Study of Small and Medium Enterprises in Azerbaijan - IFC

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Yet in-depth interviews demonstrate that entrepreneurs receive information about banking services from third parties and not as a result of the banks’ communications with the business community. View from an entrepreneur: “I personally have no experience working with a bank, but I heard from others and read in the press about the problems entrepreneurs have had who do work with banks. Only businesspeople with financing problems, which cannot be solved by any other direct means, go to the bank. As I’m capable of dealing with my finances and face no problems, I do not need to go to a bank.” 8.3.3 Credit bureaus bridge such confidence gaps A credit bureau is an institution that collects information on the borrower’s credit history from creditors and from general sources. The bureau accumulates information on individual entrepreneurs and SMEs, such as payment history on previous credits (particularly defaulting payments) and information on court decisions and bankruptcies, and then makes a comprehensive credit report, which is sold to creditors. Currently, there is only one credit registry and it does not meet the typical credit bureau standards. A number of limitations prevent the credit registry from expanding into a proper credit bureau: a) The registry information is closed for the non-banking financial institutions Currently, 96 non-banking credit institutions operate in Azerbaijan. The target market for these non-banking credit institutions includes small farmers, trade and service SMEs, and individual enterprises, which mostly produce consumer goods, i.e., the target group for these microcrediting institutions includes mainly SMEs of various sorts. Not having accurate credit information on borrowers causes the microcrediting organizations to introduce tougher requirements (e.g., higher interest rates, shorter terms) in order to mitigate risk. b) Registry information does not offer a detailed analysis of the client Unlike the registry, a credit bureau processes the information received: it generalizes, classifies, and sells clients credit reports (histories) to the banks. The registry services include only a small portion of the bureau’s possibilities. Box 8.2 Examples of a successful credit bureau Experience throughout the world demonstrates the variety of forms a credit bureau can take. In some countries, such as the U.S., Brazil, and Argentina, the majority of credit bureaus are private enterprises, functioning with the purpose of capitalizing from the information services provided. In addition there are some local credit bureaus, created by the trade chambers and associations as commercial institutions operating in these countries. continued on next page 136 St u d y o f Sma l l a n d Me d i u m Ent e r p r i s es in Az e r b a i j a n
Box 8.2 Examples of a successful credit bureau (continue) In Japan and in the majority of European countries, as a rule, credit bureaus are created as private companies, owned by a creditors’ consortium. In the United Kingdom there are two independent credit bureaus, fully independent from the lenders. In Finland and Belgium, credit bureaus are controlled or licensed by the governmental agencies. Credit bureaus operating in Germany have formed a union of eight regional partnerships, which are independent in legal and economic relationships – the Common Credit Provision Protection Partnership (SCHUFA). Their owners and simultaneously partners are: commercial banks, savings banks, cooperative banks, as well as the firms offering credit cards, construction savings and mortgage banks, leasing partnerships, as well as consumer goods enterprises and equity investment funds, offering monetary or commodity credits for consumer goods to individuals. In most countries, credit bureau databases are formed through years of hard work; in the U.S., Canada, Finland, and South Africa, credit bureaus began to function at the end of 19th and early 20th century. In other countries, such as Italy, credit bureaus were established only recently and are growing rapidly and in demand as a service. In some Latin American and Asian countries, credit bureaus are in the establishment stage, accumulating small volumes, primarily negative (defaulting) records; but these are the first steps on the way to integrating larger databases. The volume of the information exchanged using the credit bureaus’ service is large. In the U.S., Belgium, Brazil, United Kingdom, Japan and Germany, the number of reports provided exceeds the population. The protection of creditors rights is the basis for a functioning credit bureau. In countries with weak legislative and legal protection, borrowers can be dishonest and stop making loan payments, even while solvent. Therefore, legislative protection of creditors’ rights not only through the monitoring system using credit bureaus’ databases, but also through the judicial and arbitration system is essential in all countries. Some arbitration courts have been known to refuse a complaint from a creditor, if no attempt was made to obtain the borrower’s records from the credit bureau before the loan approval. For the growth of SMEs, credit bureaus can play a crucial role. By increasing the volume of transactions, the database expands to include a multitude of different datasets received from creditors, as well as from the companies themselves, not only relating to the activity of the borrower, but on their financial standing, as well as about their other creditors, stockholders, and managers. Besides providing the standard reports on credit operations as a statistic risk-management, credit bureaus perform functions as rating agencies. The largest and oldest global agency is Dun & Bradstreet, which currently holds data on more than 48 million companies, 10 million of which are located in the U.S. In addition to private credit bureaus, many countries have a state credit registration institution – Public Credit Registers (PCR). This institution was historically formed for registration of mortgages on real estate, later to be expanded to other types of leases. This too may be a valuable source of relevant data. The main difference between a PCR and a credit bureau is that for the former, participation is mandatory, established by corresponding rules (except in Finland and Sri Lanka, where participation is voluntary). As this takes place, all information is standardized (for example, credits above an established level, issued for a defined time period) and is credit-focused rather than borrower focused. In the majority of countries, PCRs are controlled by central banks. Exceptions are: Chile, Costa Rica, and Peru, where they operate under the banking supervision agency, as well as Finland, where management has been transferred to a private entity. Access to information is granted only to authorized employees of the central bank (primarily to support the database and to adhere to strict observance of confidentiality) and reports are provided to financial institutions. Credit bureaus provide different types of reports on credit operations depending on the availability of the information on the potential borrower, credit types, and most important, the degree of details required by the creditor. The simplest report contains information on previous defaulted payments and bad loans – so called “black” or “negative” data. The most detailed reports - “white” or “positive” – contain complex information on assets and liabilities of the borrower, guarantees and debt structure according to the lending terms, his business, and, sometimes, family history. The report’s price depends on the degree of details provided. The basic report’s price is relatively low and fluctuates from $1 in the U.K. and U.S., to $2 in Italy, and $3 in Argentina. The most developed credit bureaus compile the borrowers’ credit ratings, based on their characteristics and credit history, as well as data for compiling statistical models, promote the use of financial instruments, help evaluate credit costs, and establish and regulate credit limits. Experience shows that the exchange of information, which credit bureaus facilitate stimulates the expansion of the bank credit portfolio in relation to GDP by approximately 20 percent. In addition, credit risks are lowered significantly, and, correspondingly, provisions for bad loans decrease. Thus, increased access to financial information positively affects credit efficiency and as a result positively affects GDP growth and labor productivity. Aze r b a i j a n Bu s i n e s s En a b l i n g En v i r o n m e n t Pr o j e c t 137
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Study of Small and Medium Enterpris
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Study of Small and Medium Enterpris
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5. Business Permits................
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Foreword and Acknowledgements IFC,
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critically examines all areas of op
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of each formality. Special attentio
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Policy Recommendations Business Reg
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Problems Sources of Problem Recomme
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Business Taxation Problems Sources
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Capital: Baku Country’s populatio
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The state, ultimately responsible f
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1. Methodology 1.1 Background The s
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the share of economically active co
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Scope of activity Official statisti
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2. SMEs in Azerbaijan The aim of th
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Meanwhile, the number of small and
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Table 2.2 Statistical information o
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The “typical” small enterprise
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According to the IFC survey, more t
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2.5.3 Legal disputes Most entrepren
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3. Business Registration In January
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According to the law previously in
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3.4 Economic impact estimate Accord
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tion duplicate is addressed to the
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the local tax inspectorate for regi
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3.10.3 Introduce the electronic reg
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3.10.7 Simplify the liquidation pro
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Business registration before ‘one
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Process map of one-stop-shop busine
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Registration for individual entrepr
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4.1 Licensing: the legal framework
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Chart 4.1 Number of activities requ
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While the Rules specify limits for
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Chart 4.6 Economic impact of licens
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Annex 4.1 Checklist of issues for d
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Based on the IFC survey estimates,
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5.2 Permits coverage The Azerbaijan
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Box 5.4 An example of overlapping p
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5.4 Permit expenses Azerbaijani leg
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Chart 5.9 40% Average percentage of
Page 87 and 88: 2.4. Specifying in the law a unifor
Page 89 and 90: Annex 5.1 Procedure for obtaining c
Page 91 and 92: Annex 5.2 Checklist of issues for d
Page 93 and 94: The most significant legal act in i
Page 95 and 96: 6.1.2 There is no effective mechani
Page 97 and 98: 6.1.4 Entrepreneurs are not aware o
Page 99 and 100: IFC’s analysis showed that only h
Page 101 and 102: 6.2.2.1 The inspections process and
Page 103 and 104: View from an entrepreneur: “The s
Page 105 and 106: Chart 6.11 Average registration in
Page 107 and 108: going in the opposite direction. In
Page 109 and 110: clearly defined circumstances, or a
Page 111 and 112: Annex 6.2 Presidential Decree No. 7
Page 113 and 114: The bulk of individual entrepreneur
Page 115 and 116: Items 1-9 are collected at the firs
Page 117 and 118: The IFC survey reveals that one in
Page 119 and 120: Table 7.5 Main tax obligations of a
Page 121 and 122: Chart 7.3 IFC Survey: Complexity of
Page 123 and 124: 7.3.2 Tax inspections negatively af
Page 125 and 126: 7.3.5 The cumbersome VAT administra
Page 127 and 128: • Introducing clearer and more el
Page 129 and 130: Chart 8.1 Development of Credit Ins
Page 131 and 132: More than 90 percent of entrepreneu
Page 133 and 134: Chart 8.9 The loan interest rates o
Page 135 and 136: Case study of a Baku-based glass an
Page 137: View from a bank employee: “One p
Page 141 and 142: Box 8.3 Examples of alternative mec
Page 143 and 144: 9. Foreign Trade The volume of fore
Page 145 and 146: Box 9.1 Customs regimes under the C
Page 147 and 148: As Chart 9.1 illustrates, 98 percen
Page 149 and 150: Table 9.1 A comparison of the proce
Page 151 and 152: The comprehensive system of mandato
Page 153 and 154: Table 9.2 Average costs for imports
Page 155 and 156: Box 9.5 Customs payments The Custom
Page 157 and 158: Box 9.8 An excessive number of docu
Page 159 and 160: Moreover, due to the underdeveloped
Page 161 and 162: Expected impact More comprehensible
Page 163 and 164: 9.5.6 Accelerate WTO accession of A
Page 165 and 166: Chart 9.5 Goods importable upon app
Page 167 and 168: Azerbaijan has been long pending a
Page 169 and 170: List of Laws 1. The Tax Code of the
Page 171 and 172: Statistical Annexes Aze r b a i j a
Page 173 and 174: Chart A1.3 Individual Entrepreneurs
Page 175 and 176: Chart A1.7 Individual Entrepreneurs
Page 177 and 178: Chart A1.14 Three Major Types of Ob
Page 179 and 180: Registration Chart A2.1 Entrepreneu
Page 181 and 182: Chart A2.8 Three Major Problems Occ
Page 183 and 184: Chart A3.3 Existence of Licenses by
Page 185 and 186: Chart A3.9 Three Major Obstacles to
Page 187 and 188: Chart A4.4 Obtaining of Any Permits
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Chart A4.10 Time Required to Obtain
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Chart A5.4 Application for Credit o
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Chart A5.12 Average Interest Rate (
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Chart A6.3 Entrepreneurs That Under
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Chart A6.8 Authorities That Made In
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Chart A6.13 Breakdown of Number of
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Chart A6.19 Average Duration of One
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Chart A6.25 Small and Medium Enterp
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Chart A7.3 Small and Medium Enterpr
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Chart A7.8 Reported Share of Busine
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Chart A8.3 Usage of Optional (not c
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Azerbaijan Business Enabling Enviro
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Study of Small and Medium Enterprises in Azerbaijan - IFC

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