POST SCRIPTUM ABOUT POS TERMINALS

In its desire to integrate into the international economy, Azerbaijan has already cleared a large number of obstacles and hindrances. The country has completed its transition to a market-regulated economy and the stability of its financial system, despite the troubles in the international markets during the global crisis, has further improved the country's financial ratings.  However, it is premature to talk about addressing all the problematic issues yet.  And in this context, the top priorities now are strengthening the non-oil sector and boosting the revenues it generates for the budget.

Although attempts to improve the situation in this direction have been made almost every year (amendments were made to the Tax Code and the system of registration and monitoring of business entities has been improved), the rate of tax evasion is still high, especially among the small and medium-sized enterprises.  The weakness of controls to regulate settlements in the trade sector - one of the most important components of the non-oil sector of the economy - plays an important part here.  Among other problems, this situation paves the way for corruption, which the country is fighting with increased intensity.  As early as five years ago, the transition to a cashless system of payment for goods and services began in Azerbaijan, and its completion would address all the above-mentioned problems.

Things have not budged an inch?

On 24 November 2005, the president issued a Directive on Additional Measures to improve payment systems in the Azerbaijani Republic, and the State Programme for development of the national payment system in the Azerbaijani Republic for the period of 2005-2007 was also passed; this envisaged installation of POS terminals in sales and services outlets. Also prepared was the cabinet's directive dated 2 February 2006, which defined the criteria for installation, and a schedule for phasing them in on the country's territory in 2006-2007.

The success in implementing these projects can by judged by the fact that five year later, in January 2011, head of state Ilham Aliyev had to return to this issue once again during a cabinet meeting:  "We have to minimize cash payments at points of sale, service and catering facilities.  There are already credit cards; most people in the country have these cards.  These credit and payment cards should be used in every shop and every restaurant.  Of course, if this happens, the tax base will widen automatically and effortlessly.  The situation in this area in Azerbaijan should be no different from the situation in developed countries.  I expect that in 2011, radical and decisive measures will be taken in this direction."

At present, the situation in this area is indeed different.  Despite the government's attempts to stimulate the process, there has been no desire among businessmen to support these measures.  True, all government organizations and many private companies transfer salaries to their staff's banking cards, pensioners, too, receive their payments from cash machines almost everywhere, and the same system is used when scholarships are paid to students or social benefits payments are made to entitled people.  But all these are steps by the government.  Businesses almost never reciprocate.

By and large, today you can pay by bank card only in upscale fashion boutiques or, in some cases, at large supermarkets, and even there you risk seeing displeased expressions on the faces of sales people.  And the point is not just their lack of skill in using POS terminals.  As always, it is entirely a financial matter, as non-cash transactions are disadvantageous.  Banking fees and 18% VAT make cashless payments unattractive to sales and services outlets.

However, the lack of public awareness of the advantages and benefits of this method of payment also slows down the development of the system.  For example, at present it is possible to pay for all communal utilities by bank card without leaving your home, but the vast majority of Azerbaijanis prefer to spend hours in long queues at banks and pay in cash to get a payment receipt.

And these are only some of the current problems.  The last five years have proved that to popularize non-cash payments in Azerbaijan, more effective measures are required than the mere installation of POS terminals at all points of sale.

In the mean time, the Government, or to be more specific, the Tax Ministry, which, together with the Central Bank regulates this issue, mentions yet another reason for the lack of popularity of this method of payment among businesses: it is a considerable impediment to tax evasion.  Tax Minister Fazil Mammadov said that "tax evasion is minimal in areas where cashless transactions are used".

Incidentally, the fact that the number of the POS terminals in the country is decreasing demonstrates the lack of desire among small and medium businesses to enjoy the benefits of non-cash settlements.  Milli Kart Executive Director Calal Orucov said that there is a decline in POS terminal use at smaller points of sale in Azerbaijan because of the lack of demand for these services.  For example, the number of POS terminals serviced by the processing centre declined from 2,500 to 1,200 in 2010.

Second wind

When, as already mentioned, President Ilham Aliyev drew attention to this issue again, the Government promised that major changes would take place this year.  Central Bank of Azerbaijan (CBA) Board Chairman Elman Rustamov said that a joint working group had been created with the Tax Ministry to stimulate the non-cash settlements system in the country.  "We are studying the measures taken to economically stimulate them and, first and foremost, this involves active dialogue with business organizations, which will help us establish their expectations of the system and stimulate their interest; second this means cutting expenses in the system, including tariffs and the cost of transactions via cash machines and POS terminals", he said.  Rustamov added that the CBA believes that dialogue with businesses should be intensified to make them more interested in transition to cashless transactions.

Besides the dialogue, a number of specific measures are to be carried out to stimulate interest in this problem.  Rustamov argues that there should be administrative measures, so that everyone realizes that there is accountability for violating the law.  "The development of a non-cash payments system in the country is a serious issue and one of the main goals of the CBA", he said.

Ziyad Samadzada, chairman of the Parliamentary committee for economic policy, said that the "committee is now actively involved in preparing changes and amendments to the country's Tax Code, aiming to assist the business sector, improve the effectiveness of taxation policy and improve tax collection.  The introduction of amendments to the Tax Code will result in changing rules and tax benefits to stimulate cashless payments".  The Member of Parliament said that there are plans for wider use of payment cards and greater fines for irregularities.  "Overall, major changes are expected in this sector during the year, and the Central Bank is doing a lot of work in this field", Samadzada said.

As for the tax benefits, it is known that within the framework of measures to stimulate non-cash settlements, the possibility of introducing graduated VAT rates is currently being discussed.  Deputy Tax Minister Natiq Amirov said that cutting the VAT rate for retail sales if payments are made by card is considered to be appropriate.  To stimulate wider use of non-cash settlements by individuals and businesses, VAT is to be halved to 9%.

Minister Fazil Mammadov said that the Tax Ministry is studying the experience of different Eastern and Western European countries, the Baltic States and Brazil to carry out additional measures to stimulate wider adoption of paperless payments.  "Overall, the banks have to install POS terminals at points of sale, address communication and processing issues, and revise the tariffs on plastic card transactions.  At present, the ministry and the CBA are working on the changes which need to be made in the legal framework", he said.

On the other hand, Eldar Ismayilov, head of the Association of Banks of Azerbaijan (ABA), maintains that the banks must coordinate their efforts to promote the development of paperless payments system in the country:  "This is a fundamental issue, and we have already discussed a stimulus package for this sector of the market in the past, but now we must change our approach entirely.  Everyone must know when and how to take measures, and all the players in the market must coordinate their work in this direction".

In his opinion, the CBA, commercial banks and appropriate organizations must work proactively to develop the infrastructure, because this will help broaden the tax base, increase the investment potential of the banking sector and give customers the possibility of using a safe and convenient method of payment.  The banks should start carrying out stimulating measures, sign deals on better prices and broaden the technological infrastructure.

However, Rustamov says that the CBA has studied best practice in developed countries and has created a national electronic payments infrastructure.  It fully complies with international standards and specialists from more than 10 countries have visited Azerbaijan to familiarize themselves with the system and to borrow the country's technology in this field.

Cahangir Mammadov, head of business development at the country's second processing centre AzeriCard, notes that the banks and AzeriCard are ready to put into operation and offer to the populace cutting-edge technology in this sector as soon as they become available.  "Today, the plastic card market is using new services, such as mobile banking, sms notification, e-commerce and internet banking.  Banks prefer to install wireless GPRS POS terminals which process transactions many times faster than ordinary terminals.  They are also convenient in that they are wireless and customers do not have to go to the cash desk to perform a transaction", he said.

Of course, the presidential edicts aiming to consolidate social support systems for the traffic police, customs officers and others, which stipulate that fines for violations should be collected only by use of plastic cards, will be a powerful incentive to address the problem.  Many traffic police cars and customs offices are already equipped with POS terminals and payment of fines in cash has been discontinued.  Naturally, all this will create a major obstacle for corrupt machinations in these areas.

It is evident that popularizing cashless transactions can only benefit the economy and society.  The head of the Central Bank said that the "gist is that the more transactions are performed through the banking sector, the more funds remain within the sector and can be used by the banks not only to carry out settlement transactions, but also to lend or deposit.  This means greater investment.  The country's economy becomes stronger, and its financial potential increases".