RIF Regulation Mapping: Azerbaijan
March 2016
Written by Jhale Hajiyeva, Executive Director of the Azerbaijan Micro-Finance Association
Reviewed by Kinga Dabrowska, Projects Manager at Microfinance Centre
SPTF, in conjunction with its Responsible Inclusive Finance (RIF) Working Group[1], developed a framework that maps countries’ regulation to responsible inclusive finance issues. The framework is designed to help networks and financial service providers better engage with regulators on RIF issues, as well as to identify examples of how regulators can integrate such issues into regulation.
SPTF used this framework to map several countries’ regulatory issues, and all mappings can be found on the SPM Resource Center at . For any questions, updates or additions to the mappings, please email .
Country / Azerbaijan1. General Landscape: MFI Sector Size and Maturity, FSPs providing MF
The Azerbaijani microfinance sector is served by small and medium scale banks, non-bank credit organizations, credit unions and leasing companies.
While the banking sector has had an increasing impact on the overall economy of the country, it is only 5% of the GDP, which is relatively small in comparison to other sectors. However, the microfinance sector is recognized as increasingly relevant to the government’s economic development strategy. Access to financial services has enabled larger numbers of low- and middle-income households to improve their living standards, as well as to enhance their social safety and financial wellbeing. Business loans provided by microfinance providers have enabled MSMEs to expand and diversify their businesses.
A key constraint for the microfinance sector is that it remains a relatively small percentage of the overall banking portfolio (about 3%) of Azerbaijan and contributes to only 5% of the overall GDP.
Also, while banks are rapidly gaining market share of the microfinance portfolio (more than 57%), the growth in NBCIs and credit unions remain relatively slow. The sector is concentrated in a few NBCIs that are supported by foreign investors. However, growth is limited or negligible in smaller NBCIs and credit unions. The microfinance sector strategy must focus on strengthening the enabling environment and support for smaller NBCIs and the credit union system.
Although the microfinance market in Azerbaijan is relatively small, with a population of 9.5 million, there is scope for credit unions and small NBCIs to serve certain segments of the population who remain beyond the reach of banks, especially vulnerable households, informal micro and small businesses, poor women, economically active youth, and small farmers[2].
According to the Central Bank of Azerbaijan Republic, total assets of banking sector is AZN 28545.9 million, total loan portfolio is AZN 18178,3 million with 2,532,712 borrowers and deposits of AZN 7089.5 million (as of December 1, 2015).[3]
The 43 private banks have a total of 712 branches, and NBCOs (including credit unions) have a total of 242 branches covering whole urban and rural regions of the country.[4]Credit unions do not have branches. Branch penetration in Azerbaijan is high, with 8.6 commercial bank branches per 1000 square km (higher than the global average of 8.03) and 9.9 commercial bank branches per 100,000 adults.[5]
Banks serve microfinance customers through 2,608 ATMs. The ATM penetration rates in Azerbaijan are 25.82 ATMs per 1,000 square km, which is significantly higher than the global average of 15.92. Clients are also served by 29.82 ATMs per 100,000 adults. In addition, banks and other FSPs have expanded services through various types of cards, including debit, credit and prepaid cards. In addition, retail customers offer POS-terminals for payments and transfers.
As of November 30, 2015, 57 MFIs, AMFA member banks, credit unions, NBCOs and leasing companies had a total portfolio outstanding of US $3.479 billion, a PAR 12.3%; 837,128 borrowers; 21.8% female clients and 11,211 staff.[6]
Liquidity is a major concern in smaller NBCIs and credit unions. The lack of domestic capital and the difficulties in attracting foreign investment is limiting institutions from scaling up and achieving profit margins and financial sustainability. The sector strategy must focus on identifying capital for refinancing smaller NBCIs and credit unions, including domestic and international sources.
2. Regulators/Supervisors Responsible for Microfinance
The Azerbaijan microfinance sector is served by a diverse set of financial service providers including regulated and non-regulated entities. Banks and non-bank credit organizations are regulated by the CBA. NBCOs include non-bank credit institutions that offer microfinance as well as credit unions. In addition, the NBCO category includes Azerpost, foreign exchange providers, consumer finance companies, payment and money transfer service providers.
Insurance companies are regulated by the Ministry of Finance. Leasing companies are regulated by the Tax and Civil Code Authority of Azerbaijan. Retail shops and informal sector financial service providers like pawnshops, moneylenders, and lotteries (informal savings mechanisms) are not regulated by CBAR.
Central Bank of the Republic of Azerbaijan is the main regulator implementing licensing, supervising, enforcement and reporting requirements for all banks and NBCOs.
Contact: Headquarters: Address: AZ1014, Azerbaijan Republic, Baku. R. Behbudov 32
Website:
All financial institutions report performance statistics to the CBAR and online Centralized Credit Registry. Additionally, 38 members of the Azerbaijan Micro-finance Association report to AMFA on monthly basis through MATRIX report covering 10 indicators.
Contact: Azerbaijan Micro-finance Association, 44, J. Jabbarli str, Caspian Plaza 1, 5th floor.
3. National Strategy for Financial Inclusion (NSFI)
The microfinance sector/financial inclusion strategy has been developed by the Central Bank of Azerbaijan (CBA) in consultation with all relevant departments, including Banking and Supervision, Credit Registry, Legal, Payments, Consumer Protection, Strategic Management and Research. The microfinance strategy is being developed in alignment with the CBA strategy and the national policy and strategy for Azerbaijan 2015 to 2017.
The development of a national microfinance sector strategy helps to strengthen sector regulation and supervision, improve the capacity of different players, promote product reform and information, and most importantly, improve the overall quality of services to customers.
Historical background on Financial inclusion:
Azerbaijan’s overall score was 38, ranking it in 38th place out of 55 countries scored in Microscope 2014 ( ) for the financial inclusion level. Within the 7 countries covered in the report from the Eastern Europe and Central Asia, Azerbaijan ranked 5th place.
Almost 30% of adults have accounts at a formal financial institution, according to the 2014 World Bank Global Financial Inclusion (Global Findex) Database ( ), and the operating environment in Azerbaijan was fairly conducive to financial inclusion: (i) it was quite competitive, especially in the non-banking credit organization (NBCO) segment, focused on low-income borrowers, with authorities firmly believing in the promotion of competition as a means by which to ensure better terms for financial customers; (ii) the interventions of the authority were increasingly focused on prevention of over-indebtedness (for example, new instructions on consumer lending, the success of the Credit Registry and the imminent launch of the Credit Bureau) and consumer protection (for example, mandatory public disclosure of effective rates, financial literacy, etc.); and (iii) there was no traditional market distortions in the microfinance institution (MFI) segment (no interest cap, no micro-lender under political influence).
However, the country has experienced two devaluations of the local currency: on Feb. 21, 2015 manat was devalued in relation to foreign currencies by 34%, and in December of the same year by 48%. On December 21, 2015, the Central Bank decided to move to a floating exchange rate. The main factors that stimulated the process of devaluation are the trend in oil prices on world markets, reduction of transfers to the state budget, intensive reduction of central bank reserves and balance of payments deficit.
Along with all this, CBAR issued an interest rate cap, which lead to the slowdown of financial institutions and staff cut-offs.
After the devaluation of the national currency, there was:
- Intensive purchase of foreign currencies, including the conversion of manat deposits in dollars.
- A reduction of cash money in circulation and reduction of term deposits in national currency (more 40%).
- A gradual increase in the annual average inflation that exceeds 3.5%.
- A sharp decline in foreign exchange reserves of the Central Bank.
There are initiatives for increasing financial literacy of the population both by the CBAR and AMFA as a local association where some initiatives are supported by the foreign development and investment agencies.
The Central Bank of Azerbaijan launched the Financial Literacy Project in 2010 under its mission plan.
The Development Department of the Center for Research and Development implements these activities on behalf of theCBA. The key target audience of the financial literacy project are high school students, the broader public, economic journalists,CBAemployees, commercial bank employees, and students majoring in banking. The future financial literacy activities include enhancement of socio-economic growth of the country, support for development of the Azerbaijani banking system, raising economic and financial awareness in the country and promoting financial literacy as a public value and changes to people’s behavior.
Partners of the Development Department on Financial Literacy include the Azerbaijan Library Confederation (ALC), the Organization for Economic Cooperation and Development (OECD), the International Federation of Library Associations (IFLA), the American Resource Center (ARC), the Germany International Cooperation Society (GIZ), PricewaterhouseCoopers (PWC), the World Bank (WB), the German Savings Banks Fund for International Cooperation (SBFIC) and the Ministry of Education.
As the objective of the FSDS 2011–2020 is to develop a sound financial sector that can contribute to poverty reduction by supporting economic growth and increasing poor people’s access to finance, the FSDS anticipates more work on consumer protection, financial literacy and expanding services to increase financial inclusion, particularly mobile money. Constraints, challenges, and gaps for development of the sector include (i) strengthening the regulatory and supervisory framework and capacity, (ii) expanding services, (iii) improving outreach, (iv) increasing consumer protection, (v) enhancing operational efficiency and the quality of service providers, and (vi) strengthening sector support. [7]
In December 2004, the President issued a decree on “State programme on Development of the National Payment Systems in the Republic of Azerbaijan;” in September 2013, the Central Bank order on “Cashless Settlements and Money Remittances in the Republic of Azerbaijan” was issued, after which emerged national payment channels and terminals, such as as MilliON, E-Manat and etc. Outreach and simplicity of the systems are available and affordable for the populations in urban and rural areas. There is no service fee for executing the payments. This helps to increase quality of financial inclusion in the regions.
4. Banking Laws: Establishing Laws and Recent Laws
The Law on Banks (2004) defines the principles, rules and standards for organization, internal management, regulation of activities and liquidation of banks with the purpose of aligning the legal framework of the banking system to international standards, increasing the role of banking services in the economy, enforcing the protection of bank depositors and creditors, and maintaining the stable and safe performance of the banking system.
The Law on Non-Bank Credit Organization (2010), defines the rules on establishment, management and regulation of non-bank credit institutions with an aim to better meet demand of legal entities and individuals in the Republic of Azerbaijan for financial resources and create suitable conditions for access to financial services.The Law on Credit Unions (2000), determines economic, legislative and organizational basis for establishment and operation of credit unions.
Registration, licensing and regulation of financial institutions is managed by the Central Bank of Azerbaijan. According to the legislation, charter capital for registering the NBCI (non-Bank credit institution) should be AZN 300,000 whereas for the Banks this is AZN 50 million.
Exchanges in the country were licensed by the CBAR; however after the devaluation of manat 50 % in December 2015, CBAR issued a decree on waiving the license of all exchangers in the country (January 13th, 2016). Therefore, exchanging currency can currently only be done in the banks.
Pawn businesses also play a part in meeting poor peoples’ urgent need for cash. Opening lombard business in Azerbaijan does not require a license, and they are not regulated. They register as an LLC at the respective regional department of the ministry of taxes; therefore, their reporting requirements are similar to any LLC operating in the country.
Starting from 2013, digital financial services started to be integrated into banks’ operations and then gradually integrated by the large NBCOs. Mobile banking is also a part of most banks’ services which is being developed and expanded by and within the financial institutions. Payments are available through national payment terminals – E-Manat, MilliON and etc.
5. Mapping the Universal Standards for Social Performance Managemet (USSPM)
This section maps the six Universal Dimensions with regulations, financial infrastructure (such as advocacy efforts, and services (e.g. capacity building, credit information) that are currently in place within Azerbaijan.The left side of the chart lists each of the Universal Standards in a given dimension. The right side of the chart lists the application of that standard in Cambodia.
5.1: Dimension 1 – Define and Monitor Social Goals
The institution has a strategy to achieve its social goals.
The institution collects, reports, and ensures the accuracy of client-level data that are specific to the institution’s social goals. / Microfinance emerged in Azerbaijan in the post-war period of the 1990s, when 1 million refugees located within the country had no employment. Thus, emerging microfinance institutions developed missions to help economically poor and low-income populations (who were not served by the banks) to help build small businesses and improve their welfare.
In the 2000s, banks also started to launch microfinance services with a social mission. But not all of the institutions set, track, monitor and/or report on achievement of their social goals.
MatureMFIs and banks collect client level data on social indicators, which are in most part aligned with their social goals and report to their stakeholders based on request. Small MFI and banks lack capacity to do this.
5.2. Dimension 2 – Ensure Board, Management and Employee Commitment to Social Goals
Members of the board of directors hold the institution accountable to its mission and social goals.
Senior management oversees implementation of the institution’s strategy for achieving its social goals.
Employees are recruited, evaluated, and recognized based on both social and financial performance criteria.
/ While many indicators of Dimension 1 and 2 are internal to the organization, there are supportive initiatives within the industry through network. AMFA provides access to SPM standards and encourages reporting data on MFI social goals. It has been active in promoting the USSPMs among membership through direct contact and by building commitment of the Board and upper management of member institutions via explaining, demonstrating and presenting benefits and real outcomes of valuable commitment to social performance management.
Mature MFIs and socially oriented microfinance banks require both social and financial performance by their employees.
Again, matured MFI and banks have special programs for recruiting, evaluating candidates based on their social mission, and they provide training to all new employees on customer fair and respectful treatment.
5.3. Dimension 3 – Design Products, Services, Delivery Models and Channels that Meet Clients’ Needs and Preferences
This principle has been critical to the success of microfinance in Azerbaijan, especially in a high-growing, competitive market.
The institution understands the needs and preferences of different types of clients
The institution’s products, services, delivery models and channels are designed to benefit clients, in line with the institution’s social goals / In the early stages of microfinance in Azerbaijan, access to credit was the preference. Now, as there are options for consumers, quality of service is valued by clients, and transparency, fair treatment, comparative lower interests and local currency loansare higher on clients’ priority lists.
To keep their clients’ loyalty, MFIs are learning clients’ needs and diversifying product types to include consumption, education, health, travel, and housing loans.
Collaborative efforts and/or competitiveness within MFIs and banks have increasedthe diversity and quality of products they offer,as well astheir delivery models and channels. Delivery of products now is quicker, loan payment options are comfortable (Rural clients can pay through payment terminals, and it is less expensive, more widely available, safer and more transparent). AMFA supports and implements financial literacy programs to build consumer awareness and financial capability.
5.4. Dimension 4 – Treat Clients Responsibly
Most MFIs and banks adhere to the Smart Campaign’s Client Protection Principles partially or in full. There are official Guidelines of the Central Bank of Azerbaijan dated Dec., 2013, which provide clear guidance on how to build an effective system of responding to and processing complaints, suggestions and any other appeals of the clients. This section analyzes each Universal Standard in Dimension 4, one-by-one.
5.4.1. Prevention of Over-indebtedness.
CBAR has a series of regulations covering PAR reporting, NPLs, provisioning and restructuring of microfinance loans.
Early in 2011, NBCOs also joined the Centralized Credit Registry under the Central Bank, which enabled NBCOs and banks to conduct better repayment capacity analyses and prevent clients from over-indebtedness by getting information about the current debts of a client.