Study of Small and Medium Enterprises in Azerbaijan - IFC

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8.4 Recommendations The following solutions will make financing more accessible to entrepreneurs and reduce the cost of borrowing: 8.4.1 The banking sector must liberalize and develop to the point of being able to borrow for SME targeted financing While this is a macroeconomic development policy matter, further liberalization and more flexible sector conditions that would enable banks to borrow in larger amounts will ultimately increase the volume of their lending to smaller businesses. Expected Impact The ability to tap into a larger pool of financial capital available at international markets would enable banks to lend at more favorable conditions to the SMEs: • this would help reduce the interest charged to SME loans (currently at 24 percent per annum), eliminating the key reason for entrepreneurs’ dissatisfaction; • larger financial resources would enable banks to expand the maturity periods and offer a longer grace period to their lending, which would also work toward meeting the clients’ needs. 8.4.2 Expand the National Entrepreneurship Fund’s operations NEF, otherwise discussed in the SME Overview section of this publication, has an average loan size of $127,000. This appears to target larger entities than SMEs, since that amount size is the half of the annual turnover of SMEs and is more than three times greater than the annual turnover of IEs. Additionally, such subsidized funds need to be channeled in a transparent manner with equal conditions applying to all. The most feasible option exercised in similar developing economies was managing such public funds through the banking sector. Expected impact A transparent and well channeled funds may result in multiple positive effects: a. A greater transparency and accountability toward the revolving fund; b. NEF supports the development of the banking sector; and c. NEF provides improved access to finance for SMEs. 8.4.3 Develop and implement the mechanisms so that SMEs can provide alternative collateral Other countries’ experience shows that alongside subsidized credit line allocation, there are various mechanisms aimed at improving the borrowing conditions for entrepreneurs. Other options have been used to minimize risks for the banks while supporting entrepreneurial development. 138 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 8.3 Examples of alternative mechanisms for providing guarantees for SMEs THE ITALIAN EXPERIENCE: CONFIDI Italian SMEs used to face a credit crunch problem, due to non-transparent financial reporting. The banks would frequently require SMEs to provide an amount as an individual collateral or security for the bank’s risk exposure. In order to provide the SMEs with a form of guarantee that would please the banks’ requirements, the business associations developed a new form of (partial) credit guarantee called CONFIDI (i.e., “shared crediting”). The operating mechanism of CONFIDI call for provision of the credit insurance and the risk is proportionally distributed among its participants. Up to 50 percent of the credit risk encountered by the banks while lending for a project was covered. Every participant in the association would contribute to its functioning (typically 2-5 percent of the credit amount). CONFIDI provides a guarantee based on the following principles: • Dual “risk inspection”: before each participant receives the guarantee, the firm is evaluated by CONFIDI, and then by the bank-creditor; • “Risk consolidation”: CONFIDI services a large number of small borrowers, thus diversifying the risk portfolio. CONFIDI facts: by the end of 2004, there were about 1,000 CONFIDIs in Italy. They provided guarantees in the amount of €7 billion ($8.8 billion) for credits totaling €20 billion ($25 billion), which consisted of about 12 percent of the entire crediting volume to SMEs. THE UZBEK EXPERIENCE: CREDIT INSURANCE Credit insurance is a widespread instrument for limiting credit risks, simplifying crediting for financial institutions. The creditor can insure a part of the credit with an insurance company, which facilitates the bank crediting process. The insurance company analyzes the project and evaluates the possibility of the risk at some conditions, i.e., the share of risk, as well as the price. The insurance covers up to 50 percent of the credit amount (40-50 percent on the average), and the premiums are 5-6 percent of the credit amount. Adapted from: Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006, IFC. 8.4.4 Stimulate a general education campaign on products and services offered by the banks Despite the rise in the total number of the lending institutions in Azerbaijan, the credit portfolio does not correspond to the institutional trend. Moreover, the study points to a profound lack of mutual understanding and information sharing between the banks and the intended clients, i.e., to a poor marketing strategy. This is partly an underlying cause for the low lending rate. Chart 8.13 Share of enterprises who had problems with financing that applied for a loan Did the enterprises facing problems with financing accessibility, apply for the credit or credit line 21% Apply Didn’t apply 79% 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 139
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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
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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 and 138: View from a bank employee: “One p
Page 139: Box 8.2 Examples of a successful cr
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
Page 189 and 190: 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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