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 Report - Legal Environment for Micro-finance in Azerbaijan (MC)

 Report date: 15.12.2002

Legal Environment for Micro-finance in Azerbaijan

[The article originally appeared in the November 2002 issue of the Policy Monitor Published by Microfinance Centre for Central and Eastern Europe and the New Independent States]

On October 10-11, 2001 the first Azerbaijan Micro-finance Conference was held in Baku. On December 19, 2001 ten international non-govern-mental organizations (INGOs) presented on this conference, including ACDI/VOCA, ADRA, FINCA, NHE, NRC, MC, OXFAM, IOM, SCF and WVI, signed a Memorandum of Understanding to form Azerbaijan Microfinance Association (AMFA). Of these ten organizations nine provide microfinance services to the clients. One of them Mercy Corps is not providing direct microfinance services to the clients, but became one of the active members of AMFA because of being umbrella grant manager for a 6-year $45-million Azerbaijan Humanitarian Assistance Program funded by the United States Agency for International Development (USAID), one component of which channels micro-finance services through other INGOs. Of the 9 implementing agencies only three were registered as local micro-finance institutions by the Ministry of Justice and obtained the license from the National Bank 3. Therefore, it has been decided to postpone the formal registration of AMFA until all the members are formally registered. In the meantime, AMFA will operate as an Initiative Group to create Azerbaijan Micro- finance Association and its activities are regulated by the respective by-law adopted by the Initiative Group's founding members.

The legal environment in Azerbaijan for micro-finance institutions is still not friendly. Currently there is no comprehensive legal framework in Azeri legislation that covers microfinance activities. The main law regulating microfinance activities is the mentioned law on Banks and Banking Activities. Addendum made to this law currently allows the registration of non-governmental organizations as non-banking credit organizations. However, the language of the addendum is vague, and the lack of lobbying power, especially, on the side of local NGOs significantly impedes the process of registration. Therefore, even though the members of AMFA continue their microfinance activities, the lack of formal registration is a serious obstacle, in particular in dealing with the delinquent clients, when non-repayment cases are taken to the court.

Since majority of clients are the very poor, refugees and internally displaced persons from
Nagorno Karabakh and surrounding regions, the main tool to guarantee repayments is group solidarity principle. However, collateral is also used, especially with individual loans. The law on Mortgages covers cases when real estate is secured as collateral. However, the only item of real value the poor have is land. Even though the land was privatized in Azerbaijan, there is no mechanism allowing for the registration and use of land as collateral. Subsequently, this hinders the economic development of rural areas. Finally, the third impediment how even exists laws and regulations are implemented. For example, regular notary registration fees for a collateral agreement vary between 0.45%-1% of the credit amount depending on the size of the loan. However, bribes to collect necessary documents may reach 10 % of the value of collateral, which makes micro-credits non-attractive to clients and increases the risk.

On June 25, 2002, representatives from the government of Azerbaijan, the USAID, the representatives of the embassies located in Azerbaijan, members of INGOs gathered to discuss the legal framework for operating in Azerbaijan. The seminar was devoted to establishing a standard legal framework for all INGOs operating in Azerbaijan. In September, two meetings brought together representatives from the INGO community and the government of Azerbaijan to follow up on issues raised at the June 25 conference. The Ministry of Justice meeting on September 24 focused on licensing and registration issues, in particular on the status of applications submitted by AMFA Initiative Group members; the meeting with the Ministry of Taxation on September 25 focused on VAT reimbursement. Similar meetings are planned between AMFA and National Bank and other respective agencies.


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