Azerbaijan greenlights expansion of microfinance market Review by Caliber.Az

Simplification of lending conditions and increase of financing for small and micro businesses has been defined as key vector of Azerbaijan's economic development. This trend is included in the strategy for the development of the financial sector developed by the Central Bank of Azerbaijan (CBA), the presentation of which is scheduled for the near future. İn the financing of small businesses, the emphasis will be made on non-bank credit organisations (NBCOs).

CBA has paid particular attention recently to the development of such organisations. Since the beginning of the year, several new NBCOs have started operating in the country, microfinance structures increase their authorized capital, place bonds at the auctions of the Baku Stock Exchange (BSE), and they will probably soon get the right to issue credit cards.

"Currently, the Central Bank jointly with international consultants is finalizing the draft three-year strategy for the development of the financial sector, which will cover the banking sector, securities and capital market, insurance sector, fintech, regulatory functions, as well as the sphere of NBCO activity," CBA chairman Taleh Kazimov said recently, saying that presentation of the strategy is planned tentatively in the middle of this year.

Among the priorities of the new strategy of the financial sector development is the solution of problems of financial and banking structures, strengthening their cooperation with businesses operating in the real economy, particularly in the regions and rural areas, in order to improve economic entities' access to financial resources.

A number of measures have been undertaken in the last two years to address these objectives: venture capital companies have been established to finance start-ups, investment companies have been encouraged to invest in accelerating regional economic development, and SMEs are receiving more preferential loans, including in the agricultural sector.

Implementation of the new strategy will strengthen these areas and at the same time promote the use of alternative financial instruments, such as Islamic banking, as well as help to introduce the OpenBanking platform in the country for the mass use of fintech solutions and expand access to various payment systems.

Facilitating access to financial and banking services for business entities is a long-term objective, but it has to be recognised that at present, despite excess liquidity, the banking sector has failed to become a key donor to entrepreneurs. This is hampered by difficult access to loan capital, high-interest rates, collateral problems, etc. Banks still maintain high lending rates, which is due to the significant (as perceived by banks) risks of financing the real economy, especially in the regions.

On the other hand, the CBA's anti-inflationary measures implemented since last year, reflected in a gradual increase of the interest rate, are an objective threshold for commercial banks, which are forced to raise interest rates on their loans in this case. However, the lack of floating charges and the weak coverage of agricultural insurance for small farmers have prevented banks from increasing their participation in financing rural producers. As a result, more than three-quarters of all loans disbursed by banks currently go to the capital.

Against this background, NBCOs and credit unions, which have been operating since the mid-1990s predominantly in agrarian regions and have managed to become an effective instrument for financing SMEs and micro-businesses, providing more than $2.3 billion in micro-loans over 20 years, look much more effective. Unlike banks, these institutions are not constrained by complex prudential regulations and can disburse microcredits without collateral. The very registration of such a transaction is incomparably easier - the borrowers are not required to have a long credit history, etc.

It should be noted that the global energy crisis of 2014-2017, devaluation, successive bankruptcies, and a slowdown in the country's economic development have caused very serious damage to NBCOs' operations: the number of such structures experienced a triple decline (before 2015), and the loan portfolio and a number of borrowers have more than halved from 800 million. In the past two years, however, microfinance has once again seen steady growth.

According to the CBA, by the beginning of June 2023, the number of active NBCOs in the country stood at 52, with licenses for new microfinance structures issued since the beginning of the year, and they are already increasing their share capital, placing bonds at BSE auctions, etc. At the same time the operating space of NBCOs is expanding: in January-May this year they granted loans for $368 million - a 6.2% increase compared to five months of last year.

One of the goals of the Central Bank's reforms and AMFA's related efforts is to meet NBCOs' need for low-interest liquidity: in the past such resources (in foreign currency) were mainly provided by international donors, but since the energy crisis nine years ago, funding from MFOs has declined markedly. The current priority, therefore, is to ensure that microfinance institutions have access to "cheap" money, mainly in local currency, without which it will be difficult to meet the increased market demand for short-term credit resources for SMEs and micro businesses.

"During the meeting with the heads of AMFA and its member microfinance institutions we discussed issues of developing the financial sector, including expanding the activities of NBCOs, increasing access to finance for entrepreneurs in the regions," CBA chairman Taleh Kazimov said the other day.

At the initiative of the CBA, the capabilities and functionality of non-bank credit organizations operating in the country will soon significantly expand. In particular, NBCOs will be able to engage in payment intermediation services, a right that is currently held only by banks and the national postal operator. It is also proposed to grant NBCOs the right to issue credit cards, which has also so far been attributed to the privileges of banks.

All this, of course, will require strengthening the regulatory framework for microfinance structures. And among the innovations for the NBCO segment recently reviewed in the Milli Majlis (Azerbaijani Parliament), the definition of prudential requirements for improving financial stability has already been outlined: it is planned to determine for such structures the maximum amount of credit risk, the minimum amount of capital, the ratio of liabilities to capital, etc.

The Parliament also discussed amendments to the law "On Non-Bank Credit Organisations", defining the procedure for acquiring a substantial interest in the authorised (share) capital of the NBCO. These measures are designed to expand the capitalisation opportunities of microfinance organisations, attract investors, and facilitate access of microfinance organisations to financial resources.