets’ value climbed by $244 million, or about 83 billion dram, according to the Central Bank. Nonetheless, in terms of the ratio of total bank assets to Gross Domestic Product, Armenia ranks as an outsider country. This ratio, commonly used by specialists to evaluate the banking sector, was just over 19 percent by the end of 2006. In most post-Soviet countries, it can stand as high as 50 percent.

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But more banking activity could mean higher inflation, a situation often seen in rapidly growing economies which consume large sums of money in a short time. The Central Bank has hoped that a stock market, planned for introduction in the coming year or two, could help keep that risk even lower, but, for now, as bank investment grows, the outcome is far from certain.

Bankers say that inflation could provide a clue. Despite earlier fears that inflation for July 2007 compared with December 2006 might be as high as 4 percent, the increase ranked a mere 0.6 percent. This slight jump, despite above-average growth in the banking sector, has suggested that money supplies have not yet outstripped economic activity. For now, the bets are on that the Armenian economy has room to absorb still more.

The full article is here.