WB: Azerbaijan needs new model for state funding of business
Azerbaijan needs to switch to a new model of state financing of entrepreneurial activity and population, said Angela Prigozhina, the World Bank (WB) coordinator for private and financial sector in the Southern Caucasus.
"As of today, Azerbaijan has quite large program for encouragement and development of small and medium-sized enterprises (SMEs) through state funds," Prigozhina said.
However, as she noted, Azerbaijan's National Fund for Entrepreneurship Support (NFES), and similar structures largely depend on state resources, therefore it is needed to switch to a new modern funding model, that is, "to diversify the resource base with help of other sources."
Prigozhina said in the future it is necessary to improve the mechanism of allocation of resources for SMEs as part of state programs.
At the same time, she believes that the funds allocated from the state budget could be used more effectively to improve the cash flow efficiency.
"Given the current situation in the global economy, Azerbaijan, in order to replace the fiscal costs with private capital, needs to take additional measures to attract both domestic and foreign investments," said Prigozhina. "It is very important to develop the stock market to allow companies to attract funds through the issuance of securities."
WB coordinator said that in total, Azerbaijan Mortgage Fund, the National Fund for Entrepreneurship Support and State Service for Management of Agricultural Projects and Credits get large volumes of financing from the state budget, but very small number of enterprises and individuals can really use them.
One of the tasks of the country's government is to support the further economic development by providing a large number of enterprises with access to long-term and inexpensive resources and by stimulating mortgage lending that will allow to resolve the housing problem of many people, she added.
Prigozhina said that it is also important to stimulate attracting the population's deposits to banks and allow to return these resources back to economy.
Another issue is related to the way of reducing the interest rates on loans, she said.
"Currently, the high interest rate is largely formed as a result of high risks: there is no registration of objects of pledge, not all companies prepare financial statements, there is no a loan office, accordingly, banks can not always reveal that borrowers have a large amount of debt," she said.
WB representative believes that creating a private loan office and movable property registry is one of the priorities for Azerbaijan.
She added that this will create preconditions for increasing lending to the population and small and medium-sized enterprises. "These two reforms haven't been carried out in Azerbaijan and accordingly, they are very relevant and should be carried out as soon as possible."
A package of amendments to the laws on personal data, banks, non-bank credit organizations and the Code of Administrative Offences is currently discussed as part of the establishment of a credit bureau.
After making changes, regulating the activity of private credit bureaus, a technical partner of the first bureau will be chosen.
Some 11 banks and two non-bank credit organizations are the potential founders of the country's first private credit bureau.
Among them are Access Bank, AGBank, Azerbaijan Senaye Banki, Bank Respublika, Demir Bank, Muganbank, PASHA Bank, Turan Bank, Yapı Kredit Bank Azerbaijan, UniBank, Kapital Bank, Finka Azerbaijan and AzerKredit.
As for the personal property register, it will be governed by the bill on secured transactions. IFC helps Azerbaijan in the establishment of the registry and the credit bureau. This document is still finalized by the CBA.
The creation of the personal property register in the country will affect the number of the delivered loans, in particular, to the small and medium-sized businesses. Today, the entrepreneurs without real estate are facing difficulties in drawing the credit resources.
The register will allow registering the right of claim to the personal property, when it is as collateral for the loan.
Azerbaijan offered to expand ways of banks' merger by law
The World Bank (WB) is ready to assist Azerbaijan in improving the legislation and consolidation tools in the banking sector, Angela Prigozhina, WB Coordinator for Private and Financial Sector in the Southern Caucasus, said.
"It is desirable to stimulate the consolidation of banks through the development of appropriate tools," she said. "But given that the stimulation of different types of the banks' restructuring is limited by law, the Central Bank of Azerbaijan should consider the world's experience in this sphere to expand the process."
She said that the consolidation tool is quite wide.
"For example, there is a technical procedure for merger and acquisition, assuming certain accounting, financial and investment commitments, which must be prescribed by law," she said. "There are the countries where the merger is technically impossible because their legislation does not allow this or this takes much time technically."
She said all the methods and commitments, associated with the consolidation process, should be clearly spelled out in the laws, as investors need to know about the tax and investment commitments, how much time will be spent on merger, as well as what costs are associated with this.
"Meanwhile, the consolidation procedure should be as simple as possible, so that investors don't have additional questions or concerns," said the expert.
She said the acquisition of individual assets and liabilities of a bank can be one of the options for a merger.
Also, as Prigozhina said, a transition bank can be created to sell a "clean" bank to the investor.
She also believes that the presence of a strategic investor is one of the incentives to the consolidation.
"For Azerbaijan it is a very relevant topic," said Prigozhina. "We were happy to hear the Central Bank's Chairman Elman Rustamov saying that he strongly welcomes the entry of strategic western investors in Azerbaijan's banking market," she said.
Because, they can bring new technologies, knowledge, attract resources and so on, she said. "In other words, if several influential financial groups enter the Azerbaijani market, this will allow to increase the stability and attractiveness of Azerbaijan's financial market."
Azerbaijan already has successful experience in consolidation of banks with participation of for example, EBRD. Current Unibank was established as a result of merger of two commercial banks - MBANK and PROMTEXBANK where EBRD obtained 15-percent share, while 8.3333 percent is owned by German Investment Corporation DEG. This was followed by a merger of the Bank of Baku and IlkBank in 2005.
Currently, 43 banks operate in Azerbaijan. The Central Bank of Azerbaijan cancelled the licenses of two banks in July.
S&P not expecting devaluation in Azerbaijan until 2019
No further devaluation is projected in Azerbaijan during the 2015-2018 forecast horizon, said the international ratings agency, Standard & Poor's.
"After several years of the exchange rate remaining stable, the Central Bank of the Republic of Azerbaijan (CBA) devalued the Azerbaijani manat (AZN) against the US dollar by 33 percent (manat per dollar rate) in February 2015," said the S&P. "The decision followed a sustained decline in CBA's foreign-exchange reserves in the preceding months to about $15 billion at the start of February 2015 from $17 billion in November 2014."
S&P also said it expects CBA's foreign-exchange reserves to remain stable through the rest of the year.
"They continued to decline during February to April but stabilized in
May," said the ratings agency.
S&P believes that the Azerbaijani manat remains largely pegged to the US dollar, even though CBA announced a move to a regime targeting a euro-dollar currency basket.
The ratings agency's analysts said the rapid dollarization after the February devaluation will further weaken the already-weak monetary flexibility.
"As of end-May foreign currency deposits exceeded 70 percent of total
deposits, a significant increase from 50 percent in January," said the S&P.
The agency also said the CBA's recent lowering the refinancing rate to 3.0 percent from 3.5 percent will not have a significant effect on stimulation of the non-oil growth, support for small and medium size enterprises and
mortgage lending.
"At the same time, we also project imports to contract following the devaluation and expect net exports to contribute positively to GDP growth,
forecast at 2.2 percent in 2015, down from 2.8 percent in 2014," said S&P.
"From 2016, a gradual recovery in consumption and stronger investments will support stronger economic performance, which nevertheless will remain much weaker than during the pre-2008 boom years when it consistently exceeded 20 percent annually," the agency said further.
S&P also added that it forecasts credit growth to reduce to 12 percent this year from 24 percent in 2014.