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(i) ADB provides stable long-term financing that currently cannot be raised from the local market. Azerbaijan''s capital markets are nascent, and public confidence in the finance sector is only gradually being restored. More broadly, the loan may contribute to increasing public confidence in the banking system, through the support of this strong and growing bank with significant outreach in underserved areas;

(ii) The loan supportsfinancial inclusion, specifically by targeting MSMEs in regions, including rural areas. Secondary towns play an important role as trade and service hubs linking agriculture to national and regional markets. MSMEs have not been well served by the traditional banking system, and ABA has developed specialized lending practices to reach these underserved customers. The ADB loan will support diversification in the regions outside Baku and to nonoil subsectors; and

(iii) Through close on-site monitoring and dialogue with ABA management, ADB will support ABA''s adherence to high corporate governance, social, environmental, and fiduciary standards; and enhance risk management.

Financial sector development is a key focus of ADB assistance as set out in ADB''s Private Sector Development Strategy and Enhanced Poverty Reduction Strategy, which note economic growth, stimulated by private sector investment, as a key contributing factor in reducing poverty. These strategies also note the importance of generating jobs, with private sector employment being the major source of income for workers and their families. The Private Sector Development Strategy emphasizes ADB''s role in strengthening finance sectors in its developing member countries. It provides that SME beneficiaries of financial intermediation are important employers and providers of income to contribute to poverty reduction. Support of financial intermediaries is important to instill confidence and rehabilitate the finance sector in countries affected by macroeconomic shocks and financial crises. The loan is consistent with ADB''s financial sector operational plan and the 2007 report of the Working Group on Rural Poverty, which underscores the importance of rural finance and promotes financial inclusion of underserved poor households, farmers, and SMEs.

ADB plays an important role in supporting deepening of services in Azerbaijan's finance sector. The proposed loan would be ADB's second loan to ABA, building on the success of the previous loan, and specifically targeting MSMEs in the regions where access to finance is most limited.

The number of MSME clients served increased by >20,000 (31%) reaching more than 125,000 MSMEs almost reaching the target of 130,000 clients for 2017. The number of MSME borrowers with up to 100 employees increased by 8% to 17,200. The amount of MSME business loans outstanding increased by >$160 million (30%), reaching $689 million (nearly the $700 million target aimed for 2017).

Two thirds of ABA clients are repeat borrowers contributing to an excellent portfolio quality (portfolio at risk >30 days of 0.36%) based on graduation of borrowers through a number of loan cycles. ABA has a very strong profitability with return on average assets of 4.3% and a return on equity of 28.9% during 2013. Since ADB's due diligence in April 2012, ABA demonstrated a strong push towards regionalization of its portfolio in terms of loan numbers and portfolio size as illustrated in the figures above. The average increase in loan size is a good indication that the business model that is based on, repeat borrowing with gradually increasing amounts, works well.