The European Bank for Reconstruction and Development (EBRD) is taking an equity stake of 25% plus one share in Azerdemiryolbank (ADB), one of Azerbaijan’s leading private banks, as part of a capital increase.

At the same time, the EBRD is also lending ADB US$1mn over five years for on-lending to micro and small enterprises around the country, stimulating grassroots business activity as well as increasing the limit under the Trade Facilitation Programme to US$3mn (from US$1mn).

ADB will be the first bank to be included in the EBRD’s micro and small lending programme through commercial banks in Azerbaijan. The EBRD’s program now works with 55 banks in its countries of operation to provide financial access to smaller borrowers and plans to further expand its outreach through other Azeri banks in the coming months. EBRD will offer technical cooperation to help ADB extend this service further into the regions and will be co-ordinating this effort with the German-Azerbaijan Fund.

The equity investment will enable ADB, with its 288 staff and total assets of US$38mn, to further strengthen its position as competition heats up in the banking sector. Gradual consolidation in the sector and increasing capital requirements have intensified competition within the core of the private banking sector. This competitive core consists of a number of strong, fast growing private banks.

ADB’s strategy is to expand its customer base, especially in the retail and small and medium enterprise sector, and emphasise regional expansion to become one of the major private commercial banks in Azerbaijan. With the EBRD equity stake, it will now be in a better position to compete with the state-owned banks still dominating the sector.

As part of the deal, ADB has agreed to implement an institutional building plan and business plan agreed with the EBRD. One element of this will involve strengthening the corporate governance structure of ADB, which will help set standards that can be applied by other banks. Another element targets efficiency enhancements, allowing faster transfer of skills and improved commercial performance.

The institutional building plan will be implemented through advisory services financed with technical co-operation funds from the early transition countries multi-donor fund.

ADB has been a client of the EBRD since 1998. It is involved in the bank’s Trade Facilitation Programme and Multi-Bank Framework for Azerbaijan with credit lines for small and medium-sized enterprises. ADB is also receiving technical cooperation to support the development of sustainable SME finance.