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Leasing market in Azerbaijan: Results of 2010

Analysis Materials 28 December 2010 12:10 (UTC +04:00)

During the period of crisis, because of the tightening of credit procedures and the lack of long-term financial resources in local banks, the customers increasingly preferred the leasing, which associated with beneficial and favorable terms of financing. The interest in this type of financial services also increased due to a number of advantages that distinguish it from the credits. Thus, the distinguishing feature of leasing from usual bank loan is that the security is the facility purchased under leasing, and until the last payment for equipment under leasing, it is the property of the leasing company. It is convenient to both sides: the leasing company controls the purposiveness of the invested funds, and the client is free from finding security. Also it is worthy to note that the leasing is a long-term type of credit.

In 2010, the leasing market in Azerbaijan began to gradually intensify after relative inactivity in 2009. If last year the companies feared funding some projects, today serious contracts have already begun to be concluded on the market. In 2009, in order to protect their portfolio, the leasing companies increased interest rates by 26-28 percent because of the high risk, but today they are gradually reducing tariffs, which have already been brought up to 20-21 percent.

However, significant growth in the portfolio of leasing companies is not observed this year. On the contrary, according to participants of this market, currently there is a tendency of reduction in portfolios of several leasing companies in Azerbaijan. This process is largely linked with the increased failure of customers to pay for leasing, as a result of which the major resources are directed towards solving problems with a portfolio of bad loans.

Coming of new players also has a positive impact on the growth of the total portfolio of leasing companies. In 2010, 3 new companies started activities on the leasing market in Azerbaijan. Their portfolio is growing, which will also affect the growth of the total market portfolio. Particularly, TKB Lizings LLC (Latvia) passed state registration via the principle of "one window" in September in Azerbaijan. In July, for the first time in the post-Soviet territory, the Pakistani MCB Bank entered Azerbaijani market, establishing a joint leasing company. In June, a new Rao lizing LLC leasing company, founded by the German Rao Global Group Gmbh, was registered in Azerbaijan.

The presence of new leasing companies in the market encourages competition and makes the local company introduce more competitive products, and therefore, the increase in their number can be regarded as a positive factor. The increase in the number of companies is also supported by a great potential of the local market, which allow to successfully finance various projects of Azerbaijani businessmen. Today, 28 leasing companies operate in Azerbaijan. AtaLeasing, Joint Leasing, AGLeasing, NIKOIL Leasing, Qafqaz Leasing, Texnikaleasing, Parex Leasing & Factoring and Unileasing are the leaders of the local leasing market.

Development of industrial enterprises, the opening of trade facilities, stores and restaurants in the country - all these stimulate the sales of the different equipment. However, to avoid problems, the leasing companies have become more legible in choosing projects. The direction of their activities also changes. If earlier the companies paid great attention to the construction sector, today the interest is growing in the processing sector and leasing vehicles. Today the interest in leasing of motor vehicles is growing and in this regard, the companies compete with banks.

Unfortunately, it should be noted that the problems that stand in the way of leasing development in Azerbaijan were not solved in 2010. They literally can be called barriers that impede the development of leasing in the country.

The key problem is VAT applied to purchasing equipment. It should be noted that as the main factor stimulating the development of leasing, the participants of the leasing market call the tax policy of the government. Today only the agricultural equipment is exempt from the VAT in Azerbaijan, but it would be better to expand this list for other types of equipment and machinery imported into the country in order to be leased.

The leaser needs to pay VAT twice: from fee for leasing the facility and from fee being paid by the client. It means that one deal incurs VAT twice and becomes 18% more expensive.

The second important condition for the development of the leasing sector is the reliable legal regulation. In Azerbaijan the leasing operations are being regulated throughout 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 is not sufficiently developed, the law did not become an actively operating tool for the development of leasing.

Thus, there is a necessity for a law that would regulate the activities of leasing companies in Azerbaijan, like the low regulating the banking and insurance sectors of the country, and would make leasing and loan products equal in status.

Another problem for development of leasing is the cancellation of mechanism of speed amortization in the country. For 2-3 years the leasing was included in the list of areas of activity covered by the speed amortization, which means that the lessee (the person taking the leased equipment at the long-term leasing) have the ability to write off significantly huge amortization costs rather than other areas that not have similar privileges.

Another problem is the lack of long-term financial resources in the leasing sector in the country. Capitalization of operating leasing companies is relatively small, but commercial banks prefer to short-term investment resources to what leasing is not referred, and quite carefully use their resources to finance long-term projects. Thus, the local leasing companies experience problems with the finances, the authorized capital of some of them do not exceed one million manat, they are forced to take loans. However, bank loans to Azerbaijan are not cheap (16-26 percent), and, therefore, the lessor's interest rate will be high (at least 17-27 percent). Under such conditions, only the leasing companies that are created by banks with an access to cash resources can survive, offering their services on very favorable terms - 16 percent and below.

It is obvious that competing with these companies is almost impossible. The presence of Aqrolizinq state enterprise in market strengthens unequal struggle. It offers preferential agricultural machinery to farmers, and as a result, this segment is also closed for the private companies. That is why, the share of such equipment in the total portfolio of companies totals only 3 percent.

Leasing companies in Azerbaijan also experience a need for an access to central credit registry, acting at the Central Bank of Azerbaijan, to receive complete information about the customer's credit history.

But despite the crisis in global financial markets and some of the above-mentioned domestic issues, the leasing in Azerbaijan is a rapidly developing and in-demand business, having a bright future. In 2010, no leasing company left this market, but the number of participants with foreign capital has increased, which testifies the presence of market potential.

According to forecasts of the market participants, the growth in the leasing market in the country will continue in 2011. And resolving the current problems will bring to significant development of the leasing market in the country.

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