World Bank: Lack of collateral and high lending costs complicate credit application system in Azerbaijan

Azerbaijan has traveled a long way since independence twenty years ago.

In the past decade alone the economy has grown five times, thanks in great part to a wealth of oil-based revenue. With steady growth, more and more people have gained employment and overall living standards have risen, especially in the capital city of Baku, Contact.az reports, citing the World Bank website.
However, Azerbaijan is now said to also face some new challenges as the income generated from oil exports is decreasing and the fallout from Russia’s economic downturn damages Azerbaijan’s immediate growth prospects.

To help mitigate these risks, the government of Azerbaijan is looking at economic diversification to reduce the country’s dependency on the oil sector, boost private sector growth and competitiveness, and foster new and better paid jobs in the economy.

To achieve this, however, the financial sector needs to grow and increase its intermediation capacity to serve the needs of the economy. Access to finance is key to the growth of small and medium-sized enterprises (SMEs) and jobs creation, but it remains constrained – with private credit to GDP at a modest 31 percent (2014) in Azerbaijan, compared with countries of similar economic size.

The financial sector remains relatively small and bank-centric, with the state playing a dominant role in ownership and financing. Gaining access to finance, therefore, has often proved challenging for micro, small and medium enterprises (MSMEs), especially entrepreneurs and young businesses; thus the SME sector remains small (10 percent of GDP). 

According to a 2014 World Bank “MSME Access to Finance Demand Survey”, around 51 percent of MSMEs in Azerbaijan cite inadequate access to finance as their primary obstacle to business growth.

The survey, carried out across the sectors of agriculture, manufacturing, construction and trade, and services and tourism, was designed to assess the gaps in access to finance and help Azerbaijani authorities to identify policy reform priorities aimed at increasing MSME lending.

While Azerbaijani authorities have attempted to fill-in the private sector finance gap by launching various special lending and loan subsidy programs, including through the Entrepreneurship Fund and the State Agency for Agro Credit, only 5.1 percent of surveyed MSMEs applied to these programs and less than 1.7 percent actually benefitted from them.

Complex credit application procedures, lack of collateral, high lending costs, and short maturities in the backdrop of low financial capability prevent MSMEs from accessing finance. While roughly two thirds of MSMEs currently own a bank account, only 14 percent have an outstanding loan or a line of credit. Around three quarters of MSMEs have never applied for either.

Very few MSMEs have access to other types of credit such as credit cards (2.4 percent) and overdrafts (0.3 percent), while letters of credit, trade insurance, leasing, and factoring remain rarely used, with only 4.1 percent and 1.7 percent of MSMEs using leasing and factoring in 2013, respectively.

Four factors in particular contribute to high financing constraints and low usage of credit instruments by MSMEs.