> Posted by Daniel Balson, Lead Specialist for Eurasia and MENA, The Smart Campaign

The following is the second post in a four-part blog series on the financial inclusion of refugees and the internally displaced. The first post can be found here.

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In 1992, sporadic clashes between ethnic Armenians and Azerbaijanis in the mountainous region of Nagorno Karabakh erupted into full scale war. By the time a ceasefire was reached two years later, the territory lay under Armenian control, and between 800,000 and 1 million Azerbaijanis were displaced from their homes. Since the end of hostilities, ethnic Azerbaijani internally displaced persons (IDPs) who fled from Armenian-controlled to Azerbaijani-controlled territory have continued to face difficulties accessing economic opportunity. However, a financial sector inclusive to IDPs is emerging, lessening these difficulties and demonstrating that IDPs can be a bankable client segment. 

First, it’s important to distinguish IDPs from refugees. Unlike refugees, IDPs have not crossed an international border when fleeing violence or disaster; they are likely to remain in the same (or similar) cultural, linguistic, religious, and political milieu as the one they fled. It is likely that their documentation and identity is still recognized by the relevant local authorities. Nonetheless, IDPs form a specifically vulnerable population. Across the world, the majority of IDPs continue to lag the rest of the population on most economic indicators. Globally, IDPs are frequently forced to rely on services from informal actors in the grey economy, particularly when the government is the cause of their original displacement. In Azerbaijan and elsewhere, many IDPs rely on government or international assistance for basic provisions and are unable to secure property rights to their government-provided homes. Children of internally displaced persons typically find their schooling interrupted.

To address the financial difficulties faced by the IDP population, the government registers internally displaced Azerbaijanis and provides them with housing and a modest stipend. Additionally, it has put forward numerous schemes to promote IDPs’ self-reliance. While the housing assistance has proved successful in helping alleviate IDP poverty, the economic development schemes have yielded limited results. Because rural IDPs reside in areas far from major towns and near the conflict zone, they face limited opportunities to participate in commerce or trade. Moreover, Azerbaijani IDPs are unable to gain access to the country’s most fertile land, which was claimed and farmed long before they were displaced. As a result, many Azerbaijani IDPs are concentrated in urban and semi-urban areas where arable land is scarce and of poor quality.

While the details of their displacements vary, the vast majority of Azerbaijani IDPs have very limited access to financial services. For the most part, major financial institutions in Azerbaijan consider investing in internally displaced persons to be a risky proposition.

Major financial institutions shy away from providing IDPs with financial products because they require very small loans that have historically been expensive to administer. Often, IDPs lack a permanent or stable income as well as property in their name to use as collateral. Many IDPs suffer serious disabilities that prevent them from working, a legacy of the mine fields circling the conflict area. IDPs disproportionately live in or around the conflict zone, and violent incidents are not uncommon. Basic sanitation and access to energy are often substandard. These challenging conditions take a toll on the population’s health and circumscribe their ability to grow a business. Moreover, financial institutions fear their efforts to enforce collections actions against internally displaced families would die in the courts.

With major financial organizations refusing to provide credit, a number of internationally-funded boutique microlenders have stepped in to fill the gap. Today, 16 percent of IDPs bank with microcredit organizations, compared to 3 percent of the Azerbaijani population as a whole. Using seed capital provided by international non-governmental and development organizations, institutions including Eurasia Credit, Caspian Invest, Caucasus Credit, and Azeristar Microfinance focus on providing small loans for IDPs.

These small financial firms quickly found that IDPs were not as risky as many had suggested. Prior to the recent devaluation of Azerbaijan’s currency, internally displaced clients demonstrated an outstanding recovery percentage – with 98 percent of loans repaid on time. While financial over-indebtedness is a common problem across the country, IDP clients were no more susceptible than other Azerbaijanis. As the price of oil fell and Azerbaijan’s central bank devalued the manat, IDP clients proved that, in some ways, they are the less risky demographic. Since IDPs typically take on far smaller loans, their credit was less likely to be dollarized, leaving them less susceptible to currency fluctuations.

As this Azerbaijani IDP market segment became established, participating financial institutions found that to stay competitive, they had to differentiate themselves by providing exceptional customer service and client protection. Financial organizations began hiring IDPs and training them to serve as branch managers, thereby providing the firm with an internal perspective on the trials and opportunities IDPs faced. By hiring and training community members, financial institutions quickly learned that to succeed, they needed to cultivate the talents of people who culturally knew the communities in which they operated.

Financial institutions serving IDPs in Azerbaijan quickly identified several policies and practices that could be implemented to protect this population. Even more than ordinary Azerbaijanis, IDPs require flexible loans. Given their perceived riskiness, the precariousness of their economic situation, and their limited assets, IDPs face higher interest rates. To compensate, financial organizations offer refugees more flexible products with a variety of repayment schedules and conditions. Agriculture loans are developed with especially accommodating terms to ensure vulnerable farmers are able to meet their obligations. And branches serving IDPs are typically given a greater degree of decision-making autonomy, allowing them to modify and adjust products based on the feedback they receive. Some branches are even empowered to adjust financial products to a particular customer’s needs (within certain bounds).

Readers familiar with the Smart Campaign will see that the above strategies are closely tied to the client protection principles. Appropriate Product Design and Delivery, for example, ensures that providers take adequate care to design products and delivery channels so as not to cause clients harm and to take into account clients’ unique characteristics. Fair and Respectful Treatment mandates non-discrimination. Mechanisms for Problem Resolution requires recourse mechanisms so that clients who wish to complain can do so and will have their complaints taken seriously and handled responsibly.

While these positive client protection approaches ameliorate the harm caused to Azerbaijani IDPs by financial institutions, IDPs remain a particularly vulnerable client segment. Even though they are unlikely to borrow dollarized loans, the country’s economic downturn, precipitated by a currency devaluation and falling commodity prices, hits them hardest nonetheless. In regions with large refugee populations, Portfolio at Risk has risen to 30 percent. When quizzed about refugees’ unique economic vulnerability, a representative of Azerbaijan’s microfinance association said, “It’s really simple. When Azerbaijan sneezes, the IDPs catch pneumonia.”

Far from being unreliable borrowers, Azerbaijani IDPs have catalyzed a diverse and active industry of microfinance institutions catering to their needs. IDPs have shown themselves willing and able to help their institutions serve them better both by providing feedback to and working with their creditors. Nonetheless, they remain an economically disadvantaged population, highly vulnerable to economic downturns and shut out of the best economic opportunities their country has to offer. If special care is not taken to understand their needs and protect their rights, they risk being left substantially worse off than their neighbors during times of economic trouble.