Such a rhetorical question can be answered by both “yes” and “no”.
It should be noted that Azerbaijan has the infrastructure of the securities market: the Law of the Republic of Azerbaijan “On Securities Market” which has been written in accordance with international standards, the rules governing the relevant regulation, the supervisory authority, the Central Depository and platform-exchange that organizes trade.
Even if we look at the published reports, we can see that the securities turnover is expressed in billions.
But what is the reason for the answer “no”?
First of all, it should be noted that the turnover of securities in Azerbaijan is related to state securities. Here, the institutions of special importance in the economy invest their assets in short-term instruments with “zero” risk.
Is it necessary to develop the securities market? I ask myself this rhetorical question. It is more than 30 years that this market has been going its own way without proper order. So why is the capital market considered to be important in developed countries, as well as in economic theory?
Let’s ask ourselves one more question… What is the capital market?
Today one of the urgent issues in our economy is the lack of financing opportunities. At present, the priority issues are the development of non-oil sector and support for small and medium enterprises. In many cases, the securities market is seen as an “opportunity for alternative financing”. Is it so? No, of course not. The securities market is a classic financing opportunity.
Unfortunately, our economic experts speak very little about this area. However, it is the development of the securities market that can help close the gaps in the economy. But how to create interest in this market? The experience of many countries shows that the growing interest of the government in this area is related to tax benefits. For example, Russia, our close neighbor, has achieved the development of this market by introducing a product as an individual investment account. What is an individual investment account?
This account must be opened in investment companies and is formed at the expense of income generated from official activities.
The funds in this account are transferred to the management of the investment company. The goal here is to trust the money to the experienced persons. It is known that having any strategy in the securities market requires experience. That is why it is more expedient to entrust this work to professionals.
Tax benefits have also been applied to these individual investment accounts. The tax credit applies to both main workplace and the exemption of income generated from investment activities from tax. There is also a time limit on this account. The term of contract is intended to be three years.
Such an analogy was applied to life insurance in Azerbaijan, and this product was developed as a result of concessions provided by the state. However, skeptics may immediately note that unconditional tax benefits can be applied to those working in the state’s commercial organizations. It goes without saying that every tax benefit contributes to the development of this or that area or increase the social welfare of the population. Dear skeptics, this is just an example of a number of existing practices.
Conditionally, we formed 3-year investors with this method. The issue to form the tools that these investors can invest still remains. I think that this is the easiest part. Thus, one of the most urgent issues in Azerbaijan is the creation and search for financing opportunities. At the beginning of the article we talked about the classic financing opportunities. That opportunity is just the issue of securities. An investment is a bond or stock that is a part of security. The bond can be presented to readers as an analogy to a bank loan. The difference is that the legal entity that wants to take advantage of financing opportunities does not go to the bank to get a loan. It borrows directly from those who want to give money. As a result, it has access to financing at a lower interest rate. Of course, in order to have access to such funding, company must have a proper reporting system and a corporate governance approach. In general, it should be noted that the companies that have applied to public offer and traded on the country’s stock exchange are one of the first factors of the transparency of the economy. And the reason is clear: the company, which was once listed on the stock exchange, is already trying to protect its image. Only in this case, the corporate governance that we have been discussing for years will finally be applied by companies on a voluntary basis. Companies will take new steps in their evolutionary processes.
Another tool we will talk about is stock. It means to have joint capital. However the “bad experience” observed in 90s should never discourage us. The application of the stock instrument in accordance with international practice will allow companies to have a healthy capitalization. It will be necessary to apply corporate governance method in the first IPO of the Azerbaijani stock market. Here, shareholders will receive dividends, traders traded financial instruments, and issuers financial resources. But is this enough for the development of the capital market? No, it is not enough. It is also necessary to form institutional investors who are the main market participants.
Who is an institutional investor? Of course, bank, insurance and other financial institutions that come to mind.
However, investment funds and pension funds must be added to the list of investors who have a clear impact on the capital market.
Unfortunately, there are no such financial institutions in Azerbaijan. I will not refer to statistics or provide information on investment funds in other countries. The main thing is that 9 years have passed since the adoption of the Law on Investment Funds in Azerbaijan and not a single investment fund has been established. Another institution is the pension fund. This institute has a very important place in the country’s economy. A pension fund engaged in the activities directly aimed at the social welfare of the population can also act as an institutional investor in relation to the capital market.
Thanks to such complex measures and approaches, more intensive economic development and, finally, the development of the capital market, which is a key element of financial markets, can be achieved.
To be continued…
Author: Parvana Gasimova
5 Jun 2020
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