EVERYTHING BEGINS SLOWLY

Microfinancing is considered one of the most important segments of the financial sector, the first step to attract entrepreneurs to the credit market, a serious support for the development of small and medium-sized businesses. In fact, microfinancing institutions (MFIs) are purely credit organizations, which, thanks to short terms loans, prompt consideration of applications for financing and liberal requirements for collateral, are more popular with novice businessmen than banks. The monetary potential of this market in Azerbaijan reaches approximately several billion dollars.

In early October, microfinancing institutions held their sixth meeting to discuss the most relevant problems and solutions. This year, the title of the so-called investor fair was Microfinance at the Crossroads: Sustainable Development in the Digital Age.

Simplified access to financial funds

The fact that microfinance is one of the most important tools of the financial market in Azerbaijan are as follows: over the 20 years non-bank credit institutions (NBCIs) of Azerbaijan have provided about ₼4 billion worth loans to the population. According to the Central Bank of Azerbaijan (CBA), by the end of August 2019, NBCIs loan portfolio reached ₼339.1 million, or 2.4% of the country's total loan portfolio.

According to Suleyman Keleshov, member of the board of the Azerbaijan Microfinance Association (AMFA), 500 thousand people used the funds, and indirectly - about 2 million Azerbaijani citizens, although not everyone can get access to finances due to the lack of basic knowledge on drawing up a competent business plan or for the lack of collateral.

Until recently, microfinancing institutions have faced a problem of lack of funds. After the devaluation of the manat in 2015, lending was carried out exclusively in the national currency, which tightened the opportunities to issue loans. Unfavourable and unstable situation in a number of credit organisations caused the withdrawal of foreign investors, creditors and financial funds from the market. This was accompanied by delays in the credit histories of debtors. Therefore, new lending became unavailable.

However, the decree of President Ilham Aliyev On additional measures related to the solution of problem loans to individuals helped to solve most of these problems. In fact, the development of microfinancing over the past five years can be divided into two stages - before the decree and after.

The document also had a positive effect on the liquidity of banks and non-bank credit institutions, since the borrowers are now restructured on concessional terms. AMFA believes that another positive result of the decree could be a reduction in interest rates in this sector, which in turn will open up great opportunities for lending additional loans to small and micro-businesses.

"The presidential decree is socially oriented. At the same time, it helps financial institutions, freeing them from a large number of non-performing loans. In particular, from the beginning of 2019, the non-performing loan portfolio of non-bank credit institutions decreased by 70%. In addition, the improvement of the financial situation of the population has resulted in the growth of lending rates and the revival of the microfinancing market," AMFA Chairman Jalal Aliyev said.

Another important aspect - the income of borrowers is becoming more transparent, according to AMFA. The fact is that the revenues of small and micro-businesses must be recorded so that they can be analysed for compliance with lending. And this process is accelerating as reforms in the tax sphere are implemented, more and more entrepreneurs are willing to legitimize their business. Thus, the existing market potential is increasing and the customer base is expanding accordingly.

Risk insurance

Microcredit institutions will soon find reliable customers among small and medium-sized enterprises. Thus, it will be easier to solve problems related to access to financing.

Agency for the Development of Small and Medium Business is currently implementing a large project to provide services from a single platform, which is going to be useful both for state - private sector and businesses as a whole. It is also planned to involve microfinance institutions in this process.

According to the agency, one of the problems of attracting resources from banks and microfinance institutions is the issue of risk insurance. The newly established Friend of Small and Medium Businesses (KOB Dostu) network is the very platform that will try to solve this issue. In essence, it is a platform to accompany business projects to successful completion, which provides a guarantee of their sustainability and accessibility to resources. It should be noted that so far 17 KOB Dostu are operating throughout the country, however, it is envisaged that they will cover other cities and areas. The purpose of these organisations is to provide informational, legal, advisory support, assistance in establishing relations with government agencies.

Risks in the credit market are also reduced because all market participants, or rather lenders, can verify the credit history of borrowers. In addition, as noted by the Director General of the Credit Bureau Elchin Habibov, in April 2020 it is planned to launch a new service - credit scoring (assessment of the borrower's creditworthiness), which will make it possible to launch new services, in particular analytical services. "In addition, this will encourage the automation of processes and allow citizens to control the changes in their own credit histories themselves," E. Habibov claims. The system is being developed jointly with Turkish colleagues.

It is planned to launch another service until the end of 2019 to make it possible for credit institutions to send a larger number of requests to the bureau at a time. Currently, credit institutions can send just one request at a time. The new service, according to the CEO, will bring the number of requests to 5-10 thousand.

He emphasized that the share of scoring in general requests to the bureau is gradually growing. Since December 2017, when the system was launched, the bureau received 3.6 million requests, of which 1.9 million were scoring. If last year the share of scoring in general requests was 43.5%, then for 8 months of this year this indicator reached 61.5%. This growth may be due to an increase in lending, which followed the decree on bad loans. After being released from the old credit burden, individuals covered by this document may well become new potential customers of non-bank credit organizations and other financial institutions.

Single platform

Digital financial services have been actively introduced in the banking sector of Azerbaijan in recent years. The main goal is to introduce innovative models in the entire financial market that will provide the population with inexpensive financial services and simplify their receipt. This is especially important for mountainous and rural areas where access to finance is difficult.

At the 6th Investors Fair, one of the ideas was to regulate all participants in the financial market of Azerbaijan from a single platform. The proposal was made by the chairman of the Association of Banks of Azerbaijan, Zakir Nuriyev, who believes that different approaches to regulating individual participants in the financial market, which directly or indirectly carry out the same works and services, will lead to negative consequences.

"We work with various institutions to improve our activities and develop digital channels of services. But this issue requires improving the legal framework. Like the banks, we are trying to introduce remote lending, without the physical presence of borrowers in the office. I think that after the adoption of the necessary amendments, the situation will improve significantly," AMFA Chairman of the Board said.

Implementation of all these plans will lead to an increase in the role of microfinancing institutions in lending to businesses, an increase in their share in the total amount of lending to entrepreneurship. After all, only the projects in the non-oil sector are financed by microloans; any progress in this area directly corresponds to the main line of the country's economic policy, which is focused on reducing the oil factor in the national economy.