Access Bank, Cont’d
I talked about my visit to Access Bank in this post, a few weeks ago. It’s time to continue that discussion, for two reasons: first, Access Bank is the leading bank in Azerbaijan regarding effective banking practices and microcredit lending, and second, now that I’m going to be working with Araz Credit Union, specializing in microcredit for farmers, the lessons from Access Bank become particularly relevant.
There’s a lot going on with microcredit in Azerbaijan. For those of you unfamiliar with the concept of microcredit, or microfinance, check out Muhammad Yunus from Bangladesh, or go to Kiva. In Azerbaijan, microfinance takes a little different form from those examples because of Azerbaijan’s oil resources. Things are generally more expensive here due to inflation and resource (read: oil) wealth. For this reason, microcredit loans can reach $5-10,000 in order to make the loan useful for the borrower. Most don’t hit those amounts, but Access Bank reportedly can reach $20,000 for a microcredit loan. In Yunus’s Bangladesh, there isn’t any oil (that we know of) and the loan amounts there will be a lot smaller. Ditto for Kiva’s clientele, in general.
The first thing about Access Bank is that it is foreign-owned. It was started by a German group for the specific purpose of microfinance and one of the major goals, beyond microfinance, was to introduce western-style banking practices. What hubris! To think we could impose such cultural mores on Azerbaijan! To be sure, Azerbaijani banks are resisting with gusto. However, it’s hard to argue with a company that insists on accurate record-keeping, effective training programs, and thorough loan procedures. Many Azerbaijani banks don’t do any of these things. Because of these aspects, AB currently has a loan portfolio with less than 1% of its funds at-risk (loan repayments overdue or at risk of defaulting). That’s INCREDIBLE. An American bank, not to mention Azerbaijani banks, would be head-over-heels to have that sort of repayment on it’s loans, especially post-crisis. There are some banks here that are in real trouble, with up to 20% of their loan portfolios at risk.
Some other facts about Access Bank: Often, the bank will lend in dollars, generally for anything over $5,000 value. This is because of the funding source. Azerbaijani law (or the finance ministry) dictates that you need to lend in the currency of your funding source. This practice is a way for the government to keep a cap on inflation, regulating the currency. Using dollars, it reduces the demand for Azeri Manat (AZN) and keeps the price of the currency from skyrocketing. Otherwise, all the dollars coming in would go towards purchasing AZN, and the currency would appreciate rapidly. That’s not a good export-strengthening practice, so the rules help keep the currency stable. (For those of you in the know, for the last year, Azerbaijan has tied their currency to the dollar, keeping the exchange rate at a cool ~.80 AZN/$ to help stabilize inflation, in the face of protests from international free marketeers)
In Azerbaijan there are about $350-400 million in the microfinance loan sector. Access Bank’s major competitors, the German Azerbaijan Fund (12 banks) and FINCA, represent about 35% of the market. Access Bank checks in at 38%. It is undoubtedly because of their strong loan policies and business structure. As I said before, the bank has a strong western-style influence and thorough training program.
The last big detail you need to know about Access Bank and the microfinance sector, in general, is that loan officers are like door-to-door salesmen, here. They approach business owners or potential entrepreneurs with the offers of credit and all the details of the loan process. They document all of the assets and liabilities for the borrower, and help formulate a business plan for the borrower. The last part of the process is when the loan officer presents the loan to the credit committee for approval. We were able to participate in this process as observers, and it was really different than what I expected. The loan officer presented all the information on the loan and the potential borrower, and then they also discussed the borrower’s reputation, whether the borrower was connected to any other borrowers from the bank, what the family situation was like. In one instance, they delayed approval to get information on the co-signer of the loan, who also had a loan with the bank. It seemed like a remarkably thorough process for approval. Talking with the loan officers and the credit committee, they explained that this is why they don’t have problems with credit like those in the United States. Touché