Access to Finance for Micro, Small, and Medium-Sized · PDF fileAccess to Finance for Micro,...

Access to Finance for Micro, Small, and

Medium-Sized Enterprises in Azerbaijan

A Demand-Side Assessment

Angela Prigozhina

Country Sector Coordinator

May, 2015

Agenda

Main Findings of the MSME A2FSurvey

Key Policy Recommendations

Setting the Stage

Setting the Stage

• Overview of the Azerbaijani Financial Sector –

public data

• Financial constraints to MSME finance – public

data

4

While financial sector nearly doubled along the oil boom,

it remains fairly small

Source: The Central Bank of the Republic of Azerbaijan

17%18%

24%22%

19%

22%

27%

31%

15%16%

18% 18% 18%20%

22%

26%24%

26%

33%31%

27%

30%

35%

43%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2007 2008 2009 2010 2011 2012 2013 2014

credits/GDP deposits/GDP Banking assets/GDP

Azerbaijan Financial Penetration Indicators

Many SMEs in Azerbaijan have bank accounts, but still

don’t have access to loans

5

87% 88%82%

65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

High Income MiddleIncome

LeastDevelopedCountries

Azerbaijan

Percentage of SMEs With a Checking or Savings Account

51%45%

18%15%

0%

10%

20%

30%

40%

50%

60%

High Income Middle Income Least DevelopedCountries

Azerbaijan

% SMEs with line of credit from financial institution

6

67% 70%76%

93%

15% 12%8%

5%

8% 11% 11%

1%10% 7% 6%

1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

High Income Middle Income LeastDevelopedCountries

Azerbaijan

Financing sources for working capital

Internal Financing Banking Financing

Supplier Credit Financing Other Financing

60%67%

81%71%

23%18%

9% 28%3.7%4.8%

2.8%

0.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

High Income Middle Income LeastDevelopedCountries

Azerbaijan

Financial sources for investment

Internal Financing Banking Financing

Trade Credit Financing Equity, Sale of Stock

Other Financing

7

Bank private credit to GDP (%) among peer countries

Source: WBG FinStats 2015

0

10

20

30

40

50

60

70

80

90

100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

% o

f G

DP

Azerbaijan

Belarus

El Salvador

Georgia

Jordan

Kazakhstan

Serbia

Tunisia

Turkey

While bank credit is the main source of formal finance, the

depth of the market is much lower than in peer economies

UzbekistanMontenegro

Albania

Hungary

TurkeyMoldova

KazakhstanUkraine

Bosnia and Herzegovina

Bulgaria

Belarus

Georgia

Serbia

Macedonia, FYRAzerbaijan

Tajikistan

Kyrgyz RepublicArmenia

Romania

Kosovo

0

5

10

15

20

25

30

35

40

45

50

0 5 10 15 20 25

%

Constrained finance is the key business growth impediment

Source: WBG Enterprise Survey 2013, WEF Global Competitiveness Index

% of MSMEs reporting access to finance as a major obstacle to business operations

Collateral based lending is dominant, with reliance on cash

flow/business analysis still rare

Source: WBG Enterprise Survey 2013

% of MSME loans requiring collateral

Turkey

Ukraine

Serbia

HungaryBosnia and

HerzegovinaBelarus

Romania

Bulgaria

Kyrgyz Republic

Kazakhstan

Armenia

Azerbaijan

KosovoAlbania

Macedonia, FYR

Tajikistan Georgia

Montenegro

Moldova

Uzbekistan

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25

%

While requirements for collateral exceed 200% of loan

value and rarely feasible for MSMEs

Serbia

Bulgaria

Ukraine

Hungary

Kyrgyz Republic

Uzbekistan

Belarus Bosnia and Herzegovina

Kazakhstan

Romania

Georgia Turkey

Moldova

MontenegroAzerbaijan

AlbaniaArmenia

Kosovo

Macedonia, FYR

100

150

200

250

300

350

0 2 4 6 8 10 12 14 16 18 20

%

Collateral value as % of the loan amount

MSME Access to Finance Survey:

What are the Key Findings?

Access to Finance is a Major Constraint for MSMEs

% of MSMEs citied the reason as the most important obstacle to business growth

Azerbaijan

0.1%

0.2%

1.1%

1.2%

1.3%

1.5%

2.4%

4.4%

4.7%

5.8%

6.2%

6.3%

13.8%

51.0%

0% 10% 20% 30% 40% 50% 60%

Customs and trade regulations

Courts

Difficulty hiring or retaining…

Business licensing and…

Electricity

Economic instability

Corruption

Competitors that operate…

Access to land

Transport and other…

Don’t know

Other

Tax rates

Access to finance

Source: Azerbaijan MSME Access to Finance Survey, 2014

Constrained access to finance is the most severe in Aran /Daglig-Shirvan region

and is especially felt by the construction and trade sectors

0.1%

0.4%

0.5%

0.9%

1.1%

1.5%

2.3%

2.4%

3.3%

5.5%

7.3%

7.4%

10.0%

11.0%

16.2%

30.0%

0% 10% 20% 30% 40%

Corruption

Crime, theft and disorder

Courts

Transport and other…

Access to land

Business licensing and…

Electricity

Customs and trade…

Donít know

Difficulty hiring or…

Political instability

Other

Tax rates

Competitors that…

Economic instability

Access to finance

Georgia

Loan usage among MSMEs remains low through sectors

and size

90.4% 90.2% 90.1%83.0%

91.9%

81.9%

72.7%

9.2% 7.2% 9.1%

14.1%

7.9%

14.8%

20.0%

0%

20%

40%

60%

80%

100%

Agriculture Manufacturing Services Constructionand Trade

Micro Small Medium

2 loans or more

1 loan

No loan

Loan usage among MSMEs by sector and size


While 2/3 of firms have a bank account, only 13.5% of MSMEs have a loan/ a line

of credit with a bank

Loan rejection rates are high, especially in agriculture, for

micro firms and businesses in some regions

35.7%

6.2%

29.5%

56.9%

36.6%

10.6%

6.3%

27.5%

23.2%

20.4%

12.0%

0% 10% 20% 30% 40% 50% 60%

Aran/Daglig-Shirvan

Baku/Absheron

Ganja-Gazax/Sheki-Zagatala

Lankaran/Guba-Kharchmaz

Micro

Small

Medium

Agriculture

Manufacturing

Construction and Trade

Services

Loan rejection rates for MSMEs by sector, size, and region


Main reasons why MSMEs do not apply for a loan?

2.2%

3.6%

7.0%

8.2%

39.3%

39.5%

Other

Interest rates were not favorable

Loan amount and maturity were insufficient for the companyor the minimal amount or term were exceeding company

requirements

Did not think it would be approved

Collateral requirements were too high

Application procedures were complex

% of MSMEs that cited the reason as the main reason for not applying for a loan


What Types of Collateral were Required for Outstanding

Loans?

% of different types of collateral used for outstanding loans

Immovable property of the firm

23%

Machinery and equipment

26%Accounts receivable and

inventories13%

Personal assets31%

Third party guarantees6%

Other forms of collateral1%


MSMEs are not familiar and don’t use key financial

products such as LC, insurance, leasing and factoring

Familiarity Seeking Receiving

Later payments on purchase of goods 67.4% 57.5% 56.7%

Advanced payments from customers 71.3% 59.9% 52.2%

Letters of credit 20.8% 1.2% 0.6%

Trade insurance 25.8% 5.3% 1.9%

Leasing 32.1% 5.8% 4.1%

Factoring 17.4% 2.3% 1.7%

Other 0.5% 0.0% 0.0%

% of MSMEs aware, seeking, and receiving other sources of financing


MSMEs know about Government’s program but rarely

access it

% of MSMEs seeking and receiving supports from different type of government program


Aware

70% of the MSMEs

were aware of the existence of government support programs for their field of activity

Seeking

Special loan programs for a company’s sector –5.1%

Subsidies by the government – 10.2%

Technical assistance for a company from donor agencies or government –2.7%

Receiving

Special loan programs for a company’s sector –1.7%

Subsidies by the government – 2.6%

Technical assistance for a company from donor agencies or government – 2.7%

MSMEs most interested in Government’s support to lower

cost of funds, especially for micro and agribusinesses

13.1%

39.3%

25.5%

52.9%

35.2%

30.2%

35.2%

15.1%

48.8%

8.2%

23.4%

27.0%

26.2%

36.5%

17.0%

22.0%

36.8%

36.6%

38.2%

25.8%

21.8%

28.6%

57.1%

31.0%

37.7%

20.0%

38.2%

30.9%

22.9%

45.7%

19.9%

65.0%

47.8%

1.5%

1.1%

0.3%

2.0%

0.2%

1.1%

5.3%

0.2%

1.1%

3.4%

0.2%

Agriculture

Manufacturing

Construction and trade

Services

Micro

Small

Medium

Aran/Daglig-Shirvan

Baku/Absheron



Lowering of taxes

Simplification ofregulations

Cheaper financingavailable

Incentives to keepemployees on payroll

Other (specify)

Preferred government actions in % by MSMEs in different region, sector, and size


MSMEs have high demand for finance in the next 12 months

92.3%

63.9%

83.5%

50.3%

64.7%

82.2%

85.5%

85.3%

60.9%

81.5%

92.9%

Agriculture

Manufacturing

Construction and trade

Services

Micro

Small

Medium

Aran/Daglig-Shirvan

Baku/Absheron



% of enterprises requiring financing within the next 12 months by region, sector, and size


MSMEs have poor business practices

40%

33%

13%

65%

53%

24%

52%

36%

27%

Written financial records

Financial statementsWritten business plan

Agriculture

Manufacturing

Construction and Trade

Services, Tourism, etc

Business Management and Financial Reporting Practices


MSMEs with financial records and business plans

have lower rejection rates

86%

81%

82%

100% 100%96%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Writtenfinancialrecords

Financialstatements

Writtenbusiness plan

% o

f fi

rms

hav

ing

con

stra

ints

to

fin

anci

al a

cces

s

Yes

No12%

8% 11%

35%

31%

25%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Writtenfinancialrecords

Financialstatements

Writtenbusiness plan

loan

rej

ecti

on

rat

e

Yes

No

Financial constraints and loan rejection rate by different business practices


Recommendations

Introduce MSME development strategy as a key pillar of

Azerbaijan growth and diversification strategy Vision 2020

Evaluate, streamline and rationalize existing government financial

support programs against international best practices in order to

improve design, uptake and effectiveness of existing measures

Review the existing legal and regulatory framework to foster

development of sound, broader and deeper financial market,

encourage investments/FDI

Enhance state policy and state financial support


Broaden and deepen markets and products, foster

innovation for more efficiency and financial inclusion

Encourage new innovative financial instruments and lending

technologies to tailor financial products to the MSME needs,

including those for agribusinesses and rural entrepreneurs

Explore impediments to and opportunities to the development of

leasing, factoring and trade financing (including domestic supply

chain financing and export financing)

Facilitate development of non-bank financial institutions and

products, including non-bank credit and investment institutions,

capital markets investment vehicles (for collective investments

and voluntary pension savings program).


Encourage simplification and standardization of lending

procedures and guidelines for MSMEs including loan application

processes; enhance risks management

Improve credit market infrastructure

Foster creation of a private credit bureau and ensure

adequate regulatory framework for overview of its activities,

data safety and consumer protection

Create movable assets secured transactions legal and registry

system

Build credit market infrastructure and simplify procedures


Address low levels of financial capabilities of MSMEs –

particularly in new sectors and among agribusinesses – through

providing simplified training to MSMEs in business & financial

management (financial ‘rules of thumb’)

Coordinate and consolidate efforts of private and public

institutions, including the private financial sector, NGOs and

training centers, to effectively enhance MSMEs’ financial

capabilities by launching financial literacy programs to target

groups via various distribution channels

Enhance MSMEs transparency and financial capability


Date post:	02-Feb-2018
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