Azerbaijan Benchmarking Study

May 2006

Jhale Hajiyeva, Executive Director,Azerbaijan Micro-finance Association

Donor Support

BP and partners in BP-operated projects in Azerbaijan Eurasia Foundation UNDP

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

Overview

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

Dissects and compares Azerbaijan MFI performance measures and drivers in the global and regional context

Azerbaijan Peer GroupsCategory Characteristics Peer Group Members

All Azerbaijan Azerbaijan Broad+ Azerbaijan Small Business

FINCA Azerbaijan, Azeri Star Microfinance, WW AzerCredit, Normicro, Finance for Develoment, Viator Microcredit, Micro Finance Bank of Azerbaijan, CredAgro, AgrarCredit

Azerbaijan Broad Average loan balance per borrower

< 2,500 USD

FINCA Azerbaijan, Azeri

Star Microfinance, WW

AzerCredit, Normicro,

Finance for Develoment,

Viator Microcredit

Azerbaijan Small Business

Average loan balance per borrower

> 2,500 USD

Micro Finance Bank of

Azerbaijan, CredAgro,

AgrarCredit

Report StructureCountry Overview Geography Economic Environment Macroeconomic

Indicators Microfinance in

Azerbaijan

Comparative Measurements Institutional Size Outreach Financial Structure &

Performance Efficiency Productivity Risk and Liquidity

Conclusions

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

Key FindingsINSTITUTIONAL INDICATORS(Median, USD)

All Azerbaijan

AzerbaijanBroad

Azerbaijan Small Business

MBB ECAFSS

MBB All ECA

MBBCaucasus

Number of MFIs Sample Size of Group 9 6 3 45 60 15

Age Years Functioning as an MFI 5 6 2 6 6 6

Gross Loan Portfolio

Gross Loan Portfolio, adjusted for standardized write-offs 1,930,914 1,333,136 6,903,740 3,137,182 2,780,486 1,280,770

Offices Number, including head office 6 5 15 8 7 6

Personnel Total number of employees 50 40 86 47 42 41

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

Key Findings

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

OUTREACH INDICATORS (Median, USD) Azerbaijan MFIs

Azerbaijan Broad

Azerbaijan Small

BusinessMBB ECA FSS

MBB All ECA

MBB Caucasus

Number of Active Borrowers

Number of borrower with loans outstanding, adjusted for standardized write-offs 3,755 4,137 1,132 4,127 2,884 4,127

Percent of Women Borrowers

Number of active women borrowers/Adjusted Number of Active Borrowers 37.20% 41.60% 14.10% 60.80% 60.80% 51.00%

Average Loan Balance per Borrower

Adjusted Gross Loan Portfolio/Adjusted Number of Active Borrowers 343 265 3,585 1,022 1,023 345

Average Loan Balance per Borrower/GNP per Capita

Adjusted Average Loan Balance per Borrower/

50.00% 53.40% 34.00%GNP per Capita 48.40% 37.30% 504,9%

Key Findings

Expenses managed well with relatively low expense levels Profit margins similar to All ECA and Caucasus, but lower than ECA

FSS

OVERALL FINANCIAL PERFORMANCE (Median, USD)

Azerbaijan MFIs

Azerbaijan Broad Azerbaijan

Small Business

MBB ECA FSS

MBB All ECA

MBB

Caucasus

Return on AssetsAdjusted Net Operating Income, net of taxes/ Adjusted Average Total Assets 0.10% 2.40% 0.10% 3.80% 0.90% 0.50%

Return on EquityAdjusted Net Operating Income, net of taxes/ Adjusted Average Total Equity 0.10% 2.60% 0.10% 6.60% 3.20% 0.70%

REVENUES  

Financial Revenue Ratio

Adjusted Financial Revenue/ Adjusted Average Total Assets 23.8% 31.6% 18.90% 33.20% 31.20% 36.90%

Yield on Gross Portfolio (real)

(Adjusted Yield on Gross Portfolio (nominal) – Inflation Rate)/ (1 + Inflation

Rate) 29.2% 37.90% 21.10% 30.30% 28.40% 37.10%

EXPENSES  

Total Expense Ratio

Adjusted (Financial Expense + Net Loan Loss Provision Expense + Operating

Expense) / Adjusted Average Total Assets 23.7% 27.00% 9.70% 28.60% 30.50% 38.50%

Operating Expense Ratio

Adjusted Operating Expense/ Adjusted Average Total Assets 19.90% 23.5% 9.30% 16.80% 18.50% 31.80%

Key FindingsEFFICIENCY (median, USD)

Azerbaijan MFIs

Azerbaijan Broad

Azerbaijan Small

Business

MBB ECA

FSS

MBB All ECA

MBB Caucasus

Operating Expense/ Loan Portfolio

Adjusted Operating Expense/ Adjusted Average Gross Loan Portfolio 26.00% 28.50% 10.40% 20.10% 23.50% 33.80%

Personnel Expense/ Loan Portfolio

Adjusted Personnel Expense/ Adjusted Average Gross Loan Portfolio 16.70% 18.40% 6.70% 12.80% 13.90% 18.60%

Average Salary/ GNP per Capita

Adjusted Average Personnel Expense/ GNP per capita 737.20% 751.20% 659.90% 472.10% 492.50% 546.70%

Cost per Borrower

Adjusted Operating Expense/ Adjusted Average Number of Active Borrowers 95 78 412 180 197 130

Diverse efficiency levels Overall, Azerbaijan MFIs reach more clients at low cost Azerbaijan Small Business significantly higher cost per borrower

Key Findings

PRODUCTIVITY (median, USD)Azerbaijan

MFIsAzerbaijan

BroadAzerbaijan

Small Business

MBB ECA FSS

MBB All ECA

MBB Caucasus

Borrowers per Staff Member

Adjusted Number of Active Borrowers/ Number of Personnel 99 113 21 86 76 86

Borrowers per Loan Officer

Adjusted Number of Active Borrowers/ Number of Loan Officers 174 250 28 169 147 159

Personnel Allocation Ratio

Number of Loan Officers/ Number of Personnel 61.70% 60% 75.60% 54.50% 53.00% 47.80%

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

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

RISK AND LIQUIDITY (median in USD)

Azerbaijan MFIs

Azerbaijan Broad Azerbaijan

Small Business

MBB ECA FSS

MBB All ECA

MBB

Caucasus

Portfolio at Risk> 30 Days

Outstanding balance, loans overdue> 30 Days/ Adjusted Gross Loan Portfolio 0.50% 0.80% 0.30% 1.00% 1.10% 1.60%

Portfolio at Risk> 90 Days

Outstanding balance, loans overdue> 90 Days/ Adjusted Gross Loan Portfolio 0.40% 0.60% 0.20% 0.30% 0.30% 0.80%

Write-off RatioAdjusted Value of loans written-off/ Adjusted Average Gross Loan Portfolio 0.90% 0.70% 2.30% 0.80% 0.80% 1.10%

Loan Loss RateAdjusted Write-offs, net of recoveries/ Adjusted Average Gross Loan Portfolio 0.90% 0.70% 2.30% 0.60% 0.60% 0.90%

Risk CoverageAdjusted Loan Loss Reserve/ PAR > 30 Days 435.5% 636.90% 288.50% 166.20% 133.80% 133.80%

Non-earning Liquid Assets as a % of Total Assets

Adjusted Cash and banks/ Adjusted Total Assets 6.30% 6.60% 6.30% 4.00% 4.10% 6.00%

Current Ratio Short Term Assets/ Short Term Liabilities 652.6% 1620.80% 652.60% 658.40% 695.90% 1196.5%

Summary

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

MFIs within Azerbaijan are an emerging asset class and should be considered for portfolio diversification