THIS IS JUST THE BEGINNING

The main financial instruments are now in place in Azerbaijan although, of course, we don't have the multiplicity of financial tools that exist worldwide. People no longer associate banks with financial pyramids, they happily make use of the financial services provided and the middle class is slowly learning to live "on credit", as is common now in all developed countries. We're not just talking about urban dwellers; people in the Azerbaijani provinces, mainly agricultural entrepreneurs, are gradually starting to make use of the opportunities provided by the financial market. And, from the beginning, agricultural entrepreneurs were the main target of attempts by the state, international organizations and financial institutions to introduce leasing into the republic. Even though certain forms of leasing are ideal for urban businessmen and ordinary people too, this sort of loan is for now mainly associated with the agricultural sector in our country. The first step is the hardest, as they say.

Under the state's wing

It must be said that this sector is well supported by the state. There is a company operating in Azerbaijan with 100 per cent state capital: Agroleasing. Once the company had been operating for a year, the Agriculture Ministry came out in favour of easing the terms under which farmers receive equipment bought through the Agroleasing open-type joint-stock company. Agriculture Minister Ismat Abbasov said that complaints were constantly coming in from the districts about the high tariffs for agricultural equipment sold by the joint-stock company. In view of the farmers' financial position, the purchase or rent of equipment really was very costly for them. "We made specific proposals in this regard to the government and they met us halfway - they extended the term for the repayment of credit for the purchase of equipment from the current five years to 10. When there is a mortgage agreement, the security is 50 per cent of the cost of the equipment," the minister said.

The advantages of state support for Agroleasing were there for all to see when the prices of certain types of fuel rose at the beginning of this year, Ismat Abbasov told R+. "Private agricultural equipment companies increased the prices of their services, while the organizations that are part of the joint-stock company kept to their existing prices."

The minister said that leasing has great potential in Azerbaijan, bearing in mind the need to renew the pool of agricultural machinery. According to the Agriculture Ministry's research, the equipment privatized after the reorganization of collective and state farms is 90 per cent obsolete. It is calculated that by 2015 30,000 tractors, 25,000 lorries, 4,000 grain harvesters, 1,500 feed harvesters and 2,100 cotton harvesting combines will have to be replaced. Up to 500 million dollars is required to replace this machinery. Considering the farms' weak financial position, leasing is the only way to acquire new machinery.

Leasing has an undisputed advantage over other financial tools - it has long terms with relatively low interest rates and is accessible to a wide range of customers. If a business is refused a bank loan, this does not mean that a leasing company will show them the door too. A leasing company risks far less in providing finance for a potential borrower than does a credit organization, as the leasing company remains the owner of the equipment until the customer pays up in full.

Eighty per cent growth and rising

For all its obvious benefits, private structures were very slow to use and develop leasing in our country until exactly four years ago, when the International Finance Corporation (a subdivision of the World Bank) launched a project to provide technical assistance to develop leasing (ALDP) in Azerbaijan and Central Asia. It was implemented with $1.324bn from Switzerland's State Secretariat for Economic Affairs. The project was initially set to run from May 2003 to May 2006, but was extended to May 2007.

The end of the project was officially declared recently and statistics published at the time give hope for the future of leasing in our country. The head of the Baku representative office of the International Finance Corporation, Aliya Azimova, said that the leasing portfolio in Azerbaijan had increased by a factor of 80 since 2003, while the number of leasing companies had shot up from three to 25. Twelve of the companies are already working actively, including AtaLeasing, Azarilizinq, AG Leasing, Azarlizinq, Gunay Leasing, Uluxanli, Texnika Lizinq, Parex Leasing and UniLeasing.

"While the ADLP has been in operation, the leasing portfolio in the country has grown from $0.9m dollars to more than $80m by 1 April this year. There were 787 leasing projects, 110 per cent more than at the beginning of 2006," ADLP director Elcin Ahmadov said. The leasing portfolio in the country is now worth 90 million manats and there are potentially another 33 projects worth 11 million manats. Annual interest rates for leasing range from 16 to 24 per cent and terms from one to five years. 90 per cent of operations are in the Abseron economic zone. The potential portfolio, estimated to be 500 million manats, will reach 797 million manats ($1.123bn dollars) by 2010. (Fineko information and analytical agency.)

The project has, in practice, met its objectives, specifically in improving legislation, improving the quality and quantity of leasing market figures, creating leasing associations and conducting specialized training for the financial sector, businessmen and representatives of state agencies, Elcin Ahmadov said. The ADLP has also helped to attract 11 million dollars to the sector. Leasing companies have managed to attract funds from both international financial institutions and private investors. The International Finance Corporation has provided $6m dollars ($5m to UniLeasing and $1m to AG Leasing) and the EBRD $3m to UniLeasing. The leasing companies received around another $2m from private foreign investors in capital share," Elcin Ahmadov said.

Problems to be tackled

Leasing companies in Azerbaijan do have plenty of problems, despite this support. They include problems in accounting, liquidating accelerated depreciation, restrictions on activity and, of course, a lack of financial resources. Companies have to approach international financial institutions, and in particular the International Finance Corporation, for credits. It should be said, however, that many of the problems are being tackled. Real progress has been made in preparing standards for leasing accountancy. Elcin Ahmadov said that the standards are ready, have been confirmed by the Azerbaijani Finance Ministry and will come into force from 1 January 2008.

Since May 2003, 18 amendments have been made to the Azerbaijani Civil Code. The legal basis for leasing activity in Azerbaijan had until then been set by the law "On leasing" which came into force in 1994. Azerbaijan was the only country in the CIS to adopt a law that created preferential conditions for leasing. But when the Tax Code came into force, they were liquidated and this created a greater need for bank credits amongst leasing companies. In 2003 the clause exempting equipment imported for leasing from tax was removed from the code. But gradually, thanks to appeals to parliament, the project's leaders, on behalf of the leasing companies, persuaded the government to exempt leasing payments from VAT, to exempt them from tax at source and to exempt imports of specific assets for lease from VAT and customs duty

ALDP experts are very positive about the prospects of removing VAT from imports of assets to be leased which at present applies only to agricultural machinery and equipment. "We have submitted an expanded list of assets for lease which recommends removing VAT and customs duty. The economic development and finance ministries have submitted the proposals to parliament. They are now under discussion," Elcin Ahmadov said. The Association of Leasing Companies of Azerbaijan will also be involved in the discussion. "I think that there is a good chance that these drafts will be accepted, as there was no negative response from the government side and they are supporting the initiatives. We understand that the process has to be discussed with all the parties involved. We hope that the process will be successful," Elcin Ahmadov said. (Fineko)

Nevertheless, against this background of evident success, experts point out that leasing makes up just 0.2 per cent of GDP in Azerbaijan at present, which is very low. However, the chairman of the UniLeasing joint-stock company, Xalid Askarov, said that the company expects a significant increase in leasing's share of GDP in the near future according to a 1news.az report. "Private business predetermines Azerbaijan's rapid economic growth, which itself means that principal resources must be constantly renewed via leasing," thinks this expert. Let's wait and see.