In his interview to Armenian News - NEWS.am, IFC Regional Manager on South Caucasus Thomas Lubeck talks about current and completed projects focused on SMEs, energy efficiency and advisory services to banks implemented by IFC in Armenia in the financial year that ended on June 30, 2012.

In January you signed an on-lending agreement with ACBA Credit Agricole Bank, targeted at SMEs. Do you think access to credit for SMEs in Armenia is adequate? 

If you look at the structure of the Armenian economy, you will see that the vast majority of employment comes from the SME and microfinance sector. It is an important sector for IFC to be engaged in through banks. There is definitely a competitive situation in the Armenian banking system, but the credit penetration rate is still very low - it remains a bit above 30% of GDP, which is very low compared to other European countries, where it is on average about twice as high.

Do you think banks are inclined to develop standalone lending projects to SMEs, without assistance of IFIs?

In fact, it is quite an attractive sector for Armenian banks. With technical assistance and advisory services provided by IFC, ACBA Credit Agricole, Ameriabank, and Inecobank are actively working to engage in microfinance. On the one hand, the size of the loan is smaller in this case, but the advantage is that banks are setting up competitive interest rates and searching SME clients for deposits and additional banking services.

What is the main ideology behind your energy efficiency and renewable energy projects in Armenia?

There are a couple of things we have been doing differently. We have recently done two transactions which were new for us and the market as well. IFC provided $15 million financing to HSBC Bank Armenia to help the bank support sustainable energy projects and provide loans to small and medium enterprises interested in investing in energy efficient technologies, promoting the efficient use of resources. IFC’s funding helps Byblos Bank Armenia increase access to housing finance and supports Armenia’s first residential energy-efficiency lending packages offered by a local bank helping save power and reduce greenhouse gas emissions. As a result, an individual can take a loan to replace old windows with new ones with better insulation or renovate the entire house, making it more energy efficient, reducing gas and electricity costs.

Energy saving is extremely important for Armenia and Georgia as well. A large portion of energy sources are imported in the country. So if investments are made to increase energy efficiency and decrease reliance on imports, this is going to be good for the country. Georgia is paying full international prices for gas, which is expensive. So anything they can invest in energy efficiency and efficiency of gas in particular, is going to save them a lot of money. At the end of the day, it is really a commercial question: do you want to pay more or less? Of course, there is also the broader consideration of the environment. Fewer emissions of greenhouse gas are better for everybody.

As for renewable energy, EBRD has been active in Armenia, as well as IFC. In 2009 we issued a $15 million loan to Ameriabank for on-lending to small HPP construction, with the same ultimate goal: doing something that is ecologically clean and improving energy security for Armenia.

There are a couple of areas where the IFIs can help the local banks: on-lending is one instrument. The tenure of the loan is one of the most important factors in determining whether the loan is affordable. Many people think that it's mainly the interest rate, but this is not true. It is actually the length of the loan that answers the question of affordability. The second area where the IFIs can help is very specific technical assistance to design products. Sometimes it is not only the banks that cannot decide on the type of the product, but even the clients, who don't always know how to recalculate energy spending in order to save costs. 

What were the main fields of your advisory services to banks?

Firstly, we focused on risk management practices to make sure that the currency exchange rates, as well as credit risks, will be properly managed. The second area of IFC’s involvement is advisory services for designing energy efficiency and renewable energy projects.

Do you think a risk of currency mismatch is present in the banking system?

Today a large amount of deposits in the country are currency denominated. If you look back, Armenia was actually quite advanced on the level of the penetration of the dram, and I think the peak was around 50% of total country deposits in late 2008, before the depreciation of the dram. Now it stands at around 30%.

The banks cannot do much in this regard as incoming deposits can be saved in any currency and the banks have the liability to lend it in the same currencies.  The advisory services IFC provides to the banks focus on careful underwriting of loans to make sure that the borrower has an income cushion in hard currency to repay the loan comfortably, even with some fluctuations in the currency. But, truly, this is not a standing risk.

Do you plan to increase engagement with larger businesses?
 
IFC is open for business across all the sectors in Armenia. We work with the banks and SMEs because these are the areas where we see significant growth prospects. Besides, we also work in the real estate market, with Elite Group, in order to help complete the construction of a business center in Yerevan. We are also partnering with Lydian International because we believe mining is a great export opportunity for Armenia. IFC will continue working with the banks as banks are an ideal platform for finding the right candidates and distributing the lending.

One of your recent projects is Food Safety. Have you chosen this because of challenges Armenian food exporters face? Has Armenia done less in improving food safety related regulation than other Eastern European countries?

We thought very carefully about this project before starting. We found that there is a very good fresh food production in Armenia, specifically in food processing and fish farming. Therefore we decided to increase the capacity of the local producers to export to the EU, in addition to large exports going to Russia. Improvement of food safety standards is as important for international export as it is for local consumers.

In regards to food safety, countries in the region are at different stages of development. In Armenia IFC launched the project last year, in Georgia the project was launched a year before and the same project was implemented by IFC in Ukraine before that. Harmonization of standards is just an approach which we believe will help local food companies and producers meet international standards.

Thank you
By Aram Gareginyan