BIG MICROCREDIT

Development of entrepreneurship is a major component of Azerbaijan's economic policy. By applying various tools and mechanisms, the government seeks to remove obstacles to business growth and it has already achieved certain success in this area. 

As of today one of the main barriers to the development of private companies including small and medium enterprises (SME) is limited access to financial resources. As is said in a World Bank report, more than 65 per cent of their investments are still provided from internal sources. 

In 2004, the share of loans issued to the private sector totalled 9% of the country's GDP. In 2012, their share increased to 24.5%. Nonetheless, according to WB specialists' calculations, this figure is lower than in countries with a high average income (72% in Bulgaria) and countries of the region (32.8% in Georgia).

In this environment, the dynamically developing microfinancing sector may become an important source to attract funds for supporting small and medium enterprises.

Market

There are some 30 non-bank credit organizations (NBCO) and over 100 credit unions. The number of banks providing microcredits also keeps growing. According to the Asian Development Bank's (ADB) estimates, Azerbaijan's banks and NBCOs have microcrediting portfolios totalling 1.4bn dollars and 0.6bn dollars respectively. The total number of borrowers exceeds 600,000 people (or 7% of the country's population). However their combined assets still remain lower than 2% of the GDP, which is below average international indicator. Only 9 organizations have assets exceeding 10m dollars. 

Nonetheless new players may appear in the microfinance market in the nearest future. The Central Bank of Azerbaijan (CBA) has already drawn up the legal framework for transforming banks into NBCOs in case the former fail to increase their aggregate capital to 50m manats as required by the new standards taking effect as from the beginning of next year. 

Meanwhile the regulator's endeavour to capitalise the banking sector will not affect NCBOs. Rasad Orucev, directorate general of the Central Bank, has told R+ that there is no need as of today to tighten requirements to the capital of NBCOs. According to him, the NCBOs are just expanding their activity now after the law "On non-bank credit organizations" was approved late in 2009. 

Thus for instance, NBCOs entitled to accept collaterals when issuing loans are required to have a minimum statutory capital at the level of 300,000 manats. The figure for credit organizations having no such right is set at 30,000 manats. 

Some microfinancing organizations on the contrary are considering the possibility to transform into a bank. Yet the Central Bank is not planning to issue new banking licences in the near future, R. Orucev said. "If someone wants to enter the banking market, they may buy out a share in an existing bank and become its stockholder or partner. The CBA's current policy is aimed at consolidation and capitalisation of existing banks," R. Orucev said. 

Funding and development 

The portfolios of microfinancing organizations have been rapidly growing in the past few years. Nonetheless the

 companies are still reporting great unsatisfied demand that they cannot cover in particular due to funding restrictions. The NBCOs receive much of their funds from international organizations and development agencies mainly in foreign currency. 

According to Jala Haciyeva, the executive director of the Azerbaijan Microfinance Association (AMFA), NBCOs have a limited choice of instruments today: they either take loans or attract external investors to become their founders. 

In her words, there are some 30 foreign investors working on Azerbaijan's microfinance market. These include Incofin, Triple Jump, Symbiotics, the Asian Development Bank (ADB), the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD) and the German Bank for Development (KfW). In addition, one or two foreign investors enter the local market annually. "Alternative sources of finance are needed today," J. Haciyeva said in her talk with R+. 

NBCOs' participation in the money market of the country's currency exchange system may provide a good opportunity to diversify funding sources. The Baku Interbank Currency Exchange is already holding talks with NBCOs to involve them in the money market of the Ex

change Electronic Trading System (Russian abbreviation BEST). NBCOs will become the third (after banks and insurance companies) category of the BEST system's users. 

"The development of this instrument in the future may reduce the dependence of non-bank credit organizations on international investments," said J. Haciyeva adding that NBCOs may become fully fledged participants of the money market, that is, to work both as borrowers and lenders. 

Alongside this, despite the fact that the NBCOs remain small in size, they play an important role in providing access to financial services in the rural areas while banks are mainly concentrated in the cities. 

According to J. Haciyeva, the need for training credit specialists has surprisingly increased in the country's reg

ions over the past two years. "This interesting trend can be seen both at NBCOs and banks. Now those structures have become very sensitive to their customers' opinions. Formerly credit department staff used to look for customers and monitor credits simultaneously but now these tasks are separated," she said. 

Moreover, she said, the NBCOs are in search for technological innovations today in order to cut their customer service costs. 

The technical aid that the ADB is planning to provide for developing the microfinance sector in Azerbaijan may prove helpful in this context. Technical aid worth 300,000 dollars will expand access for low-income individuals and small businesses to financial services and make supervision in the microfinance sphere more efficient. ADB will help Azerbaijan develop its policy and strategy for financial inclusiveness and improve information accessibility. This policy will make it possible to attract strategic investments to new services in the sphere of payments, savings, microinsurance, microleasing, branchless banking and others. 

Quality and cost of credits 

Cost reduction helps cut credit interest rates for NBCOs enabling them to compete with banks offering cheaper credits. According to J. Haciyeva, the actual annual interest rate for microfinance products varies within 26-33% and the effective rate within 11-15%. The average size of microcredits is 2,000-3,000 manats in the towns and 1,000-1,500 manats in the rural areas. 

Today's level of interest rates on credits remains steadily high despite the growing numbers of microcredit organizations in the state. This points to the fact that demand for microcredits is much higher than their supply in Azerbaijan. 

It was microfinance organizations, J. Haciyeva said, that helped low-income strata of the population to start their credit record. A good credit reputation with NBCOs will enable them to take loans from banks in the future. 

As for the credit portfolio quality, Azerbaijan's microfinance market is going through a period of rehabilitation. Historically, problem loans accounted for less than 1% of the entire microfinance portfolio in Azerbaijan. This indicator increased to 4-4.5% after the crisis in 2009-2010. Currently less than 1% of the portfolio is in the risk zone: the share of problem microcredits at NBCOs and banks varies from 0 to 2.5%. 

"At banks, the indicator for microfinance credits is lower than for other types of credits. Since the second wave of crisis passed over, attention has increased to the quality of the credit portfolio," Haciyeva said. 

In her words, the situation in this sphere has been noticeably improved by expanding access for microfinance organizations to the centralized credit register. "Microcredits are mainly issued not against collaterals but against guarantees. When issuing a credit, it is necessary for the organization to check the credit history not only of the borrower but also their 3 or 4 guarantors. This is why the association welcomes the Central Bank reducing the price of inquiry to 1 manat. We try to encourage all organizations we are dealing with to check all credits being issued irrespective of their size. Currently in most cases they do not check credit history for credits smaller than 2,000 manats although it is such small loans that form troubled credits," the expert said. 

It should be pointed out that the third investor fair held in Baku early in October demonstrated much interest in microfinancing. The fair organized by the AMFA gathered current and potential players in this sector, foreign investors and representatives of the market regulator. 

In general, according to observations, the development of this sphere in the financial sector is becoming especially important against the background of the government's plans to improve the situation with businessmen's access to money resources. According to the blueprint for the country's social and economic development in 2014-2017 published a few days ago, these intentions underlie one of the basic guidelines for Azerbaijan's state policy in the sphere of support for entrepreneurship.