BANK OF BAKU AUDITORS REPORT AND
FINANCIAL STATEMENTS AT
31 DECEMBER 2001
Note 3 - Use of financial instruments
Because of the nature of its operations, the Bank is exposed to a variety of risks, the major risks being foreign exchange risk, interest rate risk, liquidity risk, and credit risk. These risks are managed through the use of various offsetting positions and continuous monitoring of the risk positions and financial markets. The Bank does not use derivative financial instruments to hedge any of these risks.
Credit risk
Ownership of financial assets involves the risk that counter-parties may be unable to meet the terms of their agreements. The Banks loan portfolio represents a significant concentration of credit risk because the Bank deals with a variety of consumer loans. The credit risk is considered significant because of characteristics of the loan portfolio. The credit risk is managed by a credit committee that reviews all
credit transactions before disbursement. Credit risk is monitored regularly and appropriate course of action is taken for potentially problem loans. To an extent possible, the Bank requires collateral to mitigate credit risk. The credit portfolio is diversified according to various criteria including industry sector and risk categories.
Geographical concentration of assets and liabilities
Total assets
Total liabilities
As at 31 December 2001
Azerbaijan
23,260,613
13,477,976
CIS
18,298
-
OECD
countries
1,343,193
1,912,234
24,622,104
15,390,210
As
at 31 December 2000
Azerbaijan
12,292,436
5,225,725
CIS
42,371
-
OECD
countries
1,702,603
-
14,037,410
5,225,725
Currency risk
Foreign currency denominated assets and liabilities together with purchase and sale commitments give rise to foreign exchange exposure. The exposure is managed by using natural hedges that arise from offsetting foreign currency denominated assets and liabilities.
In 2001 the Bank established an Asset and Liability Committee (ALCO), which regularly monitors the foreign currency position and makes decisions in line with the expected movements in foreign exchange rates in order to reduce this risk. The related ALCO strategy for 2001 was to maintain a long position in US dollars. Included in the table are the Banks assets and liabilities at carrying amounts, categorized by currency.
