Ben Aris in Baku -

The ranks of chairs in the foyer of Bank of Baku are packed solid with customers waiting their turn to talk to a credit officer. A young man wants to borrow a few hundred manat to buy the latest model of mobile phone, while a middle-aged lady in a green and gold headscarf needs a bit more for vegetables which she resells in her local market. Express credit has arrived in Azerbaijan and Bank of Baku has a virtual monopoly over the business.

The consumer and unsecured express credit business more or less passed this country by during the credit boom of the last three years. Banks elsewhere in the region have fallen over themselves to offer money to pretty much anyone with a passport and a face in their rush to grab market share, but bankers in Baku have a natural aversion to high-risk lending. "Typically, banks like to make loans here that are backed by some form of collateral: a TV, a car or an apartment," says Jalal Gasimov, CEO of Bank of Baku. "Making loans for undetermined goods has not caught on."

Bank of Baku is a top-tier universal bank that has carved out a niche in the retail banking business. Today, corporate clients account for only a quarter of its loan portfolio, while white goods and car loans make up well over 50%. But when the crisis cut credit volumes in half, Gazimov decided to go on the offensive and proactively offer his best customers these loans.

Back in business

Gasimov is a slick show, erudite and fluent on the details of Azeri banking. The walls of his office are adorned with pictures of poppy fields painted by a local artist that give the room a summery feel. He moved from financial vice president of the petrol station operator Azpetrol to spend a year working for the international consultants McKinsey & Company, before the owners of Bank of Baku persuaded him to come and run their bank at the start of 2007.

The change of management had an almost immediate impact on the bank; after only a year on the job, Gazimov more than tripled the bank's profits to a peak of AZM10m ($12.5m) at the end of 2008, and they were still well above the 2006 levels a year later despite the crisis. "The profitability in 2009 could have been higher, but our goal last year was to improve the quality of the loan book and ensure the sustainability of the business, rather than simply to increase the profits," says Gasimov. "But even taking this into account, the bank could still double its profits compared to 2007."

Like most banks in Azerbaijan, last year was about reassembling the troops; Bank of Baku increased its capitalisation by reinvesting profits and built up a war chest of reserves in case the world's economy took another spill. But this year is about moving back on the offensive, spurred by the success of the bank's consumer loan programme.

Azeri retail banking is still in its nascent phase. Most big banks have taken the classic approach of launching debit cards on the back of their payroll business for large corporate clients. Despite the arrival of plastic, Azerbaijan remains a largely cash-based economy and queues still form in front of bank machines on payday as employees withdraw their entire salary as soon as it hits their accounts. But credit is slowly percolating into consumers' mentality. The crisis slowed the expansion of credit, but only slowed it. "We didn't stop lending for even one day throughout the crisis, but the problem was that demand fell by almost half as people stopped buying furniture and white goods when the real estate market got frozen. In order to prevent a decline in the loan portfolio, the bank has created and brought to the market a number of products innovative for this particular market, such as cash loans and express cards," says Gasimov.

With credit volumes tumbling, Gazimov decided to mine his large database of customers and go on the offensive. Over the course of the last six years, the bank has given small loans to between 300,000 and 400,000 people (from a population of about 8m), of which some 90,000 remain active clients. The bank went through this list of names and in February began to proactively offer unsecured cash loans to its 30,000 very best clients - people who had previously taken out loans and repaid them with no fuss.

Unsecured and generic consumer lending is a relatively radical strategy for an Azeri bank. While the competition in auto loans, white goods credit, SME and micro-finance is fierce, none of the other banks in the country has gone down the unsecured consumer lending road.

Still, this is not exactly sailing into uncharted waters; this model is well worn in markets like Russia and Ukraine. And it is not as risky as it looks, as the margins on these loans are typically high given the 60% annual percentage rate, which gives the lender a lot of room for mistakes. On the downside, while the total amount lent should quickly soar, the individual loans are small - typically a few hundred dollars at most - and so the administration costs on this type of lending are huge. Gazimov says the trick is getting your systems right - efficiency is key to profitability.

Bank of Baku's experiment has been a smash with the punters. Cash loans already account for 15% of the bank's total retail credit portfolio, while non-performing loans (NPLs) are a negligible 1-1.5% of the total extended. Indeed, the level of consumer bad debt is way below that of corporate borrowers at the moment.

NPLs will inevitably rise, but looking at the experience around the region the first wave of consumer lending usually nets the best borrowers. It is only once competition between banks to grab a share of the consumer lending pie heats up that the quality of the borrowers sinks dramatically. Bank of Baku is still very far away from this, as it currently holds a virtual monopoly on the business. "As we have almost no competition on the consumer finance sub-segment, there is no pressure to grow and grab market share, so this leaves us with more time to worry about the quality of our lending and the risk management," says Gasimov.