More About Banking in Azerbaijan
There’s quite a bit to talk about regarding microfinance organizations and banking in Azerbaijan. Mostly it has to do with either Access Bank, and their success, or with the serious deficiencies of the market and non-Access Bank lending groups, and, of course, the Soviet legacy’s imprint on the banking sector.
First, a little background: During the Soviet period, there were banks. There were four or five banks, state-controlled and existing for a specific purpose: agriculture, deposits, industrial, etc. Since these were the only banks, and it was the Soviet Union, it was just assumed that for any banking needs, you go there. There was no need for pleasant customer service or advertising or competitive practices. When the Soviet Union broke up in the early ’90s, the banks broke up, too. And, to add insult to injury, they took all the money they had with them. Anyone who had money in the bank lost it.
Fast forward, 2009: Banking is finally picking up now, being led by Access Bank and it’s insistence on being an effective company. The World Bank also has projects here that are geared towards effectively expanding access to credit and improving business practices. However, there have been many obstacles to the banking sector really taking hold. First, until recently, inflation has been very high. At inflation rates over 20%, it makes a lot more sense to spend that money today than to wait. Holding on to 200 AZN only to watch it have the same purchasing power as 150 AZN in a few months is a reasonable incentive to spend it quickly.
A second major obstacle, until recently, has been the prevalence of loan sharks. Since banks hadn’t really established themselves until probably six or seven years ago, loansharking was the only way for potential entrepreneurs to get credit. And it was also the only way to absorb a major shock in the family budget, like the loss of a family member or wedding or some disaster. And these cats had a sweet deal going on, with estimated rates well over 120% annually. Thankfully, with the advent of a more modernized banking system, loansharking has been largely driven out of the country. Rates are now much more moderated, to 36% annually for a 12-month microfinance loan. This still might sound high, but in a country with a rapidly growing economy, money is still expensive. And with what we saw at Access Bank, most of the people taking these loans have no problems paying them back on time.
Lastly, one might suppose that with the fallen inflation rates, the interest rates for these loans could fall, too. Over the last year, however, the rates have stuck because of the economic crisis taking place outside of this country. Even though Azerbaijan was largely spared, many institutions its economy is connected to were affected. The increased risk in the economy from the crisis, then, has served to keep the loan rates the same.