Shoulda, coulda, woulda: Lessons learned from a currency devaluation crisis in Azerbaijan

  • Kevin FRYATT, Risk management Initiative in Microfinance (RIM)
  • Jhale HAJIYEVA, Azerbaijan Micro-finance Association (AMFA)
  • Barry FIRTH, VisionFund International


The moderator, Kevin FRYATT, opted for a Q&A style of collective presentation, with Jhale HAJIYEVA focussing on how the manat (AZN) crisis affected the lives and behaviour of borrowers and Barry FIRTH and Rob HANSON sharing the problems faced by international networks and practitioners. This resulted in a rather dynamic presentation which included questions from the audience.

It is important to appreciate some key characteristics of the Azerbaijan microfinance market: some larger MFIs are directly managed by their foreign NGO investors (FINCA and VisionFund), retail lending is predominantly done in USD alongside local manat, and historically local MFIs show very high portfolio quality. Below is a representation of the timeline presented by the panellists.

June – August 2014

- Sharp drop in oil prices (June)

- Negative currency related expectations 

- Capital outflow from country

- Sharp depreciation of Russian ruble/economic sanctions towards Russia

In mid-2014, Azerbaijan started noticing the effects of the continuously dropping oil revenues, which, as in other oil-dependent economies, reduced reserves and put pressure on the local currency. First signs of capital outflow were noticed. This pressure was compounded by the depreciation of the Russian ruble, attributed to sanctions.

September – December 2014

- USD deposit shift 

- Turbulence in currency market

- Decreasing CBAR foreign currency reserves 

- VisionFund: Freezing of accounts, including safety deposit boxes (October)

Despite repeated reassurances from the Government and Central Bank that the monetary markets were under control, the country was rapidly losing its foreign currency reserves. Insecurity increased. Shopkeepers did not stock up any longer and many small businesses stagnated or even closed down. VisionFund was hit by a freezing of its bank accounts by the authorities following a sector wide review into NGO activities in Azerbaijan. For VisionFund, this resulted in reliance on cash-based operations only (it could only lend out monies as these came in through repayments).

February 2015

- 1st AZN devaluation

- Damage to sustainability of the financial sector & increase in losses

- Further economic activity slowdown

- Depreciation trends of local currency

- VisionFund: Deterioration of quality – almost all USD loans 

- VisionFund: Speculations in mass-media about government compensation for USD loans 

- FINCA: USD/AZN balanced loan portfolio currency mix implemented

In early 2015, the inevitable happened: the manat had to be devalued against the US dollar and euro with grave results for the microfinance and larger financial sector. Clients who had borrowed already faced problems in finding dollars to repay their loans and now had to pay much more for the – still scarcely available – dollars. Repayment rates plummeted. All of that in a context where the Central Bank showed little understanding and appreciation of the predicaments of MFIs. The Central Bank was more inclined to discuss means to support defaulting borrowers.

July 2015

- Interest rate cap established by Central Bank

- Receiving AZN payments for USD loans banned by Central Bank 

- AZ government recommended renegotiation of client loans

Part of that effort was to cap interest rates on new loans. At the same time, MFIs were not allowed to accept repayment of dollar loans in local currency. Instead, it recommended rescheduling. All of that eroded repayment discipline throughout the sector.

October 2015

- VisionFund: accounts unfrozen

Later in the year, VisionFund managed to have its accounts and safety deposit boxes unfrozen, which helped from a liquidity perspective but did not improve overall performance. Safety deposit boxes held the clients’ collateral.

December 2015

- 2nd AZN devaluation

- Further damage to sustainability of the financial sector & increase in losses

- Further economic activity slowdown

- Depreciation trends of local currency

By the end of the year 2015, the situation had worsened in the economy and the financial sector. Pressure on the manat had been building again leading to a second devaluation and further slow-down.

January 2016 – date

- Suspension of lending in banking sector (Jan-Apr)

- Establishment of FMSA and transfer of supervision from Central Bank 

- Mass media and MPs call for compensation by government 

- Further deterioration of quality throughout all industry 

- FMSA banned mortgage loans in USD and increased provision requirements for consumer loans in USD

In the first quarter of this year, all lending was suspended. Supervision of the sector was moved from the Central Bank to the new Financial Market Supervision Authority (FMSA). And as the mass media and politicians called for compensation of loan-loss by the Government, portfolio quality further eroded. Lending by now has resumed again but at low intensity and under stricter rules. Prospects for recovery are slim and some investors have already decided to count their losses and bail out from the country.


As indicated above, discussion was stimulated throughout the session. A key point was the necessity for investors and practitioners to hedge or mitigate the currency exchange rate risks to which they are exposed. Even stable markets can become vulnerable. Well-intended government efforts to stabilize the currency and protect borrowers’ interest may work out detrimental for financial institutions and their investors. 

The panellists put across a notion of shared responsibility in the wake of the crisis as the major avenue for recovery of stressed assets. It is, however, too early to tell if this may bring relief; as yet the dominant picture is one of implosion of what was considered one of the best performing microfinance markets in the world. 

The session concluded hedging or other robust risk management policies ought to be put in place in markets where the economy shows little variation and depth. Likewise, MFIs need to get their banking license to mobilize local currency deposits; the future Azerbaijan market may need to rely more heavily on local savings, deposits, and equity. Furthermore, managing loans in multiple currencies may be perceived as client-friendly but it is just passing the risk off to the client as credit risk because when currencies depreciate, clients default on their loans.