> Posted by Bob Bragar, Principal, Strategies for Impact Investors

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

Baku, Azerbaijan doesn’t look like a place that needs microfinance, at least not at first glance. Oil money is coursing through the streets. The shops include Tiffany’s, Cartier, Baccarat crystal, and every expensive fashion designer that New York and Paris have to offer. New apartment buildings line the road. This post-Soviet republic is transforming very fast.

But this is not the whole story. There is still a need to expand financial inclusion, despite the government’s efforts to do this. According to MicroRate’s report, “The State of Microfinance Investment 2013”, Azerbaijan is one of the largest microfinance markets for international investors. The 45 percent annual growth in Azeri microfinance is one of the fastest in the world. The Azerbaijan Microfinance Association (AMFA) reports that Azerbaijan’s microfinance portfolio, including via banks, is approaching USD 1 billion.

One group that is doing very important work, however, seems to be excluded from the party. These are the rural credit unions that are supporting agricultural finance.

By every measure, these credit unions are doing exactly what Western social investors want. They are committed to agriculture, and helping small farmers keep their holdings. Client protection is deep in their DNA, even if they are not familiar with the Smart Campaign. Rather than clients, they have members. Their governance is a cooperative structure, designed to serve the needs of these members. Interest rates are relatively low, aimed at sustainability rather than large profits. Loan amounts are small, designed to meet the farmers’ business needs.

Last month, I was invited to meet the Azeri credit unions at the invitation of Credit Implementing Agency, which is an umbrella institution that provides loan capital and support. Starting early in the morning, we drove for hours away from Baku to meet the credit unions on their own turf and have them explain their situation in their own words. We met in the simple structure that serves as the headquarters of one of the larger credit unions.

On his computer screen connected to a camera, the credit union’s managing director could see the customers approaching the bank to transact business. He knew many of his customers by name and was proud that he was familiar with their business and family situations. I couldn’t help but think of Jimmy Stewart’s portrayal of the good-hearted small-town banker in Frank Capra’s 1946 classic film, “It’s a Wonderful Life”.

The Azeri rural credit unions extend enterprise loans to help members buy inputs and pre-finance crops. They understand their borrowers and work closely with them to develop lending cycles that match the business plans. Consumer lending is minimal.

Credit Implementing Agency is a pioneer in Azerbaijan. This umbrella organization for the credit unions was started with seed capital from the World Bank. It has financed 15,000 low-income borrowers via 70 credit unions operating in 51 regions of Azerbaijan. I was told that the average farms are three to five hectares, and the average loan size is US$3,000 to US$5,000.

Even so, capital is scarce. Located in remote areas that have the fewest financial services, the credit unions have great difficulty in obtaining capital, and international investors have not yet shown an interest.

Why is this? Why should these institutions, which in many ways do the kind of microfinance that international investors say that they want, find it so difficult to expand?

Much of the difficulty can be attributed to the nature of credit unions. As membership enterprises, they tend to be isolated from the general business environment. They can take deposits, effectively equity capital, only from their members. This puts a brake on growth.

There are creative ways to funnel capital to this impact-driven sector. If we are truly committed to financial inclusion, then it’s incumbent on international microfinance investors not to leave out such vital players as the Azeri credit unions.

Should investors tread carefully? Of course. Every new industry has had some painful experiences that serve as lessons for the future, and Azeri credit unions probably have as well. Transparency might be better. Organizational capacity and IT could be expanded. Many credit unions need to learn to tell their stories better. English-language ability is limited. And how can credit unions safely take on external debt?

But we look to the future rather than the past. How can we support something valuable here?

There’s a great microfinance party going on in Azerbaijan. Let’s be sure everyone who deserves to be there is invited.

Bob Bragar is the Principal of Strategies for Impact Investors. He is also a member of the Governance Working Group. You can contact him here.

Image credit: Mike Raybourne

Have you read?

Sowing Sustainable Finance: Making Rural Inclusion a Priority

Improving Sector Transparency: A Case Study on the Azerbaijan Microfinance Association

New Smart Note: Supporting Members to Adopt Client Protection at Azerbaijan Microfinance Association