Private Banks and Leasing Companies in Azerbaijan—AGBank

Evaluation Document | 28 December 2011
This report assesses loans and equity investments to private banks and leasing companies in Azerbaijan as well as a term loan facility agreement with AGBank entered into by ADB in 1996. The main objective of the project was to strengthen the emerging private bank sector in a transition economy in which banking is still dominated by state-owned banks and to help expand the non-oil economy by financing micro and small and medium-sized enterprises.

This report assesses loans and equity investments to private banks and leasing companies in Azerbaijan as well as a term loan facility agreement with AGBank entered into by ADB in 1996. The main objective of the project was to strengthen the emerging private bank sector in a transition economy in which banking is still dominated by state-owned banks and to help expand the non-oil economy by financing micro and small and medium-sized enterprises (MSMEs).

Issues and Lessons

  • To ensure that the increase in MSME lending expected from an ADB loan achieves its targets, future projects could incorporate clear subborrower and/or subproject loan size limits in the report and recommendation of the President, and follow through with appropriate covenants in the term facility agreement along with appropriate oversight and monitoring during implementation.
  • Without investing resources in providing technical assistance (TA) to investee banks, it is difficult to commit to the development of stronger institutions with improved banking processes and the ability to withstand economic cycles, as was the expected outcome of this project.
  • MSMEs play an important role in generating employment in Azerbaijan, but their scope of activities and opportunities for growth are stunted both by monopoly control of much of the Azerbaijani economy and by financial infrastructure constraints that severely limit their access to finance.
  • Some of the changes required - to the framework for secured transactions and to the credit information system - involve legal, policy, and infrastructure that can be crafted with TA. Most other barriers to the growth and development of MSMEs involve changes to endemic conditions, such as the pervasiveness of corruption in Azerbaijan, and the concentrated structure or corporate ownership. These issues cannot be addressed only through a private sector investment project.

Recommended Follow-up Actions

The following actions are recommended to follow up on the goals and achievements of the AGBank loan:

  • Future private sector projects at ADB aimed at providing banks with funding to onlend to MSMEs may benefit from
    • a TA component to strengthen the credit capacity of borrowing banks;
    • defined targets when it comes to MSMEs, loan size, and the disbursement time frame; and
    • close monitoring and supervision of the lending activities of beneficiary banks to ensure that the loan meets the established targets.
  • ADB could provide TA to the Central Bank of Azerbaijan to strengthen the credit information system and collateral pledge system to provide better financial infrastructure to facilitate the growth of MSME access to finance.
  • For the purposes of improving the overall investment climate, future engagement by ADB with the Government of Azerbaijan could include dialogue and coordination with the appropriate agencies to reduce corruption, provide a stronger framework for competition in the economy, and introduce more favorable tax policies.

Contents 

  • BASIC DATA
  • EXECUTIVE SUMMARY
  • THE PROJECT
    • Project Background
    • Key Project Features
    • Progress Highlights
  • EVALUATION
    • Overview
    • Project Rationale and Objectives
    • Development Outcomes and Impact
    • ADB Investment Profitability
    • ADB Work Quality
    • ADB Additionality
    • Overall Evaluation
  • ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS
  • APPENDIXES