BUSINESS WITHOUT CREDITS

The post-oil phase of the national economy updates the need for new forms of capitalization and, in particular, the introduction of alternative financing mechanisms for mass business. It is, therefore, expected to apply non-credit-based procedures in the agricultural sector through the transfer of small and ready-to-use projects to entrepreneurs for further development. Other procedures may include an allocation of public funds to establish industrial clusters with complete infrastructure, workshops, and administrative buildings to be provided to entrepreneurs free of charge.

The reduced income and budget cuts of the last two years have limited the donor capacity of the state, while the crisis of the banking sector due to the devaluation of manat has considerably increased currency risks, hampering the access of small businesses to soft loans.

Thus, the production decline due to the fall in oil prices boosted by the devaluation of the national currency has provoked a crisis of non-payments on consumer loans. A huge re-conversion of bank deposits has increased the share of foreign currency deposits from 50 to 82 per cent at the beginning of this year. Dollarization of assets of banks extremely negative impact on the possibility of issuing low-interest loans, the most popular for small and medium-sized enterprises (SMEs). In the banking sector excess liquidity processes observed today: many banks on correspondent accounts at the box office, and the volume of liquid funds in four times the minimum regulatory requirements. It is obvious that excessive liquidity adversely affects the profitability of banks. However, the worst in this situation due to the fact that today the unclaimed funds of banks are not sufficiently involved in lending to the real economy, especially the agricultural sector. The share of agricultural loans in total loan portfolio of domestic banks did not exceed 6-7% even in the best years for the economy. The main reason for such caution of banks is associated with high farm credit risk.

According to experts of the International Finance Organization (IFC), in Azerbaijan 75% of usable agricultural land used by small farmers, the share of each of which have an average of two hectares of land. By the development of agricultural cooperatives in the country is only beginning, and the number of large agricultural farms with large land plots, park equipment and outbuildings extremely small. The bulk of the land-hungry peasants are not able to provide enough valuable and liquid collateral to obtain the necessary loans from banks. The situation is getting worse by the fact that Azerbaijan is in the zone of risky agriculture: the drought and lack of water for irrigation, salinization and soil erosion, periodic floods and debris flows make an incomplete list of the risks that the local farmers face almost every year. These additional risks together with the minimal use of insurance instruments narrow the capacity of commercial banks to finance rural entrepreneurs. This fact is also confirmed by the statistics provided by the Ministry of Agriculture. “In 2007-2015, the state budget reserved almost 7.5 million manat for the purposes of agricultural insurance while only about 60 thousand manats of this amount were disbursed, which makes a mere 0.8 per cent of budget allocations”, says Rahim Novruzov, the chief consultant at the Department of Financial and Accounting of the Ministry of Agriculture. “Private insurance companies also provide minimum services of agricultural insurance but the farmers are often not interested in them”.

It is no surprise that during the last fifteen years, the NEAF has been the main donor of the rural business in these circumstances. Over the years, the Fund has provided approximately 2 billion manats to almost 150 thousand SMEs, which make 70% of the beneficiaries in the agricultural sector. Manat preferential loans. The NEAF deserves an appraisal as the main contributor in the development of domestic farms but in recent years, the NEAF’s loan portfolio has included less microfinancing tools than before. A considerable amount of funds provided by the NEAF is used to finance medium and large undertakings that provide greater efficiency and guaranteed return investments.

Therefore, it is urgently required to form new mechanisms for financing SMEs, especially small rural businesses, using alternative non-monetary instruments.

By the way, the non-credit-based forms of capitalization in agriculture and small-scale production have been known since ancient times, and have generally dominated until the emergence of classic bank systems and the contemporary monetary system. In essence, these relations presume a temporary lease of the means of production such as land, livestock, workshops, and small industries owned by private entities or the state to entrepreneurs. In this case, the lessee does not have the rights of the owner but can use the means of production and pays a part of the manufactured goods or shares a part of his profit after the sales. Similar schemes had been used in the production of sheep wool, which was the primary raw material for the cloth industry in England and Scotland in the 16-18^th centuries, or animal husbandry in the Midwest of the United States in the 19^th and 20^th centuries. Currently, this method is practiced in the cultivation of cotton and tea in India, Pakistan, as well as the production of other agricultural crops in the Asian, African, and Latin American countries.

It is important to note that unlike other funding tools the non-credit-based schemes are simple and do not expose serious financial burden on leaseholders. This means that the entrepreneur does not need to pledge a substantial collateral or to provide financial guarantees to obtain a loan. In case of management failure or force majeure, he does not risk his property but simply loses profit and is obliged return the leased means of production. On the other hand, the disadvantages of this scheme include significant risks to the lessor: wear and tear, loss of soil fertility, loss of livestock, etc. In addition, the non-credit-based capital is less flexible to market conditions and mainly limited to the agricultural sector and small-scale production.

Currently, both the government and parliament of Azerbaijan are working on a new program to support small businesses, which intends to provide ready-to-use mini-projects to entrepreneurs. “The transfer of such projects to entrepreneurs is one of the alternatives for concessional lending through the National Entrepreneurship Assistance Fund (NEAF)”, says Rufat Guliyev, member of the Parliamentary Committee for Economic Policy, Industry and Entrepreneurship. He further adds that the government plans to set up a commission of experts participating in the selection of entrepreneurs in every region of the country. The contracts will be concluded with those candidates who can run businesses independently. Instead of getting direct financial support, they will be provided with ready-to-use projects worth up to tens of thousands manats.

Such mini-projects will mainly focus on various segments of the agriculture including the growing of fruits and vegetables, cattle breeding, bee farming, etc. For instance, an entrepreneur will get small cattle, which nominally will remain in state property and cannot be sold or slaughtered but the farmer will be free to use the crop, dairy products, the wool, etc. In case of failure, however, he will not be bear any financial obligation but may simply discontinue running the business.

It is also planned to introduce some elements of the non-credit-based capitalization system to the industrial sector of economy. This concerns the development of national industrial districts, which should include most of the manufacturing and service structures of SMEs. These can be repair shops, service and engineering units, small garment and footwear production units, workshops for the production of building materials, furniture, various consumer goods, etc. The scope of business activities will mainly cover the needs of the domestic market.

The main advantage of industrial districts lies in the fact that the State will cover the principal costs of capitalization, creating necessary infrastructure for the businesses. In particular, it is planned to establish external and internal public utilities and transport networks, to update communication systems, to ensure fire safety and to build administrative, industrial, storage and other facilities. These expenditures, depending on the type of business, may reach a third to a half of the production costs. Moreover, the Ministry of Economy is planning to assist SMEs in obtaining soft loans for the purchase of production equipment, and will also provide consulting services and conduct vocational trainings. The companies operating in these industrial districts are not only exempt from the costs of infrastructure development but they will also pay a minimum available rent for the use of this infrastructure. The intention is to support the business projects that are mainly focused on the use of local resources, which will eventually entail profitability growth. The strengthening of cooperative ties and the separation of technological processes should also come in handy in reducing the production costs.

In short, the elaborate hand-over of the ready-to-use projects should attract a large number of entrepreneurs into the production process, particularly the untapped labor reserves in the periphery.