UNLOCKING GROWTH
As a key to success in Azerbaijan's economy, the financial landscape needs to change to allow greater MSME growth.
One of the pillars of an economy that seeks to achieve dependable and sustainable growth is cultivating a healthy environment for micro, small, and medium-sized enterprises (MSMEs). In a country focusing on diversifying revenue and alleviating its dependence on the often volatile energy markets, supporting MSMEs is a driving and vital concern, if not a prudent allocation of financial resources. As there have been major changes and shifts in the focus of the national economy, there needs to be similar and appropriate changes in financial access for MSMEs. The finance industry needs to adapt in Azerbaijan to support this critical base. Accordingly, Rolf Behrndt of the World Bank Group's Finance and Market Practice, “Azerbaijan's future growth will largely depend on the increasing role of innovative, skillful, and competitive MSMEs," a sector in which there is still much untapped potential.
MSMEs are the backbone and a main source of growth for an economy. For example, in Europe, they constitute around 99% of all businesses and employ two-thirds of the population. In the US, MSMEs employ over 50% of workers in the private sector. MSMEs are classified according to the number of people they employ and by the company's total turnover or revenue. In the summer of 2015, the Azerbaijan Cabinet of Ministers agreed to change the parameters of what constitutes a small and medium-sized business. Putting themselves more in line with international standards, small businesses in Azerbaijan are classified as having less than 50 employees and an annual revenue of AZN120,000 or less, and medium-sized businesses are for companies that employ between 50-125 employees and have an annual revenue between AZN120,000 and AZN1.25 million.
Unencumbered access to finance and necessary financial tools, especially lending, is a characteristic that must be present in order to optimize growth in this competitive sector. MSMEs in Azerbaijan currently do not enjoy that luxury. In a study conducted by the World Bank, access to finance was listed as the number one obstacle to development for MSMEs in Azerbaijan. The financial system in Azerbaijan is not very large, it is bank centric, and the state plays the major role in financing and ownership. In the current system, the process for financing prospects for MSMEs is challenging and access is limited. This is primarily due to the complicated credit application processes of the country, the general lack of collateral from MSMEs, and high lending costs. Although many MSMEs exist in the country, the reality is, despite the great diversification effort that has taken place in the country away from oil and gas, MSMEs still hold only a 10% share of the national GDP. Fortunately, changes in the financial realm can introduce a more profitable environment for MSMEs in the country.
Recently, there have been some steps in the right direction with regards to financial access from MSMEs in Azerbaijan. The International Bank of Azerbaijan completed a loan agreement with the European Investment Bank for €50 million. This money was loaned on the premise that it will be directed toward MSMEs and middle capitalization companies. This is a beneficial move on many levels. Not only will this loan enhance the financial access of MSMEs and help drive private sector development, but it will also add to the already robust domestic diversification efforts. The World Bank has also issued recommendations to Azerbaijan on steps they can take to achieve higher MSME growth. This includes simplifying the lending procedures, creating a secured framework for transactions, and improving risk management services. An additional benefit to strengthening MSMEs is the creation of new jobs for Azerbaijani citizens. This puts more income in the pockets of citizens, thus helping to reinforce the economy from within. All of this will help increase the overall economic power of Azerbaijan and raise the living standards for Azerbaijani citizens. By developing a financial sector with increased depth and creating innovative services to cater the needs of all MSMEs, Azerbaijan can achieve the environment that is necessary to grow domestic MSMEs into the powerhouse they can become.

TABLE OF CONTENTS
Year In Review
Good Times Ahead
<strong></strong><strong>In a year dominated by the overarching theme of low hydrocarbons prices, Azerbaijan showed resilience and verve in putting in place bold measures both to counter the slump in energy prices and put its economy on a surer footing.</strong>
read articleReview: Diplomacy
Operation Outreach
In 2015, Azerbaijan's military budget increased by a notable 27%, to $4.8 billion, or 17.9% of the government's total budget for the year. The first Azerbaijan Defence Exhibition (ADEX 2014), drew over 200 companies from 34 countries, including Russia and the US.
read articleInterview
Rufat Mammadov, President, Azerbaijan Export and Investment Promotion Foundation (AZPROMO)
TBY talks to Rufat Mammadov, President of the Azerbaijan Export and Investment Promotion Foundation (AZPROMO), on large-scale events and their ability to attract FDI and the potential Iran may hold.
read articleReview: Banking
More Interest
In a sector faced with relatively flat growth for 2015-16, new opportunities are still there aplenty, led by the nascent Islamic banking sector, e-banking, and microfinance initiatives. Together, these areas should make banking more diversified and less reliant on a buoyant energy sector for its capital inlay.
read articleReview: Capital Markets
Taking Stock
As Azerbaijan grapples with the knock-on effects of low hydrocarbon prices, the Baku Stock Exchange (BSE) finds itself at the center of the country's efforts to stave off a budget deficit this year. In January, the government announced plans to sell $500 million worth of bonds on the BSE.
read articleReview: Industry & Mining
In The Bag
Industry in Azerbaijan is long established, diversified, and, in many areas, fast growing. Together, these qualities make the sector well placed to see through the global slump in commodity prices, while at home, the manufacturing industry continues to find ways to use its hydrocarbons expertise in other fields, including high technologies and research.
read articleInterview
Khanlar Fatiyev, , Chairman of the Supervisory Board, Ganja Automobile Plant Production Association
TBY talks to Khanlar Fatiyev, Chairman of the Supervisory Board of the Ganja Automobile Plant Production Association, on the role of the plant in driving growth in the non-oil sector.
read articleReview: Transport
The New Node
With major new railways linking the region, the opening of the new Baku International Sea Trade Port Complex, the completion of a massive program of road building and upgrading, investment in state-of-the-art fleets ranging from Boeing 787s to rail locomotives, Azerbaijan can rightly claim the title as the Caucasus' transportation hub.
read articleReview: Agriculture
Lots More
Farms across the country are pursuing a policy of increased yields for year-round fruit and in the wheat harvest to stave off an over-reliance on imports. With carefully targeted increases in exports, better routes to port and to market, and greater sophistication of agricultural facilities, farming could soon be the morning star of Azerbaijan's diversified economy.
read articleReview: Health
Under One Umbrella
Life expectancy at birth (2015) is 75 years for women and 70 for men. The median age is 30. For both sexes, longevity increased by six years between 2000 and 2012. Azerbaijan is a relatively youthful country—an important factor in healthcare—with 22% of its populace aged under 15 and just 9% aged over 60.
read articleReview: Education
Baku to School
Azerbaijan's culture has always harbored a deep respect for educational values. This is embodied in the country's Azerbaijan 2020 mission statement, which seeks to raise standards across the sector and introduce ICT as a standard part of the learning experience at all levels.
read articleInterview
Elkhan Mammadov,, Secretary General, Association of Football Federations of Azerbaijan (AFFA)
TBY talks to Elkhan Mammadov, Secretary General of the Association of Football Federations of Azerbaijan (AFFA), on the experience Azerbaijan is gaining in hosting international events.
read article