Causes of high interest rates on business loans in Azerbaijan identified

Business Materials 15 May 2013 15:35 (UTC +04:00)
Interest rates on small consumer loans in Azerbaijan are among the lowest compared to other former Soviet states, Unibank OJSC told Trend.

Azerbaijan, Baku, 15 May / Trend L.Abdullaeva /

Interest rates on small consumer loans in Azerbaijan are among the lowest compared to other former Soviet states, Unibank OJSC told Trend.

"For example the difference in the cost of a 10 per cent credit for a loan of 1000 manat which is an average loan size in mass consumer lending, for a period of 24 months makes only five manat in the monthly payment. Moreover, when responding to questions of a recent survey conducted in cooperation with the third party among the bank's 1200 clients, only one per cent of respondents mentioned the reduction in interest rates among changes to be adopted by Unibank in the offer and granting of credit, Unibank reported.

At present, the Central Bank of Azerbaijan (CBA) has also begun to study the issue of high interest rates in the country. The results of the study will be presented to the public.

Representatives of Unibank have identified in particular, the two main reasons for high rates on business loans. The first lies in relatively high interest rates on deposits which in turn, is associated with a high level of competition in the deposit market between banks actively lending to retail customers.

"Citizens of Azerbaijan are adventurous enough and can provide a fairly high yield of their savings by investing in a small business, real estate, land and so forth. Given the rising prices of real estate and land within the past two years, investments in these facilities provide double-digit annual returns on investments. The banks are then forced to give attractive rates on deposits to remain competitive," Unibank said.

Therefore, to reduce the cost of attracted funds which is necessary for the successful growth of businesses in the country, one should also seek longer term and cheaper sources of fund-raising by banks, foreign funding and complimentary balances of customers are examples, as well as the business needs to enter the bond markets, including the local stock exchange, according to the bank.

"It is possible to significantly reduce the cost of raising funds for local companies through correct structuring of the product and consideration of the risk appetite of investors," the bank said.

The second reason for the high rates on business loans lies in high systemic risks associated with business loans. "In particular, it is about continuing high proportion of unreported income and expenses of companies, although there is a trend towards improvement and the objective and subjective difficulties associated with the removal and sale of collateral," the bank explained.

Today, the demand for consumer loans is quite high in the country as the population has a fully justified belief in a bright and stable economic and political future in Azerbaijan.

Unibank, in turn, may reduce its rates if there is a change in a positive direction with regards to some of the aforementioned factors.

According to the statistics of the CBA, the Azerbaijani banks continue to cut interest rates on loans in local and foreign currency. In particular, the average interest rate on bank lending to the economy of Azerbaijan in national currency as of April 1, 2013 was 14.85 per cent compared to 16.09 per cent as of April 1, 2012. The average rate on bank lending in foreign currency was 15.3 per cent compared to 16.16 per cent at the beginning of April 2012.

On April 1, 2013, the average interest rate on bank lending to individuals in national currency amounted to 18.31 per cent compared to 18.57 per cent as of April 1, 2012. The average rate on bank loans to individual clients in foreign currency amounted to 21.6 per cent compared to 22.07 per cent in early April 2012.

The official exchange rate on May 15 is 0.7846 AZN / USD.