BizCLIR

In a mature economy with strong legal rights that are enforced by the justice sector, secured creditors can enforce loans efficiently when debtors become unable to repay credit. This certainty and efficiency leads to wider credit availability, lower credit terms, and longer maturities. Azerbaijan, however, currently lacks the legal and institutional infrastructure for growth of secured lending.

Donors are uniform in their consensus that for Azerbaijan to achieve sustainable economic growth and reduce poverty the country must diversify its economy beyond the oil and petrochemical sector. Small and medium agribusinesses will require credit to procure the seed, equipment and plants for Azerbaijan to move beyond individual subsistence agriculture. Non-agricultural small, medium and large businesses will require credit to support real estate construction and improvements, to finance certain operating costs, and to purchase equipment and inventory. Individual consumers may also benefit from financing in order to purchase new consumer goods, such as vehicles. Meeting these needs will require substantial change.

The legislative framework governing collateral in Azerbaijan is fragmented, confused and incomplete. Although a recently enacted Civil Code does provide a post-Soviet starting point for approaching property rights and pledges of collateral, the absence of a clear, complete and consistent framework creates uncertainty in practice, whether attempting to create a security interest in movable property or trying to enforce that interest in the courts.

Azerbaijan’s establishment of a rationalized collateral registry system is a necessary institution to support the extension of secured credit. Azerbaijan lacks a collateral registry system by which creditors can establish a non-possessory interest in collateral. Several registries are presently maintained by other governmental bodies for various types of collateral. However, these registries do not cover all types of collateral, such as equipment, inventory and accounts receivable, there is confusion regarding the breadth of assets they are intended to cover, and in some cases their authority under the Civil Code is unclear.

Azerbaijan also requires a judicial system, including a bailiff service, that enforces court decisions, so that the rights of a secured creditor to obtain and foreclose on collateral can be efficiently and consistently enforced. As a general matter, the timely, clear and predictable enforcement of creditors’ rights increases lending institutions’ willingness to extend credit. The fact that enforcement will occur on a timely basis serves two purposes. It provides the creditor with assurances that debt will in fact will be protected by collateral, and also reduces the likelihood that borrowers will voluntarily default. Information regarding attempts to foreclose on real property collateral establishes that creditors who attempt to enforce their mortgage interests frequently encounter a judicial system where delays are common, judges do not uniformly apply the law, and numerous appeals are taken by creditors and debtors. When a creditor ultimately obtains a final decision in its favor, the creditor starts an uphill battle once again in pursuing enforcement of that decision. Those charged with executing the decisions are perceived by a wide section of the population to expect bribes, act slowly if at all, and commonly support sweetheart dispositions under which the sales prices are artificially low.