BIG SUPPORT FOR SMALL BUSINESS

Undoubtedly, one of the significant areas of the post-pandemic economic recovery for Azerbaijan will be support for small businesses engaged in agriculture, trade, services, catering, tourism etc., which involve about 40% of the working population of the country. Small businesses that survived the pandemic need recovery and working capital to resume their activities. Together with state funds, microfinancing institutions are also expected to meet this demand by increasing the volume of funds and making small loans cheaper.

Problems before and after

In recent years, the dynamical development of micro-financing sector in Azerbaijan has made it one of the most effective tools for financing small businesses. This process began in the mid-90s as part of international and government donor assistance to refugees and internally displaced persons. Subsequently, in addition to predominantly agricultural regions, non-bank credit organisations (NBCOs) and credit unions gradually expanded the scope of their activities and introduced a number of new directions. With high profitability, organisational flexibility and more than half a million client base, it was possible to provide more than ₼4 billion-worth microloans in 20 years.

This positive trend abruptly paused due to the negative effects of the 2014-2017 global energy crisis. The collapse of manat’s exchange rate and the slowdown in economic development in Azerbaijan have brought down the local microfinance market, reducing the volume of lending by almost ten times. One of the main reasons of this regress was the devaluation of the national currency, which caused a large-scale crisis of non-payments. A significant part of NBCOs operating in Azerbaijan were represented by branches of specialized foreign companies. However, other local institutions have also borrowed from international donors who provided loans exclusively in foreign currency. Accordingly, even the loans provided to clients in manats still depended on the exchange rate of the US dollar, which greatly increased the risks for both lenders and borrowers.

Unfavourable exchange rate still makes it unattractive to use funds from foreign donors for microfinancing small businesses. Moreover, the lion's share of NBCO clients are family farms, small trade businesses, workshops and service facilities, small construction sector operating mainly in the agricultural regions of Azerbaijan and selling their services and products in the local market exclusively for manats. The problem is that NBCOs, unlike banks, do not have the right to attract deposits and, accordingly, are limited in the use of low-interest manat resources.

Another problem is that small businesses traditionally borrowed operating capital for a relatively short period with microloans issued without collateral. This significantly increases the risks of microfinance institutions, especially in critical periods such as the existing pandemic period.

Systemic problems

Above factors have significantly slowed down the development of the microloan sector. As a result, the microfinance market of Azerbaijan with over 150 organisations in the pre-crisis period (until 2015) decreased to 91 by the end of 2020, including to 42 credit unions (some of them ceased operations).

Operations and clientele of these institutions also declined. At the beginning of 2015, the number of clients of microfinance institutions exceeded 600,000 people, with the amount of loans reaching ₼800 million. In subsequent years, these indicators decreased significantly, with a slight growth tendency observed only in 2018-2019. However, the difficult pandemic year of 2020 with numerous lockdowns and quarantine restrictions freezing the activities of tens of thousands of small businesses again intensified negative trends in this segment. According to the Central Bank of Azerbaijan (CBA), by January 1, 2021, NBCO's portfolio amounted to ₼263.4 million (decreased by 2% over the year). By the end of 2020, the credit unions had 10.7% portfolio losses, which decreased to ₼13.3 million manats. Last year, NBCOs’ net profit amounted to ₼9.9 million (decreased by almost a third). There was also a 7.7% reduction in the total assets of NBCOs, as well as a decline in liabilities, capitalisation and other parameters.

At the same time, according to the Azerbaijan Microfinance Association (AMFA), in 2020 the total authorized capital of NBCOs increased from ₼113.8 to 120.3 million, which shows the continuing interest of business in this area and the presence of potential in non-bank loan institutions.

In general, there are systemic problems in the microloan sector, primarily associated with difficulties in attracting concessional credit lines in the national currency. In addition, the activities of NBCOs are hampered by specific risks caused by the pandemic.

AMFA Chairman of the Board Jalal Aliyev noted the reduction in funding for local NBCOs from international financial institutions (IFIs). “One of the reasons for cuts in funding is that some international funds have changed the criteria for regional activities in their strategic plans. Another reason is the risks of the exchange rate, which may increase in the course of attracting funds in foreign currency,” Aliyev noted.

According to Mahir Abbaszade, member of the parliamentary Committee on Economic Policy, Industry and Entrepreneurship, SMEs experience certain difficulties in accessing preferential loans, primarily unsecured resources. “At present, based on the proposals of the Ministry of Economy, the government undertakes to provide 60% of guarantees for new loans (over ₼500 million) for big businesses. It is necessary to apply a similar approach to loans for small and micro businesses. That is, Azerbaijan Mortgage and Credit Guarantee Fund will provide 60-70% of collateral,” M. Abbaszade said. According to a number of experts, the adoption of such a mechanism would provide microfinance institutions and their clients with access to low-interest resources in the national currency, significantly reducing the need for international donor assistance.

Plans for this year

Nevertheless, in 2021 AMFA plans to increase financial support for small businesses in the regions, expand the development of the microfinance market and develop a number of new services.

In 2021, among the key areas of involvement for AMFA will be the stimulation of women's entrepreneurship and the growth of lending through NBCO's own resources and attracting other means. The latter is extremely important, since today about 64% of clients of microcredit organizations in the districts are women entrepreneurs. European Union is funding another project called ‘Accelerating the development of sustainable micro-enterprises in the regions of Azerbaijan’, which makes it possible for businesswomen to attract micro-loans. As of today, 113 beneficiaries have received a total of ₼277,800 as investment capital. This amount will significantly increase by the end of this year.

Another project implemented this year by the government jointly with the Asian Development Bank (ADB) will make it possible to expand the access to microcredits. It is supposed to provide small (₼2,000-₼5,000) unsecured loans to small enterprises. Funds will be provided by ADB, and the collateral guarantees of entrepreneurs will be taken over by the Azerbaijan Mortgage and Credit Guarantee Fund.

In addition, in accordance with the presidential decree on stimulating financing of agriculture in Azerbaijan, relevant authorities are developing a mechanism to expand the provision of unsecured microloans. Undoubtedly, the main drive of this initiative may be microfinance institutions. A year ago, AMFA and the International Finance Corporation, a member of the World Bank Group, signed an agreement that provided members of the association with access to the Cash-flow linked Agriculture Risk Assessment tool (CLARA). This expert system makes it possible to assess the risks of lending to farms using accurate modelling of the forecast cash flow of the farm, thus providing a more simplified receipt of financing by farmers.

Indeed, there is an urgent need to ensure the access of NBCOs to concessional credit lines. However, in the context of the post-pandemic revival, it is no less important to upgrade the institutional and legislative mechanisms in this area, reducing the risk threshold in the lender-borrower relationship. In this regard, AMFA is implementing a number of projects to improve financial inclusion, financial literacy for micro and small entrepreneurs, including within the framework of the Sustainable Development of Women Entrepreneurs project. Digitalization of the microfinancing sector is rapidly developing, which is especially important during the pandemic for borrowers living in the districts, making it easier for them to have unlimited online access to financial services. Joint work is also underway with the Central Bank and the Agency for the Development of Small and Medium Enterprises to facilitate access to services in self-employment.

All these measures are expected to contribute to the revival of small and medium-sized enterprises and, as a result, increase the interest of small businesses in borrowing funds from NBCOs.