Access to Finance for Micro, Small, and Medium-Sized Enterprises in - - PowerPoint PPT Presentation

Access to Finance for Micro, Small, and Medium-Sized Enterprises in Azerbaijan A Demand-Side Assessment

Angela Prigozhina Country Sector Coordinator May, 2015

Agenda

Main Findings of the MSME A2F Survey Key Policy Recommendations Setting the Stage

Setting the Stage

• Overview of the Azerbaijani Financial Sector –

public data

• Financial constraints to MSME finance – public

data

4

While financial sector nearly doubled along the oil boom, it remains fairly small

Source: The Central Bank of the Republic of Azerbaijan

17% 18% 24% 22% 19% 22% 27% 31% 15% 16% 18% 18% 18% 20% 22% 26% 24% 26% 33% 31% 27% 30% 35% 43% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2007 2008 2009 2010 2011 2012 2013 2014 credits/GDP deposits/GDP Banking assets/GDP

Azerbaijan Financial Penetration Indicators

Many SMEs in Azerbaijan have bank accounts, but still don’t have access to loans

5

87% 88% 82% 65%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

High Income Middle Income Least Developed Countries Azerbaijan

Percentage of SMEs With a Checking

• r Savings Account

51% 45% 18% 15%

0% 10% 20% 30% 40% 50% 60%

High Income Middle Income Least Developed Countries Azerbaijan

% SMEs with line of credit from financial institution

6

67% 70% 76% 93% 15% 12% 8% 5%

8% 11% 11% 1% 10% 7% 6% 1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

High Income Middle Income Least Developed Countries Azerbaijan

Financing sources for working capital

Internal Financing Banking Financing Supplier Credit Financing Other Financing

60% 67% 81% 71% 23% 18% 9% 28% 3.7% 4.8% 2.8% 0.7%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

High Income Middle Income Least Developed Countries Azerbaijan

Financial sources for investment

Internal Financing Banking Financing Trade Credit Financing Equity, Sale of Stock Other Financing

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Bank private credit to GDP (%) among peer countries Source: WBG FinStats 2015

10 20 30 40 50 60 70 80 90 100 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 % of GDP Azerbaijan Belarus El Salvador Georgia Jordan Kazakhstan Serbia Tunisia Turkey

While bank credit is the main source of formal finance, the depth of the market is much lower than in peer economies

Uzbekistan Montenegro Albania Hungary Turkey Moldova Kazakhstan Ukraine Bosnia and Herzegovina Bulgaria Belarus Georgia Serbia Macedonia, FYR Azerbaijan Tajikistan Kyrgyz Republic Armenia Romania Kosovo 5 10 15 20 25 30 35 40 45 50 5 10 15 20 25 %

Constrained finance is the key business growth impediment

Source: WBG Enterprise Survey 2013, WEF Global Competitiveness Index

% of MSMEs reporting access to finance as a major obstacle to business operations

Collateral based lending is dominant, with reliance on cash flow/business analysis still rare

Source: WBG Enterprise Survey 2013

% of MSME loans requiring collateral

Turkey Ukraine Serbia Hungary Bosnia and Herzegovina Belarus Romania Bulgaria Kyrgyz Republic Kazakhstan Armenia Azerbaijan Kosovo Albania Macedonia, FYR Tajikistan Georgia Montenegro Moldova Uzbekistan

10 20 30 40 50 60 70 80 90 100 5 10 15 20 25 %

While requirements for collateral exceed 200% of loan value and rarely feasible for MSMEs

Serbia Bulgaria Ukraine Hungary Kyrgyz Republic Uzbekistan Belarus Bosnia and Herzegovina Kazakhstan Romania Georgia Turkey Moldova Montenegro Azerbaijan Albania Armenia Kosovo Macedonia, FYR

100 150 200 250 300 350

2 4 6 8 10 12 14 16 18 20

%

Collateral value as % of the loan amount

MSME Access to Finance Survey: What are the Key Findings?

Access to Finance is a Major Constraint for MSMEs

% of MSMEs citied the reason as the most important obstacle to business growth Azerbaijan

0.1% 0.2% 1.1% 1.2% 1.3% 1.5% 2.4% 4.4% 4.7% 5.8% 6.2% 6.3% 13.8% 51.0% 0% 10% 20% 30% 40% 50% 60% Customs and trade regulations Courts Difficulty hiring or retaining… Business licensing and… Electricity Economic instability Corruption Competitors that operate… Access to land Transport and other… Don’t know Other Tax rates Access to finance Source: Azerbaijan MSME Access to Finance Survey, 2014

Constrained access to finance is the most severe in Aran /Daglig-Shirvan region and is especially felt by the construction and trade sectors

0.1% 0.4% 0.5% 0.9% 1.1% 1.5% 2.3% 2.4% 3.3% 5.5% 7.3% 7.4% 10.0% 11.0% 16.2% 30.0% 0% 10% 20% 30% 40% Corruption Crime, theft and disorder Courts Transport and other… Access to land Business licensing and… Electricity Customs and trade… Donít know Difficulty hiring or… Political instability Other Tax rates Competitors that… Economic instability Access to finance

Georgia

Loan usage among MSMEs remains low through sectors and size

90.4% 90.2% 90.1% 83.0% 91.9% 81.9% 72.7% 9.2% 7.2% 9.1% 14.1% 7.9% 14.8% 20.0% 0% 20% 40% 60% 80% 100% Agriculture Manufacturing Services Construction and Trade Micro Small Medium

2 loans or more 1 loan No loan

Loan usage among MSMEs by sector and size

Source: Azerbaijan MSME Access to Finance Survey, 2014

While 2/3 of firms have a bank account, only 13.5% of MSMEs have a loan/ a line

• f credit with a bank

Loan rejection rates are high, especially in agriculture, for micro firms and businesses in some regions

35.7% 6.2% 29.5% 56.9% 36.6% 10.6% 6.3% 27.5% 23.2% 20.4% 12.0% 0% 10% 20% 30% 40% 50% 60% Aran/Daglig-Shirvan Baku/Absheron Ganja-Gazax/Sheki-Zagatala Lankaran/Guba-Kharchmaz Micro Small Medium Agriculture Manufacturing Construction and Trade Services

Loan rejection rates for MSMEs by sector, size, and region

Source: Azerbaijan MSME Access to Finance Survey, 2014

Main reasons why MSMEs do not apply for a loan?

2.2% 3.6% 7.0% 8.2% 39.3% 39.5% Other Interest rates were not favorable Loan amount and maturity were insufficient for the company

• r the minimal amount or term were exceeding company

requirements Did not think it would be approved Collateral requirements were too high Application procedures were complex

% of MSMEs that cited the reason as the main reason for not applying for a loan

Source: Azerbaijan MSME Access to Finance Survey, 2014

What Types of Collateral were Required for Outstanding Loans?

% of different types of collateral used for outstanding loans

Immovable property of the firm 23% Machinery and equipment 26% Accounts receivable and inventories 13% Personal assets 31% Third party guarantees 6% Other forms of collateral 1% Source: Azerbaijan MSME Access to Finance Survey, 2014

MSMEs are not familiar and don’t use key financial products such as LC, insurance, leasing and factoring

Familiarity Seeking Receiving Later payments on purchase of goods 67.4% 57.5% 56.7% Advanced payments from customers 71.3% 59.9% 52.2% Letters of credit 20.8% 1.2% 0.6% Trade insurance 25.8% 5.3% 1.9% Leasing 32.1% 5.8% 4.1% Factoring 17.4% 2.3% 1.7% Other 0.5% 0.0% 0.0%

% of MSMEs aware, seeking, and receiving other sources of financing

Source: Azerbaijan MSME Access to Finance Survey, 2014

MSMEs know about Government’s program but rarely access it

% of MSMEs seeking and receiving supports from different type of government program

Source: Azerbaijan MSME Access to Finance Survey, 2014

Aware

70% of the MSMEs

were aware of the existence of government support programs for their field of activity

Seeking

Special loan programs for a company’s sector – 5.1% Subsidies by the government – 10.2% Technical assistance for a company from donor agencies or government – 2.7%

Receiving

Special loan programs for a company’s sector – 1.7% Subsidies by the government – 2.6% Technical assistance for a company from donor agencies or government – 2.7%

MSMEs most interested in Government’s support to lower cost of funds, especially for micro and agribusinesses

13.1% 39.3% 25.5% 52.9% 35.2% 30.2% 35.2% 15.1% 48.8% 8.2% 23.4% 27.0% 26.2% 36.5% 17.0% 22.0% 36.8% 36.6% 38.2% 25.8% 21.8% 28.6% 57.1% 31.0% 37.7% 20.0% 38.2% 30.9% 22.9% 45.7% 19.9% 65.0% 47.8% 1.5% 1.1% 0.3% 2.0% 0.2% 1.1% 5.3% 0.2% 1.1% 3.4% 0.2%

Agriculture Manufacturing Construction and trade Services Micro Small Medium Aran/Daglig-Shirvan Baku/Absheron Ganja-Gazax/Sheki-Zagatala Lankaran/Guba-Kharchmaz

Lowering of taxes Simplification of regulations Cheaper financing available Incentives to keep employees on payroll Other (specify)

Preferred government actions in % by MSMEs in different region, sector, and size

Source: Azerbaijan MSME Access to Finance Survey, 2014

MSMEs have high demand for finance in the next 12 months

92.3% 63.9% 83.5% 50.3% 64.7% 82.2% 85.5% 85.3% 60.9% 81.5% 92.9% Agriculture Manufacturing Construction and trade Services Micro Small Medium Aran/Daglig-Shirvan Baku/Absheron Ganja-Gazax/Sheki-Zagatala Lankaran/Guba-Kharchmaz

% of enterprises requiring financing within the next 12 months by region, sector, and size

Source: Azerbaijan MSME Access to Finance Survey, 2014

MSMEs have poor business practices

40% 33% 13% 65% 53% 24% 52% 36% 27%

Written financial records Financial statements Written business plan

Agriculture Manufacturing Construction and Trade Services, Tourism, etc

Business Management and Financial Reporting Practices

Source: Azerbaijan MSME Access to Finance Survey, 2014

MSMEs with financial records and business plans have lower rejection rates

86% 81% 82% 100% 100% 96% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Written financial records Financial statements Written business plan % of firms having constraints to financial access Yes No 12% 8% 11% 35% 31% 25% 0% 5% 10% 15% 20% 25% 30% 35% 40% Written financial records Financial statements Written business plan loan rejection rate Yes No

Financial constraints and loan rejection rate by different business practices

Source: Azerbaijan MSME Access to Finance Survey, 2014

Recommendations

• Introduce MSME development strategy as a key pillar of

Azerbaijan growth and diversification strategy Vision 2020

• Evaluate, streamline and rationalize existing government financial

support programs against international best practices in order to improve design, uptake and effectiveness of existing measures

• Review the existing legal and regulatory framework to foster

development of sound, broader and deeper financial market, encourage investments/FDI

Enhance state policy and state financial support

Source: Azerbaijan MSME Access to Finance Survey, 2014

Broaden and deepen markets and products, foster innovation for more efficiency and financial inclusion

• Encourage new innovative financial instruments and lending

technologies to tailor financial products to the MSME needs, including those for agribusinesses and rural entrepreneurs

• Explore impediments to and opportunities to the development of

leasing, factoring and trade financing (including domestic supply chain financing and export financing)

• Facilitate development of non-bank financial institutions and

products, including non-bank credit and investment institutions, capital markets investment vehicles (for collective investments and voluntary pension savings program).

Source: Azerbaijan MSME Access to Finance Survey, 2014

• Encourage simplification and standardization of lending

procedures and guidelines for MSMEs including loan application processes; enhance risks management

• Improve credit market infrastructure
• Foster creation of a private credit bureau and ensure

adequate regulatory framework for overview of its activities, data safety and consumer protection

• Create movable assets secured transactions legal and registry

system

Build credit market infrastructure and simplify procedures

Source: Azerbaijan MSME Access to Finance Survey, 2014

• Address low levels of financial capabilities of MSMEs –

particularly in new sectors and among agribusinesses – through providing simplified training to MSMEs in business & financial management (financial ‘rules of thumb’)

• Coordinate and consolidate efforts of private and public

institutions, including the private financial sector, NGOs and training centers, to effectively enhance MSMEs’ financial capabilities by launching financial literacy programs to target groups via various distribution channels

Enhance MSMEs transparency and financial capability

Source: Azerbaijan MSME Access to Finance Survey, 2014