Private Banks and Leasing Companies in Azerbaijan–Bank Respublika
This report assesses loans and equity investments to private banks and leasing companies in Azerbaijan as well as a senior secured 5-year loan of $4 million to Bank Respublika entered into by ADB in 1996, followed in 2007 by an 8-year subordinated loan of $10 million. 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 sub-borrower and/or subproject eligibility criteria 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.
- Closer monitoring could lead to lending outcomes that more closely match the development objectives of the project.
- The volatility of Bank Respublika's liquidity indicators reflects the lack of an adequate strategy for managing short- and long-term liabilities to match lending, and vice versa. Bank Respublika could have benefited from technical assistance to improve its ability to manage funding sources and liquidity.
- Without investing resources in providing technical assistance 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.
- Bank Respublika needs to improve loan underwriting, and register financial data from previous analyses in the management information system in order to use historical analysis when preparing loan files. Loan monitoring policies and practices also need improvement.
- MSMEs play an important role in generating employment in Azerbaijan but their scope of activities and opportunities for growth are limited both by monopoly control of much of the Azerbaijani economy and by the conditions that severely restrict their access to finance.
- Some of the changes required to the framework for secured transactions (collateral registration, perfection, and execution) and to the credit information system involve legal, policy, and infrastructure changes that can be crafted with technical assistance. 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 of corporate ownership. These issues cannot be addressed solely through a private sector investment project.
Recommended Follow-up Actions
Follow-up actions to the goals and achievements of the Bank Respublika loan are recommended as follows :
- Future ADB private sector projects aimed at providing banks with funding to onlend to MSMEs may benefit from
- a technical assistance component to strengthen credit capacity of borrowing banks;
- defined targets when it comes to MSMEs, loan sizes, and disbursement time frames; and
- close monitoring and supervision of the lending activities of beneficiary banks to ensure that the loan meets the established targets.
- ADB could provide technical assistance 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.
- To improve 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.
- BASIC DATA
- EXECUTIVE SUMMARY
- THE PROJECT
- Project Background
- Key Project Features
- Progress Highlights
- Project Rationale and Objectives
- Development Outcomes and Impact
- ADB Investment Profitability
- ADB Work Quality
- ADB's Additionality
- Overall Evaluation
- ISSUES, LESONS, AND RECOMMENDED FOLLOW-UP ACTIONS