With SMEs topping the development agenda, the microfinance sector is experiencing solid growth.

The drive to develop small businesses, seen as the future of Azerbaijan's economy, is leading to a boom in the country's microfinance sector. Rapid economic growth, lower non-performing loans (NPL) ratios, and greater access to credit for microfinance institutions (MFIs) are pushing banks to expand their microfinance activities and opening the eyes of investors.

During the past 10 years the number of MFIs in the country has steadily increased, making the microfinance sector one of the more active participants in the process of economic development. Microcredits rose by 36.3% in 2011, reaching $611.13 million and more than 377,000 customers. Out of the 30 organizations involved in microfinance in the country, Accessbank, which is the leader in commercial microfinance, accounted for 29.3% of all microcredits. Microcredits range from $100 to $20,000 and the average size in urban areas came in at $3,500, compared to $500 in rural areas.

NPL ratios in microfinance are officially 5%, less than in traditional finance. However, according to the Executive Director of the Azerbaijan Microfinance Association (AMFA), Jahle Hajiyeva, NPL ratios in microfinance are in reality 10%-15% below those of traditional finance institutions. This, combined with the widespread belief within the banking sector that small businesses are Azerbaijan's economic future, is attracting the interest of top banks like Pasha Bank and Unibank to expand their microfinance activities.

In an interview with TBY, Unibank's Chairman Faiq Huseynov said the microfinance sector is largely profitable. “Our aim is to expand our presence in the microfinance segment, where we see a lot of demand in the market," he said. With the economic capcaity of Azerbaijan's regions rapidly expanding, there is huge potential for the development of new businesses. “Azerbaijan is not only Baku, but also many other cities that are growing around the country and we need to support SMEs in our country, for they are the future of Azerbaijan," he added.

According to AMFA, 80% of microloans are directed to areas outside of Baku, covering around 60 rural regions in the country. This is spurring the development of small businesses and driving employment growth. Considering 40% of the labor force in the country works in the agricultural sector, there is huge potential for development in this sector, and microfinance will play a big role in its growth.

Greater access to credit for MFIs is also encouraging their development. IFC, a member of the World Bank Group, is aiming to provide $7 million to FINCA Azerbaijan, which reaches more than 100,000 entrepreneurs. This will increase access to finance for micro and small business owners in remote rural areas. Its plans to provide local currency to microfinance institutions would help the companies reduce their foreign currency risks and offer financing to their customers.

Microfinance in Azerbaijan is also catching the eye of investors. International investors such as ResponsAbility Social Investments, a Swiss investment company, has made investments in some of Azerbaijan's microfinance institutions, including Finance for Development LLC and TBC Kredit. Absolute Portfolio Management, an Austrian investment company, has also made debt investments in MFIs around the country.

The increasing participation in microfinance by international investors is a reflection of microfinance's potential and growing importance as a powerful tool for developing small businesses.

The government has, in the last few years, adopted measures favoring MFIs. The Law on Non-Bank Credit Organizations (NBCO) was approved by the National Assembly in 2009, establishing new licensing rules. Since the establishment of the law six new NBCOs have been registered and licensed.

According to AMFA's Jahle Hajiyeva, the Central Bank of Azerbaijan (CBAR) has enhanced microfinance sector supervision by preparing prudential norms and guidelines to ensure efficient performance. Hajiyeva said the existing practices to favor MFIs is something new for CBAR, but the “regulatory changes so far have been positive, the government is taking the right steps and with time it will strengthen customer protection," she commented.