Azerbaijan housing finance system STRATEGIC OVERVIEW

The Republic of Azerbaijan General introduction

Capital: Baku Bordering countries: Turkey, Russia, Iran, Georgia. Armenia, Kazakhstan and Turkmenistan Area: 86,600 km 2 Population: GDP in 2010: $52 bln, growth 5% Currency: Azeri Manat Rate AZN: 1 USD EUR 1.12 Strategic reserve: $34,2 bln Country rating: Fitch BBB -

Main macroeconomic indicators

Housing stock in Azerbaijan The housing stock in Azerbaijan dated later 2010 is 111,6 mln.m2 The dwelling space per capita is 12,8 m 2

Average prices for residential housing in Baku, ($/m)

Azerbaijan Mortgage Fund The AMF was established under the Central Bank of Azerbaijan (CBA) by decree of the President of The Republic of Azerbaijan about Establishing mortgage loans system in Azerbaijan numbered 299, dated 16 September 2005 AMF: Only state entity established for the purpose of refinancing mortgage loans; Azerbaijan Mortgage Fund is a state institution, legal entity; Mortgage loans is offering to borrowers by authorized credit organizations selected by the CBA; Main functions of AMF are: Refinancing mortgage loans originated by pre-approved banks; Assigning requirements for refinanced mortgage loans; İssue mortgage bonds in order to attract financial resources; Managing of financial risk in order to provide its activity and stability; Within its authorities makes measures to provide liquidity of mortgage lending field and attracts financial resources.

AMF Mission The main purpose of AMF is to provide mechanisms for housing finance through long-term mortgage loans, as well as to facilitate attraction of local and foreign financial resources Presidential Decree N339 Baku, December 22, 2005

Development stages Creating of legislation base Establishing of AMF under the CBA Institutionalization and standardization process Granting the mortgage loan and forming of the market Transition to self-financing mechanism and issuing of cover bonds

Financial sources Allocation from State budget; Earnings from activity including payments on loan principal and interest; Funds raised from emission of AMFs securities and its placement; Foreign loans, technical assistance, grants, etc. to AMF Other sources stipulated by legislation.

Structure of AMF and its activity Structure: AMF consists of 11 divisions and one branch Staff number 57 Board of Directors - Executive Board of Central Bank of the Azerbaijan Republic Executive body- Executive director and two deputies of Executive director Activity: Mortgage loans refinanced by AMF are granted by 24 Banks pre-approved by NBA. Mortgage objects are appraised by 12 appraisal companies selected by the AMF Mortgage objects are insured by 14 insurance companies selected by the AMF

Azerbaijan Mortgage Fund (refinancing scheme) Azerbaijan Mortgage Fund (only operator in second market) Accredited credit organizations (banks) Borrowers Mortgage loans Refinancing Allocations from state budget Cover bonds of AMF

AMF products Standard creditsSosial credits PurposePurchasing house or flat BorrowerCitizen of Azerbaijan Republic Privileged cateqories (young families amd military personel) Credit amount: AZN ( USD) AZN ( USD) Currency:AZN İnterst rate8%4% Term25 years30 years Insurance:Life and property LTV:80%85% Payment method:Monthly annuity payment

Mortgage loans by authorized credit organizations, mln.AZN

The dynamics of financial resources for mortgage loans, mln. AZN Bond detailsCoveredUncoveredCovered Term7 years10 years Coupon rate3%3.25%3% Bonds in mln.USD68,7593,7547,5

AMFs assets, mln. AZN Total assets : ,11 AZN ,14 USD

AMFs quotation rate = 4% 1% AMFs spread 4% Margin ACOs margin 4% AMFs quotation rate 8% 3% Cost of funding Loan interest rate

Strengths of housing finance system Existence of strong standardization The control of Central Bank over the system No default cases in mortgage portfolio Small portion of mortgage loans comparison with demand AMFs long-term foreign and local currency rating to 'BBB- equals to country ratings. Development perspectives of housing finance market

Results of market research About 250 thousand family plans to improve their house conditions; This demand composes 14 mln. m 2 ; The potential capacity of mortgage loans market is 8,5 bln. AZN; The volume of demand, which meet AMFs requirements is 850 mln. AZN. Housing demand Lower dwelling space per capita - 12,8 m2 Existence of 1 mln. refugees and IDPs; Increasing of nominal incomes of population; Insufficient volume of house construction. Reasons Demand exceeds offer 6 times

Main problems and difficulties Registration of property and mortgage rights, problems related to foreclosure process; Insufficient legislation on cover bonds (mortgage bonds); Enlihgtment problems related to independent appraisals Low development level of capital markets; Absence of potential investors and long term resources in internal market; Limited conditions and access opportunities to foreign markets Absence of AMFs and banks relevant experience

Future plans: To develop and apply new products (Repair mortgage, private house construction mortgage, commercial mortgages, etc.) Development of legal framework (Law on mortgage bonds, Law on Housing Construction Savings and etc.) Creating of mortgage quarantee mechanizm for mortgage loans Shift to market conditions in order to provide sustainability of mortgage system Issuing of mortgage bonds Automation of business processes and to apply e-mortgage Improve mortgage requirements and standards

Tel: + (99412) /02/03 Faks: + (99412) Azerbaijan Mortgage Fund under the Central Bank of Azerbaijan THANK YOU!