CREDIT SHIELD

In our rapidly evolving world, where the consumer credit market steadily expands, safeguarding borrowers' rights has become paramount. For many, dreams of homeownership, a thriving business, travel adventures, or everyday luxuries would remain mere fantasies without the lifeline of credit. However, the harsh realities of unforeseen circumstances can cast doubt not only on the borrowers' future well-being but also threaten to shift the debt burden onto their loved ones' shoulders. Instruments to mitigate such risks have long existed globally, and it is time our nation embraced them.

Acquiring consumer loans in Azerbaijan is no longer an obstacle but a norm. Nonetheless, this trend amplifies the need for accompanying financial security, a concern more pressing today than ever before. Accidents or grave illnesses can strike anyone, unannounced. In such unfortunate "surprises," life insurance can serve as the guarantor of a secure future. While this instrument has become commonplace for mortgage loans, shielding families from unsustainable payments during tragedies, the story for consumer loans was starkly different—until recently. Collaborative efforts among financial institutions have ushered in a positive shift.

The advantages of insurance extend beyond merely protecting family members. Paradoxically, it can directly benefit the borrower. Insurance mitigates risks for banks, potentially translating into lower interest rates on loans. Experts note that integrating this tool into the loan processing pipeline need not necessitate increased interest rates.

New Standards and Exemptions

Recent amendments by the Central Bank of Azerbaijan to the Rules on Borrower's Life Insurance under Credit Agreements for Death and Disability mark a transformative juncture, heralding a new era of security and transparency within the nation's financial sector. Banks are now mandated to offer death and disability life insurance to consumer loan borrowers, a departure from the discretionary offer of the past. 

The insurance contract must comprehensively cover not just the outstanding debt balance but also potential interest and penalties—a significant improvement over the previous limitation to principal debt alone. Most crucially, insurance has become more accessible, eliminating barriers to insuring individuals with disabilities who were previously denied coverage due to their health conditions.

Notably, borrowers or their relatives can now verify the existence and status of insurance contracts through an electronic system—a new requirement for the relevant companies. Another intriguing development is that insurance applications can be processed without the borrower's physical presence, a contrast to the previous mandate.

Undoubtedly, like any insurance, this tool comes at a cost. But isn't the peace of mind and well-being of loved ones worth the investment? After all, behind every loan lies not just a financial transaction but a person's story, their aspirations, and dreams for a better future.

Moreover, as Niyaz Ismayilov, chairman of one of the country's leading insurance companies, proclaimed, the implementation of the new rules will catalyse a revolutionary 50 percent reduction in tariffs. Currently, the new regulations apply solely to individuals securing consumer loans. Ismailov elucidated that "this stride was founded on a thorough analysis of lending data across banks." The next phase, experts predict, will be to extend the rules to other loan types and individual life insurance policies.

In Azerbaijan, where insurance penetration remains relatively low, this initiative could ignite awareness of life insurance's benefits. According to the Central Bank, credit insurance premiums within the country amounted to ₼3.8 million in 2023, a twofold increase from the previous year. However, this constitutes a mere 0.3% of the collections in the nation's insurance market. Therefore, the tariff reduction will undoubtedly contribute to substantial growth in this indicator.

Goodbye, Guarantors

According to Zakir Nuriyev, president of the Association of Banks of Azerbaijan (ABA), the country is poised at an inflection point in consumer lending, set to replace the antiquated guarantee system with borrower life insurance.

"Today, your relatives, friends, familiar acquaintances are constantly imploring you to vouch for one debt or another," laments the ABA president. "Now, you can simply advise: 'Insure your life, and you shall be granted a loan with ease.' This will cultivate conditions for more civilized interpersonal relations."

Life insurance for borrowers has long been the norm in numerous countries worldwide. In the USA, for instance, approximately 60% of lenders utilize this instrument. This empowers banks to diminish the risk of loan defaults by offering more favourable terms to clients. 

The adoption of such a practice in Azerbaijan promises a multitude of advantages. Firstly, the loan granting procedure will be streamlined, eliminating the need for banks to require guarantors. Secondly, loans will become more accessible to the general populace, stimulating the growth of consumer lending nationwide.

According to Milli Majlis MP Vugar Bayramov, banks have currently issued consumer loans exceeding ₼7 billion: "This signifies that over 3 million of our citizens bear credit debts. As evident, both the total loan amount and the number of debtors are substantial. Concurrently, statistics indicate that 95 percent of consumer loan recipients lack insurance coverage."

Although utilizing insurance incurs an additional cost, it will not escalate expenses for the debtor. "Because one of the factors influencing loan interest rates is the risk factor. When the risk is insured, banks can offer the loan at a more advantageous rate. That is, the utilization of insurance can lead to lower interest rates on consumer loans," the MP added.

A Fresh Breath for Insurance

Expert Shahriyar Majidov expounded on the peculiarities of this type of insurance in the country. According to him, it boasts four key advantages:

- Payment in the event of the insured person's death (excluding suicide cases);

- Payment upon assignment of 1st, 2nd, or 3rd disability groups;

- 100 percent payment of the remaining insured sum upon assignment of disability group 3 (previously, this rule applied only to group 1);

- Direct payment to the bank in case of credit insurance.

"Since the loan originates from the bank, the insurance payout in case of an insured event goes directly to the bank and not to the borrower's heirs. Banks are not as invested in insuring their clients' loans because if an insured event occurs, they can resolve the issue by foreclosing on the collateral or guarantor. By selling the pledged property, the bank retains the amount due and returns the balance to the client. Therefore, life insurance when securing a loan is primarily favourable for the citizens themselves," Majidov believes.

Under the new rules, the term of insurance coverage under insurance contracts must be equal to the remaining term of the loan. The insurance amount, whether fixed or decreasing, must be set at a minimum of the borrower's actual debt to the credit organization and a maximum of up to 110% of this debt amount by mutual agreement of the parties. This will ensure repayment of the borrower's actual debt to the credit organization in accordance with the loan payment schedule, including additional interest or penalties that may arise after an insured event.

Thus, the insurance subjects are individuals who are borrowers under loan agreements. Simultaneously, persons under 18 years of age, over 65 years of age, as well as those registered in narcological, psychoneurological, tuberculosis, skin, and venereal dispensaries, patients with hepatitis C, oncology, chronic cardiovascular pathologies, AIDS, and HIV carriers are not considered insurance subjects. 

Insurance coverage under the new rules is provided for "life insurance in case of death" and "disability insurance." By the end of 2023, ₼32.9 million (a 27.4 percent yearly growth) and ₼1.9 million (+59.6 percent) were collected under these respective insurance types.

It should be noted that, as with any innovation, difficulties may arise in implementing these changes. It is imperative that compliance with the new rules is stringently monitored and that the borrower life insurance system undergoes continuous improvement. The potential of these changes is vast, and they certainly lay a solid foundation for a safer, more transparent, and sustainable financial system in Azerbaijan.

And it must be remembered that insurance is not a cure for all problems. One needs to prudently assess their risks to avoid casting a shadow of debt over their life and, more crucially, their family's future.