“A comprehensive definition of this concept must

good financial plan is a road map that shows us exactly how the choices we
make today will affect our future” says Alexa von Tobel, CEO of LearnVest.
However, how to make a good financial plan and what are the requirements?
First of all, common knowledge of finance, financial literacy, is the
essential part. Financial literacy is the understanding of different
financial activities, tools and institutions and it is on personal level
which means it focuses on each person’s ability to finance his/her life
efficiently. Roughly, it is about managing one’s money, and if we consider
that money is the ultimate medium of exchange, financial literacy become more
important for every society. Yet, in Azerbaijan, the importance of this topic
is not comprehended fully and still there are some misperceptions that only
big “players” can use this knowledge. This attitude of Azerbaijani citizens
creates huge drawbacks for themselves in both everyday life and in
competitive market environment. In addition, it shapes image of Azerbaijani
market structure and partially education system negatively in the minds of
foreigners. As financial literacy affects the life of individuals and destiny
of the small entrepreneurships, Azerbaijan government tries to increase it
through Central Bank, Ministry of Economics and Ministry of Taxes; however,
there is also other factors influencing this issue. To determine if
Azerbaijan Republic suffers from financial illiteracy, the comprehensive
definition of this concept must be provided. Organization for Economic
Co-operation and Development (OECD) define financial illiteracy as “a
combination of awareness, knowledge, skill, attitude and behavior necessary
to make sound financial decisions and ultimately achieve individual financial
wellbeing”. According to this definition, financial knowledge and financial
literacy has a difference; in addition to knowledge, financial literacy
requires people act based on their knowledge and adopt to the financial
situation to reach economic welfare, too. This financial awareness covers
simple but important topics such as compound interest, time value of money,
behavior of the money or interest rates and etc. These concepts are
essentials of developing world and not knowing them would be hazardous to
person’s future. For example, knowing how to estimate the risk of taking
loan, opportunity cost of not investing money to the bank or other financial
institutions, influence of inflation to the value of money and interest rates
can save people millions of manats. Unfortunately, in Azerbaijan, extensive
research on financial literacy by government agencies has not been done yet
to confess the existence of it with confidence; however, results from the
world statistics are not satisfactory. According to the Forbes, survey done
by the S Global FinLit reveals the fact that “just one third of the
world population is financially literate”. Most literate countries are the
Northern Europe countries (Norway, Sweden and Denmark) with the literacy of
71%; United States is in the 14th place in the list by 57%, while Azerbaijan
is in the 66th place with 36%. Survey was done in 140 countries and 140th
country is Yemen with 13% literacy; Azerbaijan has the highest literacy among
the Southern Caucasus countries (Armenia 18%, Georgia 30%). Still, 36% is not
enough to reach and maintain healthy and efficient financial environment. The
impact of the financial illiteracy on the individual level is not the only
hazard of it, this issue influences the economy of the whole country.
Understanding why this impact happens, close look to the economic system of
Azerbaijan is required. According to the criteria of small, medium and big
entrepreneurship adopted by Cabinet of Ministers in 2015 June, any entity
with the annual revenue less than two hundred thousand manat (200,000) and
the number of workers less than 25 or 25 is considered as small sized
business. As reported by the Ministry of Economics, based on the stated
criteria, in 2016 July, 99.2% of the operating businesses are small; the
number of small businesses is significantly higher than others. These
businesses are mainly in trade, construction and agriculture industry; more
than half of them, 50.7%, are situated in/around Baku, 10% in Aran, 7.8% in
Absheron. However, as can be predicted, the share of the small ownerships in
all other important factors of is low; it covers 4% of the GDP, 6.3% of the
average number of workers (annually) and 9.3% of the production in 2016,
according to State Statistics Committee. These number show that there is a
potential growth opportunity for small enterprises in GDP and employment, but
some factors prevent this from happening. Some of them arise from current
economic hardships such as devaluation; however, financial illiteracy also
has a huge role in this matter. As medium of exchange, all entrepreneurs use
money in their businesses; so, understanding the behavior of money is
essential. Different from individuals, entities require more complex
financial knowledge and mistakes done while managing business result in more
devastating outcomes. If a person does not have financial knowledge, it does
not necessarily mean that he/she cannot start and run business. Nowadays in
Azerbaijan, opening a business became easier by the help of Electronic
Governmental Portal which was launched after the decree “On the approval of
State Program (E-Azerbaijan) for the development of communication and
information technologies in Azerbaijan Republic in 2010-2012”. This portal
provides electronic services to all citizens (legal and physical persons;
foreign citizens) living in the Republic of Azerbaijan; it eliminates the
distance between government agencies and citizens, facilitates process and
ensures the transparency. Small business owners also benefit from this system
as it offers all services needed by them. For example, rather than
registering business entity in Regional/Baku Tax Offices or ASAN Services,
owners simply send necessary documents electronically to E-registration and can
get their business registered in 3 days after applying. According to the
Ministry of Taxes, till 2015, more than 82,000 (72.2% of overall
registrations) small entrepreneurships got registered through E-registration.
Thus, as can be understood, Azerbaijan Republic is trying to create favorable
environment for entrepreneurship. However, these entities created without
financial knowledge will not be efficient in short-run and not survive in
competitive market in the long-run. In addition, in small ownerships or in
other words sole-proprietorships, personal finance and business finance do
not differ and owners rely on their personal resources; which makes financial
literacy more important. In Azerbaijan, by looking certain reports and
statistics, the symptoms of financial illiteracy can be noticed clearly.
First of them is current state of the stock market; there are only few
issuers and buyers in the Azerbaijan stock market, both in primary and
secondary; overall condition of stock market is not satisfactory. Till 2016
in bond market of Azerbaijan, there were only institutional players and
issued bonds were not public until Socar issued the first public bonds in
Azerbaijan Republic. The amount of issue was one hundred million US dollar
with 5-year maturity 5% interest rate; as Socar is one of the largest and
reliable government organization, demand is also high for these bonds. High
demand represents the fact that some part of the people of Azerbaijan
partially know what is bond and what is the advantages of buying it. However,
unfortunately even high demand for bonds does not encourage other
organizations to be active in bond market. This inactivity has one more
reason; as stated Socar is government organization and very likely not to
default, and it is in oil industry which has the highest share on GDP of
Azerbaijan. It is fact that bond market plays significant role in economy of
any country, yet, lack of it does not have huge drawbacks for
small-entrepreneurship. Second and the main symptom of financial illiteracy
in Azerbaijan is the kinds of the financial institutions. Azerbaijan only has
some of them, commercial banks (depository institution), insurance companies
(contractual institution), finance companies (investment intermediary) and a
private equity company which is owned by Pasha Bank. Other than these,
Azerbaijan does not have any financial institutions. The main reason for this
is the financial illiteracy of the citizens, they prefer standard methods
while managing their money. Thus, financial organizations do not get any
incentive to bring new kinds of institutions to Azerbaijan because they know
that there will not be high demand. People’s trust in the Central Bank and
Manat also affect this issue. After 2015, devaluation of manat, people’s
trust in manat and CB was broken. This can be seen from the report posted by
CB in 2017 shows the great gap between M2 and M3 money aggregate. As M3 money
aggregate covers investments in foreign currencies, it can be understood that
residents of Azerbaijan (both persons and companies) prefer to invest in
foreign currencies, apparently in dollar. This issue also creates hardships
for small entrepreneurships because when they need to take a loan or invest
their excess money, other than interest rate and inflation rate, they must
also consider exchange rates of dollar which make this process very hard and
risky. Government must increase the number of regulations on commercial banks
(by punishments such as canceling the licenses of banks or rewards such as
tax subsidies) to increase the trust to CB. Commercial banks are required to
post their annual reports in their webpages and make them public.
Unfortunately, after the devaluation some banks still do not have these
reports posted and CB must punish this kind of behaviors to gain trust again.
Republic of Azerbaijan does its best to increase the financial literacy
together with efficiency of small entrepreneurships. First of all, Central
Bank has special projects organized by Research and Development Department of
CB whose aim is increasing financial literacy among school students, business
owners and broad public. This project has been started in 2010 and various
activities have been done till then. As stated in webpage of CB, the main audience
of this projects is school students which are going to be parents and
business owners of future. This approach is very helpful for the long run
solution, but is not enough. Specialists of CB visits schools, hold seminars
and inform students on this topic. It also suggests commercial banks to do
so, because increasing financial literacy would benefit commercial banks
most. In countries like UK or US, students start to cover microeconomics’ and
macroeconomics’ topics in school, which make them financially literate by the
time they graduate from school. In Azerbaijan, these topics are covered in
the first year of university education, which is not powerful educational
strategy. Because, according to the reports of State Statistics Committee,
roughly only 41% of students get chance to study in universities; which means
only 41% of students get financial literacy. Central Bank or Ministry of
Economics has to work with Ministry of Education, and add some financial
courses to the curriculum. Financial Markets Supervision Chamber also make
some efforts to raise awareness on fraudulent activities and call
entrepreneurships to be more careful. Ministry of Taxes is also active in
this issue and works hard to educate people on specific issues such as taxation
rules, how to calculate simplified tax system and many other tax related
topics. This ministry also tried to work with Ministry of Education and add
special course which mixed simple taxation rules and finance issues to the
fairytales and offered this books to some elementary schools. Probably this
system failed that it did not last more than 1 year; however, the attempt to
do such projects must continue. In addition to educating people, government
offers subsidies to agriculture industries to increase the number of them
(people respond to incentives). These subsidies encourage small
entrepreneurships to enter the industry, and tax department supports them. As
a result, efficiency and profitability of agriculture industry increase
together with its share on GDP. Ministry of Economy National Fund for
Entrepreneurship Support offers low interest loans from government budget to
all size of businesses to encourage them; considering inflation rate, this
interest rates (briefly, real interest rate) are very low. In conclusion,
financial illiteracy is the modern plague which is needed to be cured
immediately. According to the survey done by OECD, Azerbaijan is above the
average, which is the result of existing projects. However, these activities
are not enough for reaching efficient financial system and further projects
must done. References: Small and Medium Entrepreneurship in Azerbaijan;
Country Assessment. (2012). Center for Economic and Social Development
(CESD). Retrieved from http://cesd.az/new/wp-content/uploads/2011/05/CESD_Report-SMEs_Azerbaijan.pdf
Klepper, L., & Lusardi, A. (2014). Financial Literacy Around the World.
Sultanova, K. (2014, July 17). Maliyy? savad?m?z özümüz? yetirmi? Retrieved
from http://banco.az/az/news/maliyye-savadimiz-ozumuze-yetirmi Karimova, A.
(2015, June 22). Azerbaijan promoting SMEs. Retrieved from