Azerbaijan Banking System : The effect of macroeconomic factors on the performance of banking system

During the last decade, the nature of financial institutions, especially banks have changed respectively.The global changes affected the financial system of Azerbaijan as well.Azerbaijan financial system has started its operations very recently.The first stage began in 1990s with formation of legislative base of financial system after the collapse of Soviet Union.The second stage began after 2000.Strong growth in the economy, strengthening coordination with World Bank, IMF and international financial institutions are the characteristics of the second phase.The objective of this paper is to measure the performance of Azerbaijan banking system and to analyze the relationship between bank performance and macro economic indicators over the period 2003 - 2008, a period characterized by high economic growth and tight control by National Bank of Azerbaijan.The analysis of the study consists of two parts. First part is determination of banks` performance with CAMELS performance measurement system. Second part - measurment of the relationship between performance of banks and such macro economic factors as GDP and inflation is done with panel data analysis.