NOT ENOUGH MONEY FOR MORTGAGE?

On 1 March 2006, the National Bank of Azerbaijan launched a system of mortgage credit, long-awaited by Azerbaijani citizens who did not have their own housing - although a number of banks had already issued mortgage loans and construction companies had been selling flats in new buildings on credit. However, the population had higher hopes of loans from the Azerbaijani Mortgage Fund (AMF) since it offered much more beneficial and privileged loan conditions.

The process is now under way. Hundreds of applications have already been filed with authorized banks of the AMF (there are 23 of them). As was expected, a real mortgage boom began after the introduction of the social mortgage in 2007. As a result, the AMF encountered a serious problem - lack of funding. Due to gaps in the transfer of money from the state budget, the National Bank was forced to send an official notification to all agent banks of the AMF of its decision to stop accepting applications for mortgage credits from the assets of the fund. This caused a fuss about mortgage credit because, along with the lack of funding, arguments about changes in the terms of mortgages were also raised.

The problem is the boom

Despite this, the deputy chairman of the NBA board, Rufat Aslanli, continued to maintain that the banks had not been instructed to suspend mortgage credit, but problems emerged with refinancing following delays in financing the AMF. "These issues will probably be rectified within two or three days, because the Ministry of Finance has already transferred to the fund 3m manats of the 20m earmarked for 2007. In the initial stages, mortgage credits were issued from the assets of the banks themselves but, having issued them, the banks started taking money from the AMF for refinancing 1.5-2 months later. The activity of agent banks in this process is explained by the fact that they have free resources," Aslanli said. More than a day has passed since he said this, but the banks have still not started accepting applications again.

Aslanli explained that the delay in the allocation by the Ministry of Finance of the remaining 17m manats was for technical reasons. "The funds envisaged in the budget have arrived at the treasury accounts of the Ministry of Finance and we can expect them to be transferred into the Mortgage Fund soon," Aslanli went on.

At the same time, the NBA has begun discussions with the country's government regarding the possibilities of allocating more money for mortgage credit from the state budget.

The deputy chairman of the National Bank does not believe that the reason for the temporary delay in mortgage credit was a change in mortgage terms. On the contrary, he said that 2007 had been declared a year of de-bureaucratization. "We expected a mortgage boom in 2007, and it happened. Infrastructure changes and improvements in legislation have reduced bureaucratic procedures by almost half," Aslanli said. Apart from that, the permission given to buy flats in new buildings helped mortgages to gain recognition on the market.

At the next stage, the NBA intends to ensure steady mortgage credit by means of introducing market financing. This is not an innovation: two years ago when we mapped out the strategy of mortgage credit, it was known that market financing would be initiated after the starting stage that provided for state support. For this reason, the statute and the rules of issuing mortgage credit say that they can be financed not only from the budget, but also from external sources of financing and investors' money.

Aslanli thinks that the practice of mortgage credit has been very successful in Latvia where the credit portfolio is 8bn dollars, while the population is only 2.6 million. This country has no institute for refinancing, i.e. banks provide these amounts from external sources of financing.

Credit can be different

The National Bank suggests separating social mortgages from mortgages issued on commercial terms by the end of 2007. The chairman of the NBA board, Elman Rustamov, thinks that in view of the pace of growth in mortgage credit, its should be permanently financed from state funds. Only social mortgages can be financed from the state budget, while commercial mortgages should be financed only on market conditions.

According to the NBA chairman, if we keep the conditions for financing commercial mortgages at the current level in Azerbaijan, this might hold back funding from foreign investors and become an obstacle to the additional financing of the population. "For this reason, we are carrying out serious work with other economic agencies and suggest keeping only state funding for social mortgages in order to develop mortgage credit in Azerbaijan. And in order to expand the possibility of attracting domestic and external finance, we suggest introducing mortgage credit on commercial terms," Rustamov said.

Moreover, the National Bank has drawn up a draft law on accumulative mortgage which has already been submitted to the government for examination. According to the draft law, a customer will accumulate money in a bank for his initial fee over three years and, after that, credit is automatically allocated to pay for the remaining part of housing. This system is very common in Europe. 

The introduction of this system in Azerbaijan will take a load off the budget to some extent because the current system of mortgage credit depends totally on budget finance. It is difficult to place mortgage securities in such conditions (4-8 per cent).

These institutions will not be set up within existing banks. These are very specific organisations and they will not render other banking services. As funds are accumulated, they will be able to invest them in state securities (short-term government bonds and notes). The activities of these institutions will be regulated by a separate law, "On construction-saving banks".

The authorized capital of accumulative-savings banks will not play a special role, because these banks will work with minimum risk. It is possible that they will have to meet the same requirements as newly-opened banks. They can be purely state-owned or in private and state ownership.

Running after inflation

We have to say that the dynamics of the issue of mortgage credit by authorized banks are different today. The country's largest bank - the International Bank - has not even started issuing mortgage credit yet. The NBA thinks that the IBA is right to delay the issue of mortgage credit. According to Aslanli, unlike other agent banks of the AMF, the IBA has a large chain of branches, which is why it has an individual approach towards mortgage credit. To this end, the International Bank has opened a separate branch and is training employees.

"Since the profitability of this financial mechanism is lower than that of others, every bank maps out its own strategy to make a profit and decides to which level it is necessary to increase its portfolio to ensure stable operating revenues," Aslanli said. The average spread (the difference between rates of funds from the main source and credit issued to consumers) is 6 per cent in Azerbaijan today, while it is not even approaching 3 or 4 per cent on mortgage credit.

Aslanli thinks it is impossible to issue long-term credit with a rate lower that the rate of inflation because it is planned to introduce commercial mortgages by means of market financing. "This does not mean that the current 6 per cent rate on the mortgage will increase to 26 per cent. In Latvia, for example, inflation is 6 per cent, the rate on other credits 10-12 per cent, while the financing of mortgage credit is 4 per cent and funds are invested at a 5 per cent rate. There are cheap resources everywhere, you have to know how to use them," the deputy chairman said. In his opinion, international investment companies are already showing a great interest in financing commercial mortgages with market resources. However, social mortgages cannot be linked to market financing because, in this case, we are talking about the needy strata of the population. But at the same time, Aslanli thinks it is possible to improve the social mortgage mechanism itself without changing the terms (rates and deadlines) in order to allow a wider stratum of the population to use it.

Until now, the AMF has financed mortgage credit worth 56m manats. Most of the funds allocated to the population on privileged crediting conditions have gone to refugees, displaced persons and servicemen's families. At the same time, 17 per cent of privileged credit was allocated to public servants, 6 per cent to candidates of the sciences and 4 per cent to sportsmen with great achievements. Moreover, 69 per cent of mortgage credit issued to the population has gone to people aged from 18 to 35.

Guarantee instead of the initial fee

The population will soon be able to get mortgages without paying an initial fee. To this end, the NBA has already submitted to the government a draft statute on the mortgage credit guarantee fund which is being set up at the AMF. According to the NBA deputy chairman, work to get the fund off the ground might be completed in the second half of 2007. The fund will be formed from several sources of revenue. It will already have capital when it starts working. Moreover, the fund will accumulate fees on the basis of guarantees. "We plan to introduce a conservative approach to managing fees and capital, and their management will also yield some revenue," the deputy chairman of the NBA said. In his opinion, such funds seriously assess the applicant's position while guaranteeing credits in order to make sure that fees will be paid on time, otherwise, no agency will be able to withstand the burden.

The main purpose in setting up the guarantee fund is to liquidate, in the future, the initial fee to obtain a mortgage credit. At present, it has been reduced from 30 to 15 per cent. In the future, the initial fee will be paid by the credit guarantee fund.

Its establishment is also aimed at reducing the creditor's risk. The NBA and AMF have drawn up an appropriate legal basis and have studied the experience of other countries where a similar structure has been established (Kazakhstan, European countries).

According to the calculations of the Mortgage Fund, we might need from 200 to 250m manats to provide mortgage credit for 6,000 to 10,000 families by 2010.