Azerbaijan Benchmarking Study

1. Azerbaijan Benchmarking Study May 2006 Jhale Hajiyeva, Executive Director, Azerbaijan Micro-finance Association

2. Donor Support • BP and partners in BP-operated projects in Azerbaijan • Eurasia Foundation • UNDP

3. What is Benchmarking? Benefits of Benchmarking • Increases Transparency • Attracts Government Attention and Support • Enables Access to Capital • Attracts New Investors to Market • Increases Scaling and Outreach of MFI Operations • Facilitates Economic Growth • Aids in Poverty Reduction • Provides Comparative Information for Improving Financial and Social Performance • Extends Reach to Global Networks

4. Overview Dissects and compares Azerbaijan MFI performance measures and drivers in the global and regional context • Training of finance managers of MFIs • Financial statement data collected, compiled, verified, and analyzed • 9 member institutions • Adjusted to make data comparative • Inflation • cost-of-funds subsidy • in-kind subsidy • standardized loan loss provisioning • Peer groups

5. Azerbaijan Peer Groups

6. Report Structure Comparative Measurements • Institutional Size • Outreach • Financial Structure & Performance • Efficiency • Productivity • Risk and Liquidity Country Overview • Geography • Economic Environment • Macroeconomic Indicators • Microfinance in Azerbaijan Conclusions

7. Key Findings Although first ever benchmarking study, Azerbaijan found to be in relatively competitive position with strong development potential Country Overview • Macroeconomic stability • Strong relative GDP growth • Increasing FDI • National poverty reduction program • Non-Bank Credit Organization law to be ratified • Transparency initiatives • MFIs active participants in economic development • High demand for financial services, particularly in rural areas

8. Key Findings • Overall age is approximately similar to peers • Azerbaijan Small Business relatively young • Azerbaijan Small Business has relatively large portfolio • Reasonable scale despite relatively small operations

9. Key Findings • Outreach diverse across MFIs • Relatively low overall outreach to women borrowers • Azerbaijan Small Business relatively higher loan balance per borrower

10. Key Findings • Expenses managed well with relatively low expense levels • Profit margins similar to All ECA and Caucasus, but lower than ECA FSS

11. Key Findings • Diverse efficiency levels • Overall, Azerbaijan MFIs reach more clients at low cost • Azerbaijan Small Business significantly higher cost per borrower

12. Key Findings • Relatively high number of loan officers relative to personnel • Overall, borrowers per loan officer is slightly higher than peer group, but substantially lower for Azerbaijan Small Business

13. Key Findings • Overall, Azerbaijan maintains relatively strong portfolio quality • Write-offs for Azerbaijan Small Business are significantly higher • Azerbaijan MFIs are relatively more conservative in loan loss provisioning

14. Summary MFIs within Azerbaijan are an emerging asset class and should be considered for portfolio diversification • Since 1999, investment toward development of microfinance sector in excess of 270 million USD • Active credit portfolio more than 80 million USD • Recent portfolio growth has provided enabling environment for MFIs to: • Leverage financial structure • Exploit economies of scale • Maintain positive financial and operational sustainability levels Microfinance in AZ