THINGS AREN'T MOVING …

The continued economic growth in Azerbaijan, the implementation of a large number of infrastructure projects of various proportions, gradual development of private enterprise and its growing requirements have generated large potential for the development of the leasing market in the country.

But while the country's banking sector has grown by almost 18 per cent and the insurance market by an impressive 58 per cent in one year, the leasing market has only retained the indicators of last year, showing neither growth nor decline.

According to market players, the outgoing year was one of relative stability and development, which has more to do with the healthy economic situation in the country rather than the settlement of major problems of this important segment of the financial sector.

Problems, gaps and ways of eliminating them

One of the main problems of leasing companies is still a lack of funds. Today they mainly use the resources of their parent banks and barely attract their own resources. By and large, these companies are not of particular interest to international financial institutions and foreign commercial banks (the investors are not impressed with the size of leasing companies, their portfolios and the level of capitalization), which hampers the attraction of long-term, low cost and major funds. Meanwhile, even the companies that can obtain the necessary finance from parent banks can be counted on one hand. As a result, financial resources are provided to лизингодателям at a high price and they can't offer competitive conditions to customers.

In addition, leasing companies complain about loopholes in the legislation regulating this sector, including those related to taxation. We recall that at present leasing relations are governed by the Civil Code (chapter 38, articles 747-751) and the Tax Code (article 140) of Azerbaijan. Following the expansion of a Civil Code article on leasing, a separate law regulating this sector and adopted in 1994 was canceled.

For example, lessors can't re-lease a facility that has been exacted from a lessee. That is, after a facility is exacted, companies have to keep it themselves or sell it, which ultimately leads to higher costs and affects their financial performance. The current legislation does not create conditions for the development of repeated or operational lease, whereas in developed and developing countries these sectors account for large shares of leasing companies' portfolios.

Also, according to market players, the persisting problem of the VAT strongly inhibits market development. The point is that leasing companies are not subject to the VAT today, so offsetting with a lessee is impossible, which discourages potential customers. A VAT-paying legal person applying to a leasing company has to account for its costs on this tax itself, which ultimately leads to a higher cost of the transaction. As a result, the person prefers to purchase equipment through bank loans or equity. The VAT exemption for leasing companies is not a privilege as such. In fact, companies believe that because of these problems, they lose a major business segment.

In addition, companies note that it is currently impossible to carry our Decision No 12 of the Cabinet of Ministers dated 31 January 2005, which was adopted in order to promote the leasing sector. It contained a list of some types of assets that are exempt from VAT when imported into the country. Unfortunately, up to now there is no procedure for implementing this decision, which affects leasing companies and, accordingly, economic players in Azerbaijan.

Leasing companies, just like banks, face problems when applying to courts for seizure of leased facilities, calling for compensation, etc. Typically, these processes are very long and can last for years. The situation with the execution of judicial decisions is as difficult. More efficient and effective operation of the system could greatly assist the work of leasing companies.

So, there is an obvious need for additional support for the development of this segment of the financial market. The Association of Leasing Companies of Azerbaijan (ALCA) regularly sends proposals to the government for amendments to the existing legislation governing the leasing industry, but so far these attempts remain futile. Some see the reason of that in the absence of a state authority that would regulate this area. Because of this, as players of the leasing market believe, the tax breaks which were introduced in 2009 on exemption from tax on the profit used for capitalization affected only the banks and insurers, although leasing companies also addressed the Milli Maclis in this regard. In addition, the positive aspects of state regulation also consist in the possibility, if necessary, to take measures to prevent systemic risks and resolve problems.

However, not everyone shares the view on the need for the introduction of state regulation in this sphere. For example, the International Finance Corporation, which conducted a study of Azerbaijan's leasing market several years ago, recommended not to implement this issue. The leasing sector is still quite young and should be given the opportunity for growth without limiting it with any regulations, according to market participants. This can stifle weak players and sideline the companies that are just beginning to develop and may have good prospects in the future.

Interest for portfolio 

At the same time, the prospect of yet another problem for the leasing companies is looming large - future changes to the banking sector of Azerbaijan due to the tightened requirements for the capitalization of banks. We recall that by the decision of the Central Bank of Azerbaijan from 25 this year, the required total capital of existing banks and the charter capital of newly established banks have been raised from the current 10 to 50 million manats. The new regulation comes into force on 1 January 2014 and the number of participants in the banking market of the country is expected to decline by then. And given the fact that the leasing market is strongly associated with the banking sector, the concern is understandable.

However, experts believe that the changes expected in the banking sector of Azerbaijan will have no material effect on the leasing companies. Here's why: they have been established under banks, which either meet the new requirements today or have already announced that they will fulfill these requirements. So this measure is unlikely to affect the quantitative composition of players in the leasing market.

By the way, more than 20 leasing companies are registered in Azerbaijan, 11 of which are members of the ALCA. Experts believe this number of players is normal for the market, which, however, does not apply to their portfolios.

Today, about 30 per cent of investment in real assets is made through leasing in the world. The modernization of fixed assets is also done through leasing. No company in the West will purchase equipment on credit, but will do so by leasing it. In Azerbaijan, leasing accounts for a little more than one per cent of total investments, while in Russia and Kazakhstan this figure is stands at 6 per cent.

According to various estimates, the demand for leasing services in Azerbaijan is at the level of 0.8-1 billion manats, while the aggregate volume of portfolios of leasing companies is about 200 million manats. According to experts, if at least some of these problems are resolved, the market could reach 400-500 million manats.

Today, the average interest rate on leasing, depending on the product, varies between 18 and 22 per cent a year. According to this indicator, leasing lags behind its main competitor - bank lending. At the same time, companies forecast rate cuts in 2013. 

Equipment for construction and transport sectors, production lines, vehicles, medical equipment and certain segments of the real estate are currently available on leasing terms. Given the ongoing activity in the construction market, this sector will be in demand for leasing services in 2013. However, according to market participants, leasing in Azerbaijan can be used in all sectors. They can participate in major transport projects in Azerbaijan, mining, aviation, road reconstruction, replacement of communication lines, energy projects, etc. Companies are trying to offer their products in many directions, but over time the market is expected to undergo industrial concentration, i.e. the creation of specialized leasing companies, which is happening in Russia and Kazakhstan now.

In short, the scope of activities for leasing companies in Azerbaijan is quite broad. This market has all the prerequisites for development, but realization of the potential requires serious reforms of the sector.