Why is it difficult for business in Azerbaijan to get a loan?

Small and medium-sized businesses in Azerbaijan have difficulties in accessing financial resources. This is one of the most important problems for local entrepreneurs, which has been in the TOP 3 main obstacles to business development for several years.

In one of the latest polls by the World Bank and Enterprise Surveys (part of the World Bank Group), companies named the following main obstacles to doing business in Azerbaijan:

Informal employment - 28%

Access to finance - 24%

Lack of highly qualified specialists - 15%

Corruption - 8%

Customs and trade regulation - 7%

‘Access to finance’ means not only the high cost of loans, but also the difficulty in obtaining them. According to the same survey, only 9 percent of small companies have a loan, for medium-sized companies it is 22 percent, and for large companies, it is 37 percent. Moreover, over 90 percent of all respondents have bank accounts. It means that the reason for the absence of loan is not at all the lack of information about banking products.

It can be difficult for companies to obtain loans for several reasons: (1) they have the necessary reporting, but the company won’t be able to handle the loan repayment, (2) the company doesn’t have the necessary documents, (3) interest rates on business loans are too high.

Recently, government agencies have begun to talk about this problem more often - in February alone, this topic was raised by the Entrepreneurship Development Fund, the Small and Medium Business Development Agency and the Microfinance Association.

So, for example, in 2020, the Fund, in 87 percent of cases, refused to provide entrepreneurs with a soft loan under the state guarantee. Explaining the reason, the Fund pointed out that business owners very often do not submit all the necessary documents in the timely manner.

The list of documents required for submission of a request is small. When filling out the ‘quick form’ 4 documents are needed, when filling out the ‘traditional form’, 7 documents are required. The deadline for submission of documents is 7 and 10 days, respectively.

At the same time, it is not difficult to obtain these documents: they include a tax declaration for the last 12 months, a certificate that the company is registered and operates legally, a certificate of income (bank statement), an estimate of expenses, a financial report, a business license (if required) and so on.

All these documents can be obtained even before sending a request to the Fund. The list is available on the website. So, why do entrepreneurs fail to submit the required documents on time?

Unfortunately, the reasons become apparent when looking at the list of documents.

The financial report of the company - many representatives of small and medium-sized businesses in Azerbaijan still don’t keep reports. A fiscal notebook, taking into account expenses and income, is often the only thing that can be found.

But when the company has problems, entrepreneurs blame, for example, poor marketing. They say if good advertising is launched, there will be customers, and money will cover the costs and bring it to a profit. But in fact, everything is much simpler - there is a mess in the reports and it is not clear where the money is going. It would have long been possible to make a profit.

Correct reporting would also help forecast costs and revenues, simplify company development and help raise funds. Of course, it is important to ensure the proper organization of the company, establish competent management and so on, but if the foundation is rotten, what can be built on it?

The founder of the Hajinski Naghiev consulting company, ex-banker Jalal Nagiyev agrees with this opinion. In an interview with Report, he noted that banks evaluate borrowers on the basis of three reports - a balance sheet, a profit and loss statement and a cash flow statement.

"The balance sheet shows the size of the client’s equity capital, on the basis of which the bank determines how much can be lent and what is the risk. The bank always monitors the ratio of borrowed funds to equity. The reason for refusing a loan can be not only problems with reporting, but simply the client's debt burden. The profit and loss statement is needed by the bank to understand how much the client earns. This will determine the amount of monthly payments. The cash flow statement, in turn, helps to determine the payment schedule. This report shows how often a potential borrower gets cash," he said.

Nagiyev noted that these are not the only nuances that entrepreneurs should take into account.

"Often, when we analyze the situation in companies, we come to the conclusion that a business owner concentrates too many processes on himself or herself. At best, accounting in such companies is viewed as a department that solves problems with the tax bodies. In fact, as it develops, the company’s accounting department should turn into a full-fledged financial department. This doesn’t mean that an entrepreneur does not need to understand financial issues. He or she should be financially literate in order to control all processes, as well as have available analytical reports that show the effectiveness of each department," he said.

The coronavirus pandemic has shown how important it is to do business legally. The enterprises operating ‘underground’ were unable to receive any assistance from the state, he added.

"In some cases, employers ignored unregistered employees - those who had contracts could receive salaries at the state expense, and those who had no employment contracts didn’t receive anything – they could only count on 190 manats," Nagiyev said.

Of course, there is another side to this problem. Micro and small, and sometimes even medium-sized businesses aren’t always able to independently generate the necessary reporting. A lack of money for qualified employees or a lack of experience can also affect the situation. One way or another, in such a situation, outside help is needed. In part, it can be obtained from the Small and Medium Business Development Agency. The number of Small and Medium Business Development Centers is growing, and a SME Development Fund is also expected to appear. The first structure can help companies get services in marketing, sales, financial management, human resource management, etc., and the second can provide more affordable finance.

However, centers are not available everywhere, and it is still unknown when the Fund will open. For this purpose, in European countries, special business clubs operate at banks. Bank clients can become members of these clubs and get access to qualified legal, accounting and other services. Often such a package of services is provided for a small monthly fee. Similar clubs are gradually appearing in Azerbaijan. Some banks already have their own business clubs.

In the context of difficulties in obtaining loans, high interest rates are also often mentioned.

According to the Central Bank of Azerbaijan, interest rates on loans to legal entities at the end of January 2021 increased in manats compared to January 2020, but fell in foreign currency.

So, the rates on loans in manat account for 9.37 percent (an increase of 0.57 percentage points), and on foreign currency loans, they dropped by 4.97 percent (a decrease of 0.36 percentage points).

However, in practice, the numbers look a bit different. According to the infobank.az portal, where data on the products of local credit organizations is collected, interest rates on business loans from banks account for about 15-20 percent, and sometimes even up to 30 percent, while interest rates from non-bank credit institutions total 20-30 percent, and sometimes 50 percent.

It is difficult for beginners and small companies to work with such expensive loans. Therefore, there are structures in the country that provide soft loans. But in this regard, either these structures should simplify the procedure for obtaining loans, or commercial banks should revise their rates.

Financial analyst Azad Hasanli