Six-year development of leasing in azerbaijan

Analysis Materials 30 April 2009 12:06 (UTC +04:00)

Leasing is not a new understanding for Azerbaijan. Over the past six years, it has firmly entered into the use not only as a term, but also as a tool for managing and today is amongst the successfully developing segments of the financial market. The interest in this type of financial services has increased due to several advantages that distinguish it from the loans. Thus, a distinguishing feature of the leasing from the customary bank loan is that the security is the facility of leasing, and until the last payment of the equipment purchased through leasing is the property of the leasing company. It is convenient for both parties: the lessor controls focus on investment, and the lessee is exempt from finding security. Also it needs to note that the leasing is a long-term type of loan.

International Finance Corporation (IFC) and State Secretariat for Economic Affairs of Switzerland (Seco) have played significant role in the development of leasing in Azerbaijan. Since 2003, the Corporation has invested $6 million in the development of leasing in the country. Seco has provided $3 million as technical support. Since then, the IFC has contributed to 2 leasing projects in the country - a project to develop the leasing sector and project to improve leasing legislation, establishment of the Association of Leasing Companies, increase the capacity of the sector as a whole.

Thus, today the total leasing portfolio of 19 companies represented in the Association of Leasing Companies in Azerbaijan is $208 million, while in 2003 this figure at 3 leasing companies amounted to $2.1 million. Thus, over the past six years, the assets of the companies grew almost 100 times, which can be seen as an explosive growth.

Moreover, if in 2003 the number of leasing transactions implemented by the companies equaled less than 100, the current number of operating lease transactions totaled over 1,000. The large companies in the Republic are: Ata Lizinq, Azerilizinq, ILSH Azerlizinq, AG Lizinq, Texnika Lizinq, Parex Lizinq and Uni Lizinq. AgroLizinq State Company was established to promote the leasing services market in agriculture, where currently there is a shortage of agricultural machinery. Over the period from 2005 to 2008, Aqrolizinq obtained 133 million manat from the Public budget. Of this amount, 76.6 million manats was spent on the purchase of agricultural equipment, 7.4 million - purchase of technological equipment and 4.9 million - pesticides and fertilizers.

Over six years, significant changes have taken place in the sectoral composition of leasing transactions. If in 2003 the leaders of leasing transactions were food and light industry, agriculture and financial sector, this year the construction and transportation spheres gained leadership.

Large-scale investment projects are realized exactly in these two sectors both by private and public investments. However, because of their business, building and transport companies do not have sufficient working capital, and for them leasing is almost the only way to stay on the market. Already, half of construction equipment is acquired using leasing schemes.

Last year was observed tendency of financing of small projects by medium entrepreneurs through creating their own leasing companies with small capital. In addition, a leasing company appeared in the local market which will provide financial services on Shariah principles. In addition, several local banks expressed their intentions to establish leasing companies. This process testifies potential market and significant prospects for local entrepreneurs.

However, the global financial crisis affected the local leasing companies as well. This tendency can be seen by analyzing the situation on the market, where growth in the portfolio during the year reached 76 percent, whereas in previous years, there has been stable increase of up to 100 percent.

In addition to the crisis in global financial markets, the activities of leasing companies were hampered by several internal factors. They also hinder the development of leasing in Azerbaijan. For example, the forecasted amount of the leasing market in Azerbaijan is $500 million. And if the share of leasing in the country's GDP is 0.45 percent at this stage, to solve these problems will clearly increase its share both by qualitative and quantitative growth of the tool of management.

If to consider this problem in detail, the first and most important problem is the VAT for purchasing of equipment. Today in Azerbaijan, only agricultural equipment is exempt from VAT, but it would be better to expand this list.

Another important condition for the development of the leasing sector is a reliable rule of law. The leasing operations in Azerbaijan are regulated by the Civil Code and Tax Code. The first law on leasing was adopted in Azerbaijan in 1995, but due to the fact that the legislative framework was not sufficiently developed, the law did not become an active tool for the development of leasing. Therefore, it would be better to devise a new law on leasing like many other countries, since the current legislation does not entirely meet the needs of the development of leasing activities in Azerbaijan.

For example, in accordance with the laws of Azerbaijan, the lessor can not re-lease the equipment returned.

"We propose to issue a law that would regulate the activities of leasing companies in Azerbaijan like regulation of banking and insurance sectors of the country," - said a member of the Board of the Association of Leasing Companies Yusif Muslimov. According to him, one of the key proposals of the Association is to create a model to compensate for the value-added tax. "Creating such a model would make lease and loan products equal in status," - said Muslimov.

Currently the leasing activities in Azerbaijan are not regulated by any state agency and is not a licensed activity. Another problem is the lack of long-term financial resources in the leasing sector in the country. Capitalization of operating leasing companies is relatively low, since commercial banks prefer short-term investments, and quite carefully use their resources to finance long-term projects.

Thus, the local leasing companies experience financial difficulties. The authorized capital of Azerbaijani leasing companies a little exceeds $1 million, and they are forced to take loans. However, bank lending in Azerbaijan is not cheap (16-26 percent), and, hence, the interest rate of the lessor will be high (at least 17-27 percent). Under these conditions, leasing companies created by the banks that have access to the source of available cash resources and offer its services at very favorable terms - 16 percent and below, can survive.

It is obvious that to compete with these companies is almost impossible. Unequal struggle is strengthened by the presence of public company Aqrolizinq in the market. It offers preferential terms for agricultural equipment to farmers, and as a result, this segment is also closed for private companies. That is why the share of such technology in the total portfolio of companies is only 3 percent.

The solution for this problem can be establishment of a Leasing Fund, which was included in the plans of the Association of Leasing Companies in Azerbaijan. The establishment of the Leasing Fund will be equal to the creation of the investment company. The Fund will have working capital and will be able to finance local leasing companies.