Small and medium-sized enterprises

25 November 2019

Kanan Isgandarov works as a Financial Services Manager at EKVITA and he is a financial specialist. He has working experience in the banking sector and the top 10 International Audit companies. Kanan is a graduate of the faculty of Finance and Credit at Azerbaijan State Economic University. He has more than 15 years of experience in finance.

Kanan has provided over 200 companies operating in various fields (financial sector, construction, logistics, ICT, agriculture, etc.) with services on taxes, involving financial resources, establishing internal inspection and internal audit systems, restructuring enterprises, developing strategic and financial plans. He has held many trainings for Small and Medium-sized Enterprises (SMEs), ABAD Families and Startups.

Alternative funding tools of small and medium-sized enterprises

Small and medium business owners are the locomotive of the economy, their role in both ensuring employment and creating added value is irreplaceable.

As seen from the table above, more than 60% of employment in Germany and European Union is provided by Small and medium-sized enterprises.

2018 






Source -European Commission
Categories of entrepreneurship entities based on their sizes

The number of enterprises 

The number of employees 

Created added value 


Germany

EU (28)

Germany

EU (28)

Germany 

EU (28)

Number
Share %
Share %
Number
Share %
Share %
Billion Euro
Share %
Share %
Micro-entrepreneur

2,036,100

82.60%

93.10%

5,688,702

19.60%

29.40%

255.4

15.20%

20.70%

Small business owner

257.651

14.50%

5.80%

6,749,152

23.30%

20.00%

309.9

18.40%

17.80%

Medium business owner

58.878

2.40%

0.90%

5,863,981

20.30%

17.00%

342.2

20.40%

18.30%

Total SMEs 

2,352,629

99.50%

99.80%

18,301,835

63.20%

66.40%

907.5

54.00%

56.80%

Large enterprises

11.379

0.50%

0.20%

10,651,385

36.80%

33.60%

773.5

46.00%

43.20%

Total enterprises 

2,364,008

100.00%

100.00%

28,953,220

100.00%

100.00%

1.681

100.00%

100.00%


                                                                                                                 

Low Risk
Low Risk
Medium Risk
High Risk
Asset-Based Finance
Alternative Debts
Hybrid Instruments
Equity Instruments  




Asset-based lending
Corporate Bonds
Subordinated Loans (Debts)
Private Equity
Factoring
Securitized Debts
Silent Participants
Venture Capital

Covered Debts
Participant Loan
Business Angels

Private Placements
Profit Participation Rights
Specialized Platforms for Public Listing of SME-s

Crowdfunding (Debt)
Convertible Bonds
Crowdfunding (equity)


Bonds with Warrants


                                                                                                                            Source: OECD (2013b).

As seen from the table, there are more than 10 tools to fund Small and medium-sized enterprises. Financial tools used depending on the economic growth of the country are also various, especially the number of alternative financial tools and its users in developed countries are higher than in developing countries.

"Strategic Road Map on the production of consumer goods at the level of small and medium-sized entrepreneurship in the Republic of Azerbaijan" was approved by the President of the country on December 6, 2016, in order to develop small and medium-sized businesses. The improvement of the financial opportunities of SMEs and the development of alternative financial tools (forward, futures, factoring, etc.) have been specified in detail in the events planning part of the road map.

  • Establishment of SME Agency
  • A law on the registration of personal property has been passed and a registration portal has been created.
  • A law on mediation has been passed and its implementation will begin in April, 2020.
  • Mortgage and guarantee fund launching to operate
  • Decree on the establishment of joint Agricultural Insurance Fund

   As mentioned above, many great works have been done and are still being done associated with funding SMEs in our country. The event Public-Private Dialogue was held on June 14, 2019 together with EKVITA LLC and the Commission on Business Environment and International Rankings of the Republic of Azerbaijan with the close support of the Small and Medium-sized Business Development Agency to keep these issues in mind. In the event, where more than 100 entrepreneurs, over 14 minister deputies and other senior state officials have participated, it was discussed that one of the biggest difficulties of SMEs is namely their need for financial resources.

The growth in debtor debts and the increasing problem of non-payment issues have created a great demand for Factoring at the moment. Although there is a great demand for this product in the market, it has only been offered by several banks, and when it comes to the terms, it is not very affordable for SMEs.

Another important alternative product is Financial Leasing. As a result of global processes in 2014, followed by the known devaluations in our country, the majority of leasing companies have stopped their operational activity. Leasing companies operating today fund construction engineering and motor transport means. Production equipment is needed the most today. As the company of EKVITA, based on the work we conducted with Small and Medium-sized Business Development Agency or Support to Family Business (ABAD) Public Legal Entity, and the clients to whom the company itself serves, we have determined that they need the following equipment most in Azerbaijan today.

  • Equipment for milk processing
  • Equipment for meat processing
  • Equipment for forage processing
  • For mini bakeries
  • Refrigerated warehouses
  • Farm systems

The poor development of the securities market and the lack of interest of SMEs on this market show that the path in this area is still long. SMEs should establish corporative management of the enterprise in accordance with the requirements of modern times before emitting securities. Unfortunately, the majority of SMEs don't want to do it today. Corporative bonds afford the majority of the financial needs of SMEs in developed countries. Only two companies have issued a corporative bond in our real sector today. One of them is METAK LLC and another is SOCAR.

   One of the tools having a special place in the alternative financial tools is Islamic Financial tools. The importance of these products is quite necessary taking into account that the majority of the people in our country are Muslims. It is necessary to note that the fact of the interest being haraam in the Islamic world prevents some entrepreneurs from using traditional banking products. The winners of the grant project "Developing Legal Framework for Islamic Banking in Azerbaijan" by the Islamic Development Bank in 2018 are Ekvita and a consortium consisting of IFAAS (Islamic Finance Audit and Assurance Services). Although only suggesting amendments on the legislation of Islamic Banking was intended in the project, members of the consortium have proposed a road map analyzing the Islamic finance ecosystem in detail in Azerbaijan.