Access to finance in core of Azerbaijan’s diversified growth

By: Gulgiz Dadashova

Azerbaijan’s future growth will largely depend on the increasing role of innovative, skillful and competitive Micro, Small and Medium Enterprises sector.

Rolf Behrndt, Manager of the World Bank Group’s Finance and Markets Practice, announced about this in the 2014 MSME Access to Finance Demand Survey in Azerbaijan presented on May 12.

Noting that every 9 out of 10 jobs are created by MSMEs worldwide, Behrndt said improving access of MSMEs to finance means faster growth, enhanced productivity and internationalization – core pillars of the country’s sustainability agenda.

During the past decade, Azerbaijan’s economy has grown five times thanks to wealth of energy-based revenue. However since mid 2014, Azerbaijan has faced some new challenges as the income generated from oil exports fall and Russia’s economic downturn damages Azerbaijan’s growth trends.

The government of this oil and gas rich South Caucasus nation seeks to reduce the country’s dependence on the energy sector by boosting private sector growth and competitiveness, and fostering new and better paid jobs in the economy.

Growth of the financial sector is pivotal in achieving this objective, Behrndt believes.

The financial sector needs to grow and increase its intermediation capacity to serve the needs of the economy. Access to finance is key to the growth of small and medium-sized enterprises (SMEs) and jobs creation, but it remains constrained – with private credit to GDP at a modest 31 percent (2014) in Azerbaijan, compared with countries of similar economic size, the Bank reports.

Azerbaijan’s financial sector grew significantly over the past decade with bigger assets and more diverse products, said Angela Prigozhina, who leads the WB financial and private sector work in the South Caucasus.

“Still, as the survey found out, only a small fraction of MSMEs have access to formal finance. About half of interviewed MSMEs in Azerbaijan cite inadequate access to finance as their primary obstacle to business growth,” she said. “Complex credit procedures, high costs and collateral requirements, inadequate financial transparency and financial capability of MSMEs constraint their ability to borrow and grow.”

The Bank presented a number of recommendations on advancing reforms for developing a modern secured transactions framework and credit reporting system and for enhancing risk management practices while simplifying and standardizing lending procedures.

Further growth and deepening of the financial sector would require development of innovative bank and non-bank financial products for different clients, especially for smaller and younger firms, and those located in rural regions.

A government MSME support strategy should be developed and access to finance programs should be streamlined to increase outreach, impact and targeting, the Bank recommends.

To address the low financial capability levels of MSMEs, particularly in new sectors and among agri-businesses, financial consumer protection and awareness programs need to be launched. In addition, there should be simplified business and financial training for MSMEs, through a dedicated and well-coordinated program of state support for SMEs and entrepreneurship.

Larisa Leshchenko, the WB Country Manager for Azerbaijan said unleashing the potential of the domestic financial sector will contribute to Azerbaijan’s growth and prosperity.

“The World Bank Group is currently preparing its new partnership framework for the country, and we will continue our support to Azerbaijan in accomplishing this important agenda,” she said.

The survey was carried out among 516 MSMEs operating in the agriculture, manufacturing, construction, trade, services and tourism sectors, and aimed at identifying constraints faced by MSME in getting finance and their demand for it.

The current WB investment portfolio in Azerbaijan includes 18 projects. Since joining the Bank in 1992, commitments to the country have totaled over $3 billion for 55 projects.

SOURCE: Azer News