The Costs of Credit in Azerbaijan
While I’ve been here, I’ve worked with both credit unions and banks. In Azerbaijan, the main activity of these organizations is microcredit (adjust your concept of microcredit to include sums from $500 to $10,000). The credit unions are run through the ministries of Agriculture, Economic Development, and Finance, at the behest of a World Bank project. The operations are fairly haphazard, as can be seen through this experience. The banks have a little more organization to them, but unless you’re one of the top 10 banks in Azerbaijan, you probably aren’t much more polished than a mediocre credit union.
So one of my curiosities while I was at a credit union was why someone would choose a loan at a bank or a loan at a credit union. I wanted to know what the cost of credit was to an Azerbaijani. I knew that banks charged approximately 36% annually on 12-month loans, and that credit unions charged 20-25% annually for the same loan (this is normal. In America that would sound like a terrible crime; here, that’s the market rate). From this perspective, it’s fairly obvious that I would want a credit union loan, saving me 11% annually on my loan. But there are more costs involved, and from there the picture becomes muddled. Here is the breakdown:
At a credit union, the costs involved in receiving an AZN 5000 loan are this:
Documentation: 168 AZN*
Insurance (home): 28 AZN
Insurance (life): 50 AZN
Commission: 75 AZN
Shared Capital: 500 AZN
Shared Capital costs are only for credit unions, and they charge 10% on the loan amount for shared capital. That amounts to 821 AZN before you get your 5K. So as a borrower, your 5000 AZN starts you down at 4179 AZN. There’s one difference for the bank: no shared capital. That’s 500 AZN that you get to put back in your pocket, and your 5000 AZN gives you 4679 AZN to start with.
If you add in the interest accrued over one year, 1250 AZN at the 20% interest rate and 1800 AZN at the 36% rate, the total costs of taking a 5000 AZN loan over one year are 2071 AZN at a credit union and 2121 AZN at a bank.
So at banks, you have fewer costs to access and at credit unions you pay less over the course of the year. At the bank, you start with more money in your pocket. At the credit union, you end up with more money in your pocket (but not much). Now, with that figured out, why would anyone take a loan at a credit union over a bank, or vice versa?
There are two things that credit unions have going for them (these are also features that I’m fairly certain will end up ruining most credit unions in the long run). First, you can take out multiple loans at one time at a credit union. I could take a few loans at the same time. This is nice if you need more capital right away, but I think it’s tough for most borrowers to pay back multiple loans at a time. Second, credit unions are more relaxed in their collections. My accounting system at the credit union was a ledger. Not even an Excel spreadsheet. This makes accounting and records a little more lax when you can erase your records for any adjustments you want to make. Both of these are nice for borrowers, but long-term prospects for credit unions doing this are rather poor. And if you’re taking a loan from AccessBank, you can be fairly certain that your lender will exist at the end of your loan period.
*That 168 figure is if your intended borrower doesn’t have to pay the bribes for obtaining the documents. Most likely, you have to pay a few officials to stamp those documents, which could shoot the figure up to about 400-450 AZN.