BAKU, Azerbaijan, November 24. Azerbaijan’s
financial system is entering a new era defined by digital
transformation, modern regulatory frameworks, and inclusive
financial policies. Amid these changes, Islamic banking, a
faith-based, interest-free financial model, is catching the eye not
just for its adherence to religious tenets but also for its sound
economic reasoning, risk-sharing strategies, and backing of the
real sector.
Once discussed theoretically, Islamic banking in Azerbaijan has
moved to practical implementation through legal frameworks,
research, and pilot initiatives. According to the “Financial Sector
Development Strategy for 2024-2026” approved by the Central Bank of
Azerbaijan (CBA), measures are underway to establish a functioning
Islamic banking system. Recent statements from the CBA,
international credit rating agencies, and experiences of regional
countries indicate that Azerbaijan is really putting its best foot
forward in embracing this new financial philosophy.
Why is the new financial model so relevant?
With established ecosystems in Malaysia, Indonesia, the United
Arab Emirates, Saudi Arabia, and Türkiye, Islamic banking is one of
the fastest-growing financial systems globally. The system is built
on principles of interest prohibition, risk-sharing, real-sector
financing, and financial equity. Its popularity stems not only from
compliance with Sharia principles but also from its potential to
foster stable and sustainable economic growth.
In Azerbaijan, this model is particularly relevant because a
significant segment of the population avoids interest-based loans,
and small and medium enterprises (SMEs) face financing challenges.
The country also provides favorable conditions for leadership in
Islamic finance. As a result, the banking sector is exploring new
income streams and less speculative opportunities, making Islamic
banking a real demand rather than a theoretical concept.
The CBA Approach: “Understanding Demand
First”
Taleh Kazımov, Chairman of the CBA, stressed that getting a
handle on demand is the name of the game before rolling out a
big-time model.
“To establish a broad model, we must first assess demand. This
is not a sector to implement hastily,” Kazımov said.
He added that the CBA’s “Islamic window” concept is designed
precisely for this purpose, allowing pilot interest-free operations
within conventional banks to train the sector and reveal the
market’s potential.
An initial assessment conducted in 2022 indicated that demand
for Islamic finance in Azerbaijan could reach approximately 300
million manat ($176.4 million), representing a minimal starting
point.
“If the system works properly, this market is expected to grow
exponentially,” Kazımov noted.
This statement underscores that Azerbaijan’s banking sector is
on the brink of a transformative new era. Global experience shows
that Islamic finance is far more than an alternative credit model;
it represents a completely different financial philosophy, one that
is more transparent, emphasises risk-sharing, and incorporates
elements of social responsibility.
Significant legislative reforms are
anticipated
Implementing Islamic banking in Azerbaijan entails creating a
new financial ecosystem, requiring updates to the legal
architecture of the banking sector. Since Islamic finance does not
rely on traditional interest, the current legal framework is
insufficient. Consequently, amendments across a broad spectrum,
from the Civil Code to the Tax Code, are necessary.
Rustam Tahirov, Director of the Financial Sector Sustainable
Development Department at the CBA, confirmed that these legal
changes would be submitted to the government by the end of 2025.
One key measure involves exempting Islamic finance operations from
value-added tax (VAT), which would make interest-free financial
models economically competitive.
Tahirov highlighted that the issue of VAT exemption is, in fact,
the cornerstone of the entire process. Unlike traditional credit,
Islamic finance often involves a two-step operation: the bank first
purchases an asset and then sells it to the client. Under current
legislation, these transactions face additional taxation, which
reduces the model’s economic appeal. Removing this burden would
allow Islamic banking to establish itself in Azerbaijan not merely
as a tool for ideological or religious purposes, but as a fully
competitive financial instrument.
What is particularly noteworthy is the government’s systematic
approach to this initiative. This demonstrates that Islamic finance
is not viewed as a temporary or localised project in Azerbaijan. On
the contrary, the state sees it as a strategic opportunity to
diversify the economy, create new investment platforms, and
strengthen financial stability.
The legislative package set to be presented by the end of 2025
could represent the most significant legal transformation in the
country’s financial system in recent years. If implemented
successfully, Azerbaijan could become a regional, and even broader,
exemplar for the development of Islamic finance.
Phased implementation from 2025: “Islamic windows” move
into practice
The system’s initial form, “Islamic windows” operating within
conventional banks, is no coincidence. Globally, this is the
standard starting point. This stage has three main objectives: to
introduce interest-free products to customers, to build
methodological and operational expertise within the banking sector,
and to measure real demand while creating a statistical
foundation.
World experience shows that central banks in countries like
Pakistan and Türkiye provide direct support for this preparatory
phase, ensuring the system is launched effectively and
sustainably.
Moody’s: “A positive credit effect for
Azerbaijan”
The international rating agency Moody’s highlights that the
introduction of Islamic banking will open new revenue streams for
banks.
“In particular, it will become easier to attract funds from
Islamic finance institutions, long-term and stable financing will
be possible through sukuk issuance, and the liquidity of the
banking sector will be strengthened,” the agency noted.
Moody’s also emphasised a striking point, noting that the
majority Muslim population in Azerbaijan indicates immense
potential, but regulatory gaps have so far prevented this potential
from being realised.
A new boost for small and medium-sized enterprises
(SMEs)
SMEs play a crucial role in Azerbaijan’s economy, contributing
significantly to both economic output and employment. However,
access to financing remains a challenge. Islamic finance’s
risk-sharing instruments could provide fairer and more transparent
financial opportunities, supporting the expansion of
entrepreneurship and contributing to economic diversification.
Observers note that Azerbaijan is treading carefully and playing
its cards right as it makes the leap into Islamic banking, which is
just the ticket. The country is advancing on three fronts:
assessing real demand (i.e., what products are needed?), updating
the legal framework (i.e. without which implementation is
impossible), and training the banking sector while ensuring a
gradual and controlled adaptation of processes.
This approach suggests that the transformation will be long-term
and sustainable. The goal is not just to introduce new products but
to establish a fully-fledged new financial philosophy in
Azerbaijan.
In conclusion, Islamic banking has the potential to become a
cornerstone of a new economic stage. With careful preparation and
successful implementation of “Islamic windows,” 2025-2026 could
mark the beginning of a transformative era in Azerbaijan’s
financial history.
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