Hillary Clinton, politician and expert on small entrepreneurships issues, once stated, “Being innovative in small business fields allows countries to stride forward in their giving journey. So, don’t let anybody tell you that it’s only corporations and businesses that create jobs and enhance the economic efficiency”(Meeting with small business owners, October 2014). In today’s modern world, the policy agendas of the governments of almost all industrialized and semi-industrialized countries comprise distinctive strategies to encourage small entrepreneurships.
Policymakers claim that implementation of such strategies will have a positive impacts on the essential economic variables, especially on the unemployment rate among the youth. Thus, building such strategic plans to promote entrepreneurships becomes much more significant in small economies rather than the big developed ones. For instance, Azerbaijan is a typical example of a nation that needs some effective strategies in order to enhance the stability in the small business fields. This paper enlists a number of methods that can potentially stimulate small entrepreneurships in Azerbaijan by avoiding the particular problems such as financial illiteracy and inaccessibility to credit funds, with which local entrepreneurs encounter. One of the potential methods to stimulate small entrepreneurships in Azerbaijan is to avoid the problem of so-called financial illiteracy. In order to be able to make suggestions about what can be done to overcome this issue, we need first to have basic understanding of what financial illiteracy actually means and how it negatively affects the development of small businesses in Azerbaijan. Generally speaking, financial illiteracy means not having enough knowledge about different financial terms and areas.
In more precise manner, this issue arises when the corporation is not able to effectively organize the financial principles, concepts and to make rational finance-related decisions such as investing, managing debts, issuing equities, selling bonds. So, all these problems result in a situation in which the entrepreneurs fail to make strategic and tactical business decisions. In order to avoid such scenarios, government bodies of Azerbaijan and policymakers work on a number of strategies. The most famous strategy is to just enhance the financial awareness of the owners. To do this, governmental bodies can offer some training done by business professionals for the local business owners or at least for their financial representatives.
Additionally, Ministry of Education should be involved in the process by opening finance-based courses in high schools. With the help of these courses, not only potential entrepreneurs of the future, but also majority of the population would have basic knowledge about financial concepts and principles. Ministry of Education has recently included this plan in its portfolio of prioritized policies although there seem to be no relevant implementation yet. Moreover, as a method to stimulate small entrepreneurships in Azerbaijan, we can think of the ways to overcome the difficulties of business owners to have proper access to credit funds. Before discussing which methods can be utilized against this issue, we should first interpret what are those difficulties that entrepreneurs encounter. Having improper access to available funds can be analyzed from two distinctive perspectives: very high interest rates on bank loans and so-called ‘collateral issue’.
• Recent statistics reveal that the name of Azerbaijan is in the list of countries in which the interest rates on credit loans are far above the world average. Today, a typical Azeri commercial bank charges around 30% interest rate on business loans to the potential entrepreneurs, who are willing to borrow and start running their small businesses. Obviously, such high interest rates discourage entrepreneurs and prevent them from injecting funds to their businesses. In order to avoid this problem, government should create a unique state bank(s) whose primary business will be to make loans to entrepreneurships at a lower interest rate.
• In addition to very high interest rates, collateral issue is another problem that small business owners encounter with. Today, typical commercial banks require real estate as collateral while giving loans. Here arise two major issues. First, having very high value collateral in the loan contract threatens entrepreneurs to take such a high risk.
In order to solve this issue, government can just set some regulations which will prevent real estate from being put as collateral. Obviously, this would create a harsh condition for banks, and government would need to subsidize them as compensation. Secondly, the procedures of real estate validation and verification (which is required by the banks) are too overwhelming. According to the research conducted by the CESD, due to the lack of properly working register center, it typically takes over 6 months to validate and verify the identification of the real estate for the loan agreement. To lighten this hardship, one can recommend government to create a unique centralized register system, which will decrease the time and effort that borrowers need to spend while validating and verifying their real estates. As a final note, these two collateral related issues are interconnected, so that if the government of Azerbaijan would implement a policy (as recommended above) to solve one of them, the other one would eventually be avoided as well.
All in all, this paper discusses various methods that can stimulate small entrepreneurships by avoiding the problems that Azerbaijani small business owners encounter, such as financial illiteracy and inaccessibility to credit funds. Financial illiteracy is depicted a term indicating having insufficient expertise and knowledge about basic financial principles and concepts, which results in business owners not making rational finance-related business decisions. The problem of inaccessibility to credit funds is explained from two distinctive perspectives: very high interest rates and collateral issue.
It is described that Azeri commercial banks charge far-above-the-average interest rates on the business loans; and in the loan contract real estate is required as collateral. In addition to analyzing those mentioned problems, this paper also recommends some methods by the help of which one can overcome those issues. Financial illiteracy can be somewhat avoided by offering financial training for the owners. Also, The Ministry of Education would need to involve in the process by adding a number of basic finance-related courses in high schools. To overcome the issue of high interest rates on loans, government would need to create unique state banks, which will make loans to small business owners at much lower interest rates.
The collateral issue can be avoided by either setting regulations to prevent real estate from being put as collateral in the loan contracts; or creating a centralized real estate registration system.