Small and Medium-Sized Enterprises in Azerbaijan
Introduction to the Issue
The value-added creation capacity of micro, small, and medium-sized enterprises (MSMEs) in Azerbaijan is relatively low. This was highlighted by Rustam Tahirov, Director of the Sustainable Development of the Financial Sector Department at the Central Bank of Azerbaijan, during the “Asia SME Monitor 2025” seminar held in Baku. According to him, although the SME sector provides about half of total employment in the country, productivity indicators in this area remain low due to the concentration of employment in sectors that generate low value-added activities.
Current State of SMEs
Employment and Productivity
The SME sector is a significant contributor to employment in Azerbaijan, providing about half of the total jobs in the country. However, the productivity levels within this sector are not as high as they could be. This is largely because many of the jobs are in areas that do not generate a lot of value-added activities. Value-added activities are those that significantly contribute to the economy by generating high revenues or providing innovative services and products.
Role of the Banking Sector
Azerbaijan’s financial system is predominantly banking-based, with banks playing a crucial role in providing credit to the real economy. MSME loans make up about 20 percent of the total loan portfolio of banks and 47 percent of total business loans. This indicates that banks are increasingly supporting economic activity through lending to SMEs. However, it also suggests that SMEs might face difficulties related to collateral and liquidity during credit cycles, which could hinder their growth and productivity.
Challenges and Policy Directions
Challenges Faced by SMEs
SMEs in Azerbaijan face challenges such as difficulties in accessing credit due to collateral requirements and liquidity issues. These challenges can limit their ability to expand operations, invest in technology, and enhance productivity. The concentration of employment in low value-added sectors also poses a challenge to increasing the overall productivity of the SME sector.
Central Bank’s Policy Directions
The Central Bank of Azerbaijan has identified strengthening banks’ capacity to assess and manage SME risks as a key policy direction. This involves improving the banking sector’s ability to evaluate the creditworthiness of SMEs more effectively and manage the risks associated with lending to them. Another important direction is diversifying financial sources beyond the banking sector, including the development of capital markets and non-bank financial institutions. This diversification can provide SMEs with a broader range of financing options, reducing their dependence on bank loans and potentially easing the challenges of accessing credit.
Conclusion
In conclusion, while the SME sector in Azerbaijan plays a vital role in employment, its value-added creation capacity and productivity indicators need improvement. Addressing the challenges faced by SMEs, such as access to credit and sectoral concentration in low value-added activities, is crucial for enhancing their productivity and contribution to the economy. The Central Bank’s efforts to strengthen the banking sector’s capacity in SME risk management and to diversify financial sources are steps in the right direction. Implementing these policies effectively could lead to a more vibrant and productive SME sector, contributing significantly to Azerbaijan’s economic growth and development.
