Azerbaijan Microfinance in a Regional Context

1. Azerbaijan Microfinance in a Regional Context

2. MIX: Products and Services The Microfinance Information Exchange(MIX): leading provider of data services for the microfinance industry for 6 years MIX Market: (www.mixmarket.org): online microfinance information platform and database 1283 MFIs, 102 investors and 167 partners ~ 30,000 visitors each month The MicroBanking Bulletin:premier source of benchmarking in the microfinance industry Regional and Performance Reports Azerbaijan Microfinance, Analysis and Benchmarking Trends Report 2008 Benchmarking Microfinance in Eastern Europe and Central Asia Performance Trends Reports and Customized Performance Reports for MBB participating MFIs

3. Data Set and Peer Groups • Azerbaijan: MBB trend data based on 9 MFIs- Aqroinvest, Azercredit, Azeristar, CredAgro, FINCA, FinDev, MFBA, Normicro, Viator; MIX Market trend data based on 17 MFIs • Caucasus: trend data on MFIs from Georgia and Armenia • Central Asia: trend data on MFIs from Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan • Balkans: trend data on MFIs from Albania, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, Serbia

4. Azerbaijan: How Big Is Microfinance • The microfinance sector is still young • Penetration rates increasing- 1.5 % in 2006 vs. 2 % in 2007 • Wide room for growth: more mature markets such as B&H have a penetration rate of 6 %

5. Growth in Outreach 2004-2007 • MFIs in Azerbaijan continued their fast paced growth in outreach • Growth in outreach for peer groups has slowed down • Reasons: Azerbaijan is one of the fastest growing economies in the world Source: Mix Market

6. Depth of Outreach 2004-2007 Source: Mix Market Source: MBB 2007 • Outreach growth in Azerbaijan NOT driven by much larger ALB • Among peers Azerbaijan still has the lowest median ALB in USD, on par with Central Asia • Lowest ALB per GNI p.c. and much lower than in Central Asia

7. Downscaling Banks Sector- Share in Outreach and Scale Source: MIX Market and EBRD • Downscaling banks: lowest market share in the Caucasus, highest in Central Asia • Azerbaijani non-bank MFIs: largest market share compared to peers • ALB of downscaling and microfinance banks higher than for non-bank MFIs, but disparity much greater in Central Asia and ECA as a whole

8. Funding Structure: Debt-to-Equity and Unadjusted Financial Expense Source: MBB Source: MIX Market • Sharp increase in leverage for the Caucasus and Central Asia • Little change in financial expense for Azerbaijan and the Balkans • interest rates much lower in the Balkans • Financial expense shot up for Central Asia and the rest of the Caucasus

9. Funding Structure: Debt-to-Equity and Commercial Funding • Azerbaijani MFIs are some of the most leveraged in the region • Lowest median commercial funding ratio • Local borrowing still limited in contrast to the Balkans Source: MBB 2007

10. Sources and Cost of Funding: Comparative View of Azerbaijan and Central Asia Source: MBB 2007 • Sources of funds for Azerbaijani MFIs are mostly foreign • Central Asian MFIs rely more on commercial banks (both local and foreign) as a source of funding  higher unadjusted financial expense • Foreign funds have much larger presence in Azerbaijan

11. Financial Performance Source: MBB 2007 • Lowest operating expense after the Balkans • High financial expense on par with Central Asia (due to inflation mostly) • Highest adjustment expense among peers (due to inflation) • Highest financial revenue

12. Two Young Sectors • Operating expenses reducing faster in Azerbaijan • Financial revenues reducing slower in Azerbaijan • Margins remain higher in Azerbaijan and have not decreased over the years Source: MBB 2007

13. Highlights for 2007 Azerbaijan Microfinance • MFIs in Azerbaijan exhibited faster growth in outreach and scale than most peers- the sector is still growing to its maturity • MFIs in Azerbaijan have resisted going up-market evidenced by consistently lower ALB than peers • Unlike peers in Central Asia, non-bank MFIs still dominate the market in Azerbaijan • Downscaling banks are beginning to tap into the market but altogether are serving a different type of clientele (evidenced by much higher ALB)

14. Highlights for 2007 Azerbaijan Microfinance • MFIs in Azerbaijan are becoming more leveraged,catching up with peers in more developed sectors such as the Balkans • The terms and conditions of funds have not changed, local funding remains limited and more expensive • MFIs in Azerbaijan are managing expenses efficiently, but the high inflationary environment presents a greater challenge than for peers • Expectations: continued high growth, increased availability of funding at better terms and increased competition from downscaling banks

15. MICROFINANCE INFORMATION EXCHANGE, INC. The leading provider of business information and data services for the microfinance industry. Web: www.themix.org Email: info@themix.org Headquarters: 1901 Pennsylvania Ave., NW, Suite 307 Washington, D.C. 20006 USA Other Locations Lima, Peru ● Dakar, Senegal ● Guragon, India ● Jakarta, Indonesia