SECURED BUSINESS

The main focus of the development of Azerbaijan's non-oil sector over many years has been on private entrepreneurship. The state has implemented numerous reforms in this area, introduced various business support mechanisms, benefits, and subsidies, and simplified bureaucratic procedures to the greatest extent possible. Additionally, significant steps have been taken to address one of the most critical issues for businesses in Azerbaijan: improving access to financial resources.

What about the loans?

Currently, nearly all banks in the country report having a business lending portfolio, but this does not always reflect the actual availability of resources.

According to the results from the first ten months of 2024, the loan portfolio of Azerbaijani banks exceeded ₼22.2 billion, with 54% allocated to business loans, 30.6% to consumer loans, and ₼15.4% to mortgage loans. Although business loans constitute more than half of the total portfolio, their growth rate from January to October (15.5%) is still lower than that of consumer loans (20.2%). Experts and market participants acknowledge that the volume of allocated funds does not align with the real potential and needs of the market.

It cannot be said that banks lack the funds to finance businesses. On the contrary, the Central Bank of Azerbaijan (CBA) periodically emphasizes the excess liquidity in the banking sector. However, when conducting underwriting or assessing the solvency of potential clients, banks tend to consider all possible risks and require entrepreneurs to provide guarantees, primarily in the form of hard collateral. It is evident that fully securing loans with collateral poses challenges. Borrowers are not always able to provide such collateral, often for legitimate reasons.

To enhance domestic entrepreneurs' access to bank credit resources and reduce their borrowing costs, the government introduced a credit guarantee mechanism in 2017 through the Mortgage and Loan Guarantee Fund (MLGF). The first guarantee under this new mechanism was issued in 2018.

The Fund guarantees

What is this mechanism? The loan guarantee system applies exclusively to entrepreneurs operating in the non-oil sector who seek loans from an authorised bank in Azerbaijan.

This mechanism allows entrepreneurs to finance projects that previously lacked access to credit due to insufficient collateral. Furthermore, subsidies help lower interest costs on guaranteed loans.

Additionally, banks effectively share their risks with the fund, making their services more appealing. According to the regulations, the MLGF can provide guarantees for business loans of at least ₼30,000. Moreover, the total amount of guaranteed loans provided by authorized banks to a single borrower cannot exceed ₼5 million and ₼10 million for a group of borrowers. Another significant requirement is that the loan term must not exceed seven years, and the credit line should last no more than twelve months. Notably, changes approved by the President of Azerbaijan on August 24, 2022, increased the maximum loan guarantee amount to 90% of the loan value (up from 85%).

The most convenient aspect of this process is that it is almost entirely online. Thus, human involvement is minimized—there is no need to visit offices or make inquiries. It suffices to select a suitable authorized bank from the MLGF list and complete the application by choosing the "Electronic Mortgage and Credit Guarantees" section on the "E-government" portal. Afterward, the loan undergoes underwriting—the authorized bank verifies that the borrower's credit guarantee complies with regulatory requirements and conducts a financial and credit analysis, with results posted in the electronic system. For instance, entrepreneurs cannot expect to receive guarantees if they are more than 60 days overdue on credit obligations (except for obligations for which they are guarantors) as of the loan application date or guarantee issuance date, nor if they have a loan that has been classified as non-performing within the last year—prior to August 2022, this period was over 30 days.

The Fund decides on applications from authorized banks for guarantee issuance electronically and publishes its decision in the system no later than ten working days in advance. As demonstrated, the entire process is simplified and automated to such an extent that no additional explanations or consultations are necessary for a businessman—it is enough to access the relevant section on the portal, where the system will guide them on how to fill it out.

The MLGF stated that before making a final decision, it first checks compliance with legislative acts, then assesses the business project for which financing is sought, and finally evaluates the applicant's solvency based on a credit rating model developed by the Fund. This model was created in collaboration with several international audit firms and includes an assessment of the borrower's financial condition along with factors such as any past interactions with law enforcement agencies, negative media coverage, and any history of corruption. Ultimately, a business inspection is conducted before a decision is made.

Most importantly, obtaining a guarantee reduces and offsets the bank's hard collateral requirements.

Interest subsidies

It is widely recognized that alongside challenges in securing loans, entrepreneurs frequently express concerns about high borrowing costs—sometimes making loan interest rates unfeasible. In such cases, another MLGF mechanism—interest subsidies—may be utilized. Thus, the fund can cover part of the interest payment on loans. For example, if an entrepreneur receives a loan at an interest rate of 12% per annum, up to 8% may be subsidized by the fund (or 10% if they have an investment promotion document). Essentially, this means that the loan would cost the entrepreneur only 4% or even 2% per annum.

The subsidy is provided for three years, with an annual rate not exceeding 20%. This arrangement is highly advantageous for entrepreneurs as well as for others involved.

By sharing their loan risks with the MLGF, banks also gain benefits. This explains why the banking market has responded to these new mechanisms by lowering rates on business loans. Consequently, this positively impacts the economy by unlocking funds that were previously stagnant within banks.

Guaranteed loans are primarily directed towards trade and services, construction, food production, manufacturing and processing of agricultural and other industrial goods, as well as areas related to tourism and infrastructure development.

New tools

Some changes outlined in the Decrees issued by the President of Azerbaijan on August 24, 2022, concerning guarantees for local businesses on loans issued in manat have already been mentioned.

Other innovations resulting from these decrees include guarantees provided by the fund for securities issued by domestic companies and portfolio guarantees for agent banks.

"Before initiating these projects, we conducted a market analysis and studied international practices along with profiles of local entrepreneurs. The analysis revealed that micro and small enterprises require this tool more urgently. The reality is that due to insufficient banking and credit histories, they encounter overwhelming collateral demands when applying for loans. In several instances, promising projects remain unrealized solely due to a lack of liquid collateral. We determined that introducing these mechanisms would enhance small businesses' access to credit resources, contribute to increased bank lending within the real sector, and stimulate activity in the securities market. Many times, entrepreneur bonds are not sought after due to lack of collateral; now, the fund will offer guarantees for these projects to encourage bond buyers," stated Elshan Kerimov, Director of the Credit and Guarantee Department of MLGF in one of his interviews.

Regarding "portfolio guarantees," this practice is widely employed in countries like the UK, Türkiye, Poland, Malaysia, Kazakhstan, and others. The primary advantage of this tool lies in its capacity to broaden business support programs while reducing operational costs.

Both international experience and Azerbaijani practice demonstrate that credit-guarantee mechanisms are among the most reliable methods for improving access to credit resources for businesses. This represents a crucial step toward facilitating private sector development and its active participation in bolstering the country's economy as a whole. It cannot be overstated how vital this is today when Azerbaijan is mobilizing all its resources—including those from the private sector—to address global challenges and restore territories liberated from occupation.

Notably, the "First State Program of Great Return to the territories liberated from occupation," covering 2022-2026, was approved by Azerbaijani President Ilham Aliyev's order dated November 16, 2022. According to this document, the MLGF has been tasked with facilitating construction companies' and construction material producers' access to financial resources while also reducing bank loan costs through credit guarantees and interest subsidies.

Despite its brief implementation period, the loan guarantee mechanism has proven effective as a tangible tool for addressing pressing issues faced by Azerbaijani businesses while stimulating both the banking sector and overall economic development.