The initiative to develop a covered bond framework came from the National Bank of Azerbaijan (NBA), which invited the International Finance Corporation (IFC) to participate in the project. IFC, in cooperation with the International Bank for Reconstruction & Development, began working on the law in May.
According to Victor Mints, project manager of IFC’s Azerbaijan and Central Asia primary mortgage market development project, which focuses on improving housing finance frameworks in these areas, a draft covered bond law is already in place, and is being discussed by NBA officials and other specialists participating in the project.
“We are in the process of fine-tuning the draft law,” said Mints. “Once the draft meets the expectations of IFC and the NBA, the proposal will then go the different ministries for approval, and then to parliament.”
He was unable to give a timeframe for this process.
The Heydar Aliyev Square and the National Bank of Azerbaijan
Mints said that work on the draft covered bond law has gone slower than expected because of the financial crisis. “But it is underway,” he added. “The officials at the National Bank are interested in the project and find the time to work on it, but there other urgent matters to deal with.”
A challenge that many emerging countries encounter when developing a covered bond framework is that of balancing the interests of covered bond investors, who should have a priority claim over segregated assets, and depositors. In Azerbaijan, this issue was tackled head-on.
“Either you resolve this tension, or you don’t do the legislation,” said Mints. “We made this very clear from the very beginning in our talks with the National Bank, and will continue to do so when we start discussions with other institutions.”
According to Mints, the covered bond proposal was not modelled on any particular existing covered bond legal framework, but, he said, “we made best efforts to make the law correspond with existing best practice in developed countries”.
To this end, the IFC invited specialists from the World Bank and from the National Opinion Research Center of University of Chicago to work on the law project. “In addition to that we have consulted specialists from the European Cover Bond Council to verify if the law meets the best international standards,” said Mints.
As well as preparing a covered bond law, the IFC is also trying to improve other areas of mortgage lending in Azerbaijan.
“Low appraisal quality is a very serious problem,” said Mints. “We are very concerned that the appraisal quality does not correspond to existing international standards. So in parallel to working on the mortgage bond law the project has conducted several initiatives aimed at improving the quality of real estate appraisals in the country.”
One of the initiatives was to put in place a certification system.
The mortgage market in Azerbaijan is still in the early stages of development. The Azerbaijan Mortgage Fund, a government sponsored secondary mortgage facility, used to be the major source of funds for mortgage lending, but has sharply reduced its participation in the market since mid-2007.
In addition, credit lines provided by foreign investors that domestic banks used to rely on have dried up. According to the European Bank for Reconstruction & Development, long term financing is difficult to obtain while demand for housing is surging. “As a result, demand for mortgages is exceeding the ability of banks to provide financing,” said the EBRD.
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