Benchmarking Study Report ENG - 2004-2005 - AMFA

Authors: Nigar Pirmammadova (AMFA), Scott Gaul (MIX) 1
May 2007
The Azerbaijan Benchmarking Trends Report 2004-2005 has been prepared
by the Azerbaijan Micro-finance Association (AMFA) with MIX
Market, and co-financed by BP and its co-ventures in the Azeri-Chirag-
Guneshli, Shahdeniz, Baku-Tbilisi-Ceyhan and South Caucasus Pipeline
projects and UNDP Azerbaijan.
Note: The views and ideas expressed in this report are those of the
authors and do not necessarily reflect the views and ideas of the project
sponsors.
This trend report presents comparative performance of Azerbaijani
Microfinance Institutions that have reported to MIX Market during
last 2 consecutive years. Illustrated trend lines would allow MFI
managers and board members to monitor their institution's performance
on country scale. It is the second report in industry literature
of Azerbaijan microfinance and should be useful for financial institutions,
donor agencies and investors as well as the government and
other interested parties.
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ACKNOWLEDGMENTS: Nigar Pirmammadova is Finance Manager of AMFA and Scott Gaul is the Lead Analyst, Eastern
Europe and Central Asia at MIX.
AMFA is the Azerbaijan Micro-finance Association uniting 19 members. AMFA was founded in December 2001 and
officially registered at the Ministry of Justice of Azerbaijan in November 2004.
40, Jafar Jabbarli Street, Caspian Business Center, 5th floor, Baku-AZ 1065, Azerbaijan
Tel/Fax: (+994 12) 437 1645; 437 2339
www.amfa.az
While developing this report AMFA used data and tools provided by Microfinance Information eXchange (MIX). MIX provided
AMFA with benchmarking databases and technology, the format for this report and editing support. ACDI/VOCA
MBAEC Consultant Jerrold Smelcer has provided overall review and editing support.

Azerbaijan Benchmarking Trends Report 2004 - 2005 Prepared May 2007
Executive Summary
The microfinance sector in Azerbaijan experienced
rapid development in 2005. The outstanding
portfolio of MFIs crossed $50 million
USD in 2005 and has reached over $200 million
USD by the time of this writing in early
2007. The number of active borrowers reached
60,000 in 2005, then 86,000 by June 2006 and
has now approached 167,000 in 2007. 1
In
order to look at the nature of this growth more
concretely, this report explores performance
changes in the microfinance sector of
Azerbaijan from 2004 - 2005. Although the
accelerated growth has necessitated expansion
into new regions, management has maintained
efficiency and increased profitability. The flow
of investor and donor funds to MFIs in
Azerbaijan has also increased, supported by the
high level of transparency within the sector and
demonstrated most strongly by several MFIs
which have carried out external rating evaluations.
Five institutions - CredAgro NBCO,
Findev, Viator LLC, Normicro and Azercredit -
have been qualified on MIX Market with 5
diamonds, the highest level. 2
The rating reports
confirm management's respect for financial
transparency as MFIs grow, mature, and expand
their products/services to harder to reach
clients.
The activity and growth experienced in
Azerbaijan today is a direct reflection of
effective management decisions made by MFIs
during the 2005 year. All performance
improved in each of the following areas:
outreach/scale, financial structure, profitability/
sustainability, revenue/expense, efficiency/productivity,
and portfolio risk. MFIs improved
loan distribution techniques, efficiently
managed expenses, increased profits, attracted
more investors and provided greater service to
their clients. The following sections break down
each ratio measurement category and
summarizes the highlights.
1
As reported on 31 March, 2007.
2
www.mixmarket.org
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AZERBAIJAN BENCHMARKING TRENDS REPORT 2004 - 2005
Outreach and Scale
RATIO ANALYSIS
The gross loan portfolio (GLP) of MFIs in
Azerbaijan grew by 36.4%, which is also
reflected in the increased number of borrowers
and greater rural outreach. The GLP was
$12,825,763 with 25,832 active clients in
2003, increasing to $19,826,193 and 41,502
active borrowers in 2004 and finally to a
portfolio of $53,043,458 with 61,758 clients 3 in
2005. Average loan balances remained roughly
constant over the two years, increasing from
$351 to $372 USD per borrower or from 37%
to 39% of GNI per capital.
Branches opened in 10 new regions, as
revealed in the AMFA Matrix -- a report produced
by AMFA that continuously updates MFI
statistical information (number of clients,
amount of outstanding loans, size of loans
every quarter, etc.) for MFIs in Azerbaijan. The
Financial Structure
MFIs in Azerbaijan have gradually increased
their access to debt financing and have
leveraged this debt to fund their growth.
Commercial lenders have provided additional
loan capital to several MFIs, which allowed
them to expand their field of activities
accordingly. The median debt/equity ratio for
Azerbaijani MFIs increased from 0.3 to 0.44 in
2005 - an increase of almost 50%, while the
median commercial funding liabilities ratio
Chart 1: Growth in microcredit portfolio in Azerbaijan
Source: AMFA Matrix Report, 2005.
Matrix states that FINCA opened new branches
in Xanlar and Hajiqabul; Micro Finance Bank of
Azerbaijan opened branches in Ganja and
Shamakhi; CredAgro opened branches in
Agstafa, Shamkir and Bilasuvar; and Agroinvest
opened branches in Masalli, Jalilabad and Saatli
regions.
increased from 1.2% in 2004, to 8.7% in 2005.
This corresponds to a dollar increase in commercial
debt outstanding from $2.2M USD to
over $13.8M USD within the year 2005 alone.
The ratio of overall gross loan portfolio to total
assets increased by 5.2% year on year, to
90.2% overall, as the maturing microfinance
sector also began to allocate more assets to the
credit portfolio.
3
The percent of women borrowers among the total number of clients increased by 6.1% in 2005 (Gender Ratio: female - 37%; male - 63%)
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AZERBAIJAN BENCHMARKING TRENDS REPORT 2004 - 2005
Profitability and Sustainability
Profitability & sustainability ratios measure
the ability of an MFI to continue operations and
develop in the future. The trend analysis
indicates that all profitability and sustainability
indicators improved in comparison with 2004.
However, overall profitability was still low as
these rapidly growing institutions continued to
expand operations, and the majority of institutions
still had negative adjusted returns.
Nevertheless, return on assets (ROA) and return
on equity (ROE) each grew in 2005. ROA
increased from -4.6% in 2004 to -0.1% in
2005, while ROE increased from -6.3% in 2004
to -0.6% in 2005. Moreover, 2005 marked the
first time that self-sufficiency ratios reached
levels above the breakeven point of 100%.
Operational self-sufficiency (OSS) increased
from 119.8% in 2004 to 129.7% in 2005, while
financial self-sufficiency (FSS) increased from
81.3% in 2004 to 104.5% in 2005. The
increase in FSS reflects that 2005 is the first
year in which the majority of Azerbaijan MFIs
have been able to cover all adjusted financial,
operating and provisioning costs.
Revenue and Expenses
Yield is an indicator of the ability of an MFI
to generate revenue for operations from the
gross loan portfolio (GLP). Yield levels also
closely track the effective interest rates charged
on credit by MFIs. In 2005, nominal yields
increased by 1.5%, to a median level of 34.5%,
which may be due to the increased cost of
commercial financing. However, after adjustments
for inflation are made, real yields actually
decreased by 1.8% year to year. Expenses
Efficiency and Productivity
also saw a slight overall decrease across the
years 2004 - 2005. Operating expenses,
composed of personnel and administrative
expenses, remained roughly constant while
loan loss expenses decreased slightly. At the
same time however, financial expenses saw a
slight increase - from a median of 7.0% to 8.5%
(of total assets). This reflects a higher cost of
funding, again due to inflation and the
increased presence of commercial lenders.
Efficiency and productivity ratios indicate how
well an MFI utilizes its resources, particularly in
regards to assets and personnel. Operating
expense/loan portfolio and personnel
expense/loan portfolio both decreased during
the year despite strong inflation, and this
decrease can be partly explained by the small
increase in loan balances. In terms of personnel
capacity, borrowers per loan officer decreased
from 174 in 2004 to 151 in 2005, while borrowers
per staff member increased from 84 in
2004 to 88 in 2005. This could indicate that
MFIs increased the number of loan officers to
handle the increased lending and borrower
volume, but kept the general staff levels steady.
It could also reflect the increased presence of
MFIs in more sparsely populated rural regions
of Azerbaijan, with lower productivity levels at
newer branches.
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AZERBAIJAN BENCHMARKING TRENDS REPORT 2004 - 2005
Portfolio Quality
In 2005, all portfolio quality ratios improved in
comparison with 2004 figures which is an indication
that management is performing proper
due diligence throughout the lending and collection
process. In terms of ratio analysis, portfolio
at risk (PAR) indicates the potential for
future losses based on late payments from the
gross loan portfolio. PAR > 30 days decreased
from 1.2% in 2004 to 0.6% in 2005; while PAR
> 90 days decreased to 0.3%. In both cases,
these levels are well below global medians. To
complement the decline in PAR, the write-off
ratio also decreased from 0.7% to 0.3% year on
Summary
This 2005 Performance Trend Analysis has
revealed that improvements occurred in every
measurement category for Azerbaijan MFIs
since the last Benchmarking Report in 2004.
Indicators such as gross loan portfolio, number
of active borrowers, yield on gross portfolio
(real), profit margin, operational self-sufficiency,
return on assets, portfolio at risk, write-offs, and
the number of personnel each improved
year. 4
Risk coverage indicates an MFI's ability
to absorb loan losses if all loans payments overdue
by longer than 30 days were to be written
off. A decline in the risk coverage ratio of
26.2%, coupled with reduced loan loss provision
expenses indicates that MFIs adopted less
conservative provisioning policies to reflect the
low delinquency levels. The reduction in PAR
and write-offs helped alleviate the need to
reserve capital for risk coverage, which gave
management a greater ability to focus funds on
operational issues.
between 2004 and 2005. Despite the fact that
non-banking credit organizations were not
allowed to accept deposits, 5
management also
strengthened outreach into more rural areas.
2005 was a year of change and accomplishments
that helped provide the foundation on
which the MFI community continues to build
today.
4
MFI write-off policies in Azerbaijan are dependent on the individual MFI management or on Court decision.
5
The microfinance activities in Azerbaijan are regulated by the Civil Code and the Law on Banks and Banking Activities. Current legislation in
Azerbaijan does not allow non-banking credit institutes to accept deposits or receive tax-exempt status. Therefore, deposit taking ratios are not
provided in this report
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2 Performance Trend Analysis Azerbaijan
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Azerbaijan
Performance Trend Analysis 3
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AZERBAIJAN BENCHMARKING TRENDS REPORT 2004 - 2005
APPENDIX
Inflation and Exchange Rate Indicators
Inflation Rate Indicators
Exchange Rates Indicators
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