Azerbaijan's leasing market is quarter of existing potential

Business Materials 13 May 2011 18:44 (UTC +04:00)

Azerbaijan, Baku, May 13 / Trend I. Khalilova /

The potential of Azerbaijan's leasing market is estimated at $700-800 million, or almost three-four times more the current amount of the market, the head of the Association of Leasing Companies in Azerbaijan (ALCA) Elchin Ahmadov said.

As of January 1, 2010, the volume of the country's leasing portfolio amounted to $187 million, while in 2009 it was $208 million and in 2008 about $209 million.

"Today, there is a definite decline in the total portfolio of leasing companies," he said. There exist a number of subjective and objective reasons for this."
He said that leasing companies become more cautious when choosing projects.
"Although the global economic crisis has not had a strong influence on the country's economy, the financial sector is more exposed to any risk and influence," he said. "In this case, the caution used by leasing companies is understandable."

Two years ago leasing companies had their own particular client base. Today, however, they stand stiff competition from dealers of construction machinery, production lines and car dealers. Today they propose a scheme of leasing or pseudo-leasing and delay in payments, having figured out how financial institutions operate.

Today, some banks independently take the leased property as collateral and give out loans which are secured by movable property, such as a car or machinery. In the meantime, the real sector is credited under a mortgage and other guarantees.

There is another problem posed to leasing companies: the presence of certain difficulties in financing. Today, the companies draw funds from local banks or abroad. It is much more expensive than the cost of leasing operations.

It is necessary to take comprehensive measures and recognize a leasing tool as the means to assist economic development and develop the leasing market in the country, taking into account all these problems, he said.

"In particular, state support is required to conduct some reforms in tax and civil law," the head of the association said. Today it is very important to review the Civil Code, regulate leasing activities and expand them, or else to create a separate leasing law."

Despite the lease payments are exempt from VAT, purchase and import of equipment are taxed [these tax benefits operated in the country until 2008]. As leasing companies can not offset the VAT, this leads to an increase in the cost of equipment. The leasing deal becomes more expensive to the lessee at least by 18 percent (the current rate of VAT in the country), the head of the Association of Leasing Companies in Azerbaijan (ALCA) Elchin Ahmadov said.

"If this issue is solved, then the leasing companies will offer the interesting financing", he said.

The participation in the projects to purchase equipment for processing agricultural products for large industrial companies, in infrastructure projects of large companies is of great interest for leasing companies.

"Working with these companies enables financial institutions to minimize risk and increase portfolio due to trustworthy customers," he said. "That's why today there is the need for good projects. Their number declined in the market."

Exempting the profits of leasing companies from taxation for some time would help to develop the market.

Agriculture is exempt from VAT and customs duties, but it is treated differently, whether this applies to all leasing companies or only to "Agroleasing".
"Today, some organizations admit that these benefits may apply to all leasing companies, as opposed to others," he said. So, this question must be solved. If we seek to develop the leasing sector in the country and one player has advantage, respectively, all companies must have similar preferences, conditions for the activity. We have repeatedly appealed to the state bodies, but failed to get a clear answer."
Meanwhile, the head of the association thinks that as of 2011, the volume of its leasing portfolio will increase up to $250-300 million (excluding portfolio of state leasing company Agroleasing).

"There are preconditions for the future development of the market," he said. But much depends on the leasing companies, their level of activity in the market."

Leasing companies may participate even within the government's plans for socio-economic development of Baku for the next 3-5 years. They may also participate in the projects implemented in the capital of the country and in suburban settlements. The equipment, fixed assets will be required there. Therefore, I think that much depends on the companies themselves, he said.

At present, the deals in leasing cargo (25.9 percent) and passenger (13.7 percent), motor vehicles, construction equipment and machinery for the production of building materials (25 percent), medical equipment (8.4 percent), real estate (7.2 percent) dominate in the portfolio of leasing companies.

Azerbaijan has officially registered 22 leasing companies. But 11 leasing companies and banks offering leasing services really operate.