> 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
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11 comments
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December 3, 2013 at 4:25 pm
Eugene Ellmen
This is an excellent article. Credit unions and savings co-ops need greater attention from western microfinance investment vehicles. The organization I work for, Oikocredit, invests in Agroinvest Credit Union in Azerbaijan, but certainly more should be done by us and by other MIVs.
December 4, 2013 at 12:28 am
John Gitau
Eugene, are you saying Bob’s challenge with Azeru Rural Credit is sorted now that you two have met on this forum?. If so, congratulations are in order and thanks to CFI that demand has met supply for the enrichment of financial inclusion. Could the two of you share with us how you proceed from here so that we can learn?
December 4, 2013 at 1:40 am
Dave Grace
Lest we forget that credit unions are SAVINGS and credit cooperatives — as they are known in most of Africa and Latin America.
Because of the government’s unwillingness in Azerbaijan to give full deposit taking power to something it could not supervise it initially severely limited credit unions’ ability to mobile deposit. However, it still used the term credit unions to describe them what have primarily been microcredit organizations – the point being case of Azerbaijan “credit unions” is unique.
Credit unions generally have not receive much attention from the investment funds because they rarely need the liquidity, they make a choice on who they to serve (depositing members or investment funds) and are frequently advised to focus on capturing savings instead of seeking outside funds.
In start up situations, stable environments that need long-term funding or the odd case like here I think investment funds can help credit unions. However, in most cases credit unions and their members are better served by offering competitive savings products.
December 4, 2013 at 5:31 am
Jhale Hajiyeva
i strong believe that dedicative and passionate efforts of any Credit Union to learn and improve management technical capacity and corporate governance will pay off. For example several credit unions from Azerbaijan like Agroinvest CU, Komak Credit CU, A.F.S. CU have succeeded to demostrate creditworthiness and today they are qualifed for local funding and 2 of them are quite successful in working with several social investors. Each of them invested a lots of hard work to rewrite internal policies, procedures, upgrading capacity of entire personnel, compliance with the basics of credit porftolio management and other improvements that are vital if organization would like to lift up in its instituional level. Perhaps, Credit Implementing Agency or Associaiton of Credit Unions should designate a group of experts in house or outsource them that could closely work with member Credit Unions to improve technical and managerial capacity & enable them to be qualified for working with investors.
December 4, 2013 at 10:37 am
John Gitau
Thanks Dave for that clarification.
December 6, 2013 at 4:17 am
Oktay Quliyev
On behalf of Ashigli Credit Union, I hereby express my thankfulness to Mr. Bragar for paying his visit to Azerbaijan, meeting with some of the credit unions and screening the problems of the credit unions with his valuable opinion about the real picture of the existing situation around credit unions. We do believe delivering this information to the international attention will facilitate opening a new stage in the development process of our credit unions. We believe in the perspective of credit unions institutional capacity development and look forward to partnership with potential investors.
December 6, 2013 at 4:20 am
Ayaz Quliyev
I have been impressed having read the article prepared by Mr. Bragar about Azerbaijan. His analyses are of sufficient capacity, and fully agree with him that despite the rich natural resources of the country, there is enormous investment demand for regional development of Azerbaijan. In implementing such challenging demand, microfinance has the very appropriate relevance and considerable burden. Credit Unions as part of this industry can play an important role in solving such matters. As we know credit unions are targeting to low-income members located in remote rural regions. Despite their short history, our credit unions, nowadays, internationally accepted governing structure, rather developed equity base, many active and supporting members. There are a number of rather developed credit unions in Azerbaijan (with 1-2M loan portfolios) now such as Hindarkh, Ashigli, Shahsevan, Leman, Aran, Optimal, Abbas etc. who are playing an important role in providing demand driven financial services to the low income strata of the country. I have read through and been very much impressed with the comments made by Ms. Jhale Hajiyeva and liked it as well. However, I would encourage her attention to other growing credit unions as well, who could play an important role towards poverty alleviation process in the future.
December 6, 2013 at 5:56 am
Aliyev Arif
Starting from 2002 within the World Bank Project of on Development and Lending of Agricultural Activity, CIA puts every efforts towards contributing to the development of the Azerbaijan economy, supporting the development of the small and medium-sized enterprises, implementing the stimulation of the agrarian sector, to serve the legal and physical persons operating in the working in the agricultural field, giving full support the formation and development of the credit unions and borrowers groups, providing them with funding support.
So, we have sufficient knowledge and practical experience in working with the most of these credit unions in Azerbaijan. We strongly believe these institutions are strongly dedicated to working with the remote rural regions, villages, providing deeper social outreach where the demand for microfinance services considerably prevails the existing market supply. The credit unions play a role of naturally established infrastructure to meet such demand as they are formed by these needy people themselves.
Despite to demand driven social objectives, some of credit unions have slower development dynamics due to lack limited financial capability and therefore institutional capacity. It is obvious they need external support for getting additional impetus of rapid institutional development to be able to stand on foot in the growing competitive environment. However, there are not many external stakeholders willing to assist them in such process. From the other hand, we have limited, diminishing loan portfolio which can’t promise further funding support to credit unions. We strongly believe, credit unions can develop faster should there be any possible external support as they have established social mission and deeper rural penetration.
December 6, 2013 at 10:51 am
John Gitau
Jhale, your suggestion sounds great, having groups of experts that would work closely with member credit unions to improve technical and managerial capacity to help them qualify to work with investors ( no, to qualify to attract government attention to allow you attract money from local sources through appropriate legislation).
However, I would like to go back to Dave’s point in his suggestion that the nature of credit unions is savings and credit. This set up may have slower growth given the finiteness of savings abilities of members against the desired borrowing needs. It is important to note that traditional indigenous growth may be slower but it is deep rooted. The desired rhythm in credit unions is increased savings for credit growth. That is how credit unions circuit is completed.
Those who have a growth or development mind realize soon enough that to build capital for further growth, they must save more, cut down their unnecessary expenditure and think how to increase income through multiple sources of income. Creativity is not governed by how much a society is able to source funding from external sources but how prudently they are able to work with the little they have through value addition.
External capital from borrowing or from social impact investors is income haemorrhage in the form of interest expenses. External credit can deceptively appear as panacea for growth and expansion. Credit unions members, by borrowing their own money with interest guarantee themselves the same interest as income at the end of the year.
If a social impact investor brings in funding for the projects that members of credit unions undertake and it at, lets say an expected ROI of 5% ,it means that the credit union members have been given money to first generate a return of 5% to the investor before they make their own additional return perhaps same level of 5%. It means that as they work more with more money, they are still left at the same position as they were with their little money, money economies of scale notwithstanding. Indebtedness and tension in business results from missing this simple numbers lesson. Each sector of an economy has its average return on investment and getting more money may not increase that return. The irony of capital seeking is that those who believe they require external money to fund their operations have not ordinarily exhausted their internal capacities. It is the impatience bug that bites anybody who starts feeling prosperous. It is the same bug that bites employed people when they get salary increase-they feel they deserve to consume more while indeed, because they were surviving at their previous income, they should save the extra income. But, no, the bug won’t allow as its bite is very itchy that you cant resist scratching. If you as a credit union can’t expand with what you already have and increase through prudent money management, more money from external sources won’t help you, I am sorry. The very wealthy will attest to you how they grew their empires through prudence and the auction industry thrives on those who believe they need to borrow. And watch out, those who lend, such as banks will always make money as fools get to work for them. Note carefully that unless you are looking for a grant, no social investor will come to safeguard your interest. It is their interest, end of story. They will come, give you money, make you change the way you do things and by the time you realizing you credit union members are fighting one another.
December 11, 2013 at 9:42 am
Ayaz Guliyev (ACUA Chairman)
I would like to point out that, due to the Azerbaijani credit union peculiar situation, nowadays they need to apply for external debt investment to expand their activity to be able to serve their current and potential members’ needs. As legislation doesn’t permit for the credit unions to attract savings and since most of them operate in remote rural areas where the members are not quite very rich to contribute their own, enough shares to finance the operation of the credit unions, there is definitely a need for external debt investment. As is pointed out, nowadays a number of leading Azerbaijani credit unions have a good knowledge and experience with local funding sources provided by local nonbanks, banks a and state funds. And a few of them have experience with international social investors. As a matter of fact, our credit unions basically demonstrate a good performance up to the reasonable expectation of the current lenders and present positive records and transparent relations with the lenders.
What concerns to the credit unions expenses paid to lenders, I would rather inform that credit unions earn sufficient revenues from these borrowings to be able to pay all interest expenses to lenders, plus cover all operational expenses and also accumulate sufficient profit to add up their equity base as well. So entering into borrowing situation considerably changes the credit unions condition from low level to a better position, they grow their loan portfolio and equity, expand their activity, improve institutional capacity and contribute to a better outreach indicators smoothly. We would gladly share some of our members indicators to make sure about performance of our unions. So, this is already experimented issue, and the local or international lenders who are working with Azerbaijani credit unions may possibly confirm all these mentioned by us here.
What concerns to a point about social investors asking credit unions to do what they want, and move the credit unions away from their own course, we, of course, respect this opinion, however, we would like to point out that there is full coincidence between the missions of the Azerbaijani credit unions and the expectation of the social investors, as we all strive to serve the needs of low income people, to develop microbusinesses, generate increased income in these businesses to improve these people/their families livelihood, create/sustain job places and so on. So there is no considerable disagreement between their outlooks.
As Implementing Credit Agency (ICA) has a good experience in working with our credit unions, another alternative could be for ICA to get such debt investment and allocate it in the loan portfolio of credit unions. As is known, ICA’s current portfolio is diminishing because of paying back its loan within the WB program as this loan is already due. So, some replacement for these resources could be helpful for further development process of credit unions.
Well, we, hereby, gladly invite all those interested to see the real picture about credit unions and share their experiences, achievements and future plans accordingly.
Sincerely yours
Azerbaijan Credit Unions Association (ACUA) Chairman
Ayaz Guliyev
December 11, 2013 at 1:08 pm
Joshua Goldstein
Bob, this is a very interesting contribution. You make a compelling case for the role credit unions play and can play in achieving financial inclusion. Josh