How to attract foreign investments to the leasing market of Azerbaijan?

In world practice, one of the methods of investing in the economy is leasing, which allows business entities to update fixed assets in a short time with small investments. Agricultural machinery, medical equipment, construction machinery and equipment, industrial equipment, passenger, freight, and other vehicles can be leased.

Leasing in Azerbaijan is not an activity that requires a special permit (license). Although legislation in this area came into force in the 1990s of the XX century, its widespread use as a financial instrument began in 2003. So, in 2003-2008, the portfolio of leasing companies increased at least 2 times. But with the termination of a number of incentives for this sector in 2008, the growth rate began to decline.

The 2015 banking crisis had a negative impact on leasing operations. The devaluation of the manat led to financial difficulties for leasing companies and the withdrawal of many of them from the market.

In the "Strategic roadmap for the production of consumer goods at the level of small and medium-sized enterprises in the Republic of Azerbaijan" adopted in 2017, the development of the leasing market is identified as a priority direction. As a result of the measures taken, the share of leasing operations in Azerbaijan's GDP is planned to be increased to 4% by 2025.

What has changed in the market over the past period?

Ilkin Garayev, a member of the working group on the strategic roadmap, head of the Center for Assistance to Small and Medium Enterprises, told Report that 70-80% of the problems that existed in the leasing market when preparing the roadmap remain today.

"The unified law regulating leasing activities has not yet been adopted. At present, the existing regulatory framework does not allow the leasing market to develop dynamically. This is due to the presence of a number of gaps in the provisions of the Civil Code regulating leasing activities. The definition of leasing, its main types are operational, financial, leaseback, etc., collateral for leasing agreements, insurance, and other issues were not reflected in the existing documents. The lack of finance remains relevant.

“The funds of leasing companies are expensive, that is, the company issues the leased item to the lessee with a higher margin compared to banks - the main competitors. This situation limits their ability to attract customers. Along with a significantly limited ability of leasing companies to attract financing from local sources, their low level of capitalization also hinders the attraction of financing from abroad.

“Due to the lack of accurate statistics on leasing in the country and limited opportunities for analysis, the market is less attractive for foreign investment. A foreign investor requires transparency as well as a high level of guarantees that will protect his investments. The Ottawa Convention on International Financial Leasing acts as a guarantor, but Azerbaijan has not yet joined it, which reduces the interest of foreign investors in the domestic leasing market."

The expert believes that in the strategy for the development of techno-and agricultural parks in Azerbaijan, it is beneficial to widely use the potential of leasing: "When purchasing new equipment, as well as when updating outdated machinery and equipment, modern leasing can be used. At present, when the non-oil sector of the country's economy is developing, the creation of techno-and agricultural parks is defined as a priority. High-tech equipment of residents of these parks can be formed by leasing and subsequently modernized. In addition, the sale of products that will be produced there, in the domestic and foreign markets can also be carried out through leasing. Implementation of these recommendations could significantly increase the share of the leasing market in GDP."

We should note that according to the calculations of the Association of Leasing Companies of Azerbaijan, the cost of Azerbaijan's leasing portfolio decreased from 125 million manats in 2012 to 60 million manats in 2018. According to a report by the Organization for Economic Cooperation and Development published in 2019, leasing companies provide services almost exclusively to medium and large enterprises.