A financial turnaround in Azerbaijan Empowering small and medium-sized enterprises

In recent years, Azerbaijan has undertaken a series of consistent reforms to improve access to financing for small and medium-sized enterprises (SMEs) operating in the country’s non-oil economy. A key milestone in this effort is the expansion of the microfinance market—most notably, the introduction of a new financial hedging instrument for non-bank credit institutions (NBCIs), set to launch in August. Developed by the Central Bank of Azerbaijan, this tool is expected to significantly boost opportunities for attracting foreign currency liquidity from abroad.

One of the central objectives of Azerbaijan’s Socio-Economic Development Strategy for 2022–2026 is to increase the contribution of SMEs to 35% of national GDP. The strategy also targets raising employment in the non-oil SME sector to 60% or higher. To meet these goals, the government plans to further improve the business environment by fostering a supportive ecosystem that includes effective tax policies, targeted incentives for private enterprise, and a broader range of preferential financial instruments tailored to SMEs.

In recent years, Azerbaijan’s Ministry of Economy and the Central Bank (CBA) have introduced a range of reforms to develop new financial instruments and incentives aimed at expanding bank loan programmes for SME projects in the real (non-oil) sector of the economy. Despite these efforts, financial penetration by private lending institutions remains relatively limited. Currently, private sector financing accounts for only about 40% of the country's total credit structure, while the remaining 60% is sourced from the state budget, as well as various state funds and state-owned banks.

An analysis of the combined loan portfolio of commercial banks and non-bank credit institutions (NBCIs)—which reached approximately 30.23 billion manats (about $17.4 billion) between January and June 2025—shows that consumer loans dominate, comprising 58.9% of the total. These loans, mostly issued to households, amounted to over 17.8 billion manats (around $10.5 billion), reflecting a 4.5% increase. A significant portion of lending also went to the trade and services sector, which received more than 4.2 billion manats (approximately $2.5 billion), or 13.9% of the total portfolio. Mortgage and real estate loans made up an even larger share—4.5 billion manats (roughly $2.65 billion), or 14.9% of the total. The construction sector received over 1.8 billion manats (around $1.06 billion), while loans to transport and communications totalled nearly 1.9 billion manats (approximately $1.1 billion), accounting for 6% and 6.3% of total lending, respectively.

In contrast, lending to the agricultural and industrial production sectors remains modest.
During the first half of 2025, loans to agriculture, forestry, and fisheries amounted to 565.4 million manats (approximately $332 million), while lending to the industrial and manufacturing sectors totalled just over 1.653 billion manats (around $970 million)—accounting for only 1.9% and 5.5% of total borrowings, respectively.

These figures highlight the limited involvement of the country’s credit sector in financing productive segments of the economy. Several factors contribute to this issue. Despite relatively high liquidity, many domestic banks struggle to provide the low-interest, long-term loans that industrial and agricultural businesses require to grow and innovate.

Compounding the problem are strict collateral and insurance requirements, along with high interest rates and service fees—barriers that often make borrowing unfeasible for entrepreneurs, especially those operating in the regions.

Moreover, from the perspective of commercial banks, financing small business ventures or micro-entrepreneurs—particularly in the risk-prone agricultural sector—is often seen as too uncertain and unprofitable to justify.

In recent years, Azerbaijan has undertaken sweeping reforms to align its banking sector with the country’s goals of industrial modernisation and expanded financing for small and medium-sized enterprises (SMEs). To this end, the government has introduced a range of financial instruments—including concessional lending, credit guarantee mechanisms, and interest rate subsidies—to ease access to capital and mitigate credit risks.

These measures are supported by a more flexible regulatory environment under the supervision of the CBA.

As of July 1, 2025, authorised banks operating through the Azerbaijan Mortgage and Credit Guarantee Fund (AMCGF) have issued guaranteed loans totalling 587.9 million manats (approx. $345 million) on preferential terms. These loans have been channelled into strategic sectors such as industrial production and processing, agriculture and food, construction, tourism and infrastructure, as well as machinery and equipment manufacturing.

Recently, Azerbaijan’s banking sector has become significantly more active in the microbusiness segment, with unsecured loans for micro-entrepreneurs now comprising 40% of banks’ loan portfolios. In the first quarter of 2025 alone, the total volume of loans issued to micro-entrepreneurs reached 3.072 billion manats (approximately $1.8 billion)—an increase of 394 million manats ($231 million), or 14.7%, compared to the same period in 2024.

This surge is largely driven by expanded administrative and legislative support for non-bank credit organisations (NBCOs). Since the pandemic, the network of microfinance institutions has grown substantially, now including 304 branches nationwide. Their client base—mainly individual entrepreneurs and small businesses—exceeds 700,000 borrowers.

By the end of 2024, NBCO assets had surpassed 1 billion manats (around $590 million), more than tripling since 2020 and rising 24% from 2023. Their loan portfolio grew by 35% last year, reaching 808 million manats (about $476 million).

According to the latest data from the Central Bank of Azerbaijan, NBCO assets stood at 963.4 million manats ($567 million) in the first half of 2025, marking a 12.8% year-on-year increase. Operating income rose by 26.2% to 218.2 million manats ($128 million), while the sector’s loan portfolio grew 6.5% during the same period.

Under the new Financial Sector Development Strategy for 2024–2026, the Central Bank of Azerbaijan (CBA), in collaboration with the Azerbaijan Microfinance Association (AMFA) and the Small and Medium Business Development Agency (KOBİA) under the Ministry of Economy, has set ambitious targets to significantly expand the microcredit sector. The strategy aims to grow the loan portfolio and simplify borrower interactions to enhance financial inclusion.

As part of these efforts, the CBA is developing regulatory frameworks and mechanisms to enable online lending within the microcredit sector. Plans are also in place to broaden the adoption of alternative monetary and credit instruments, including launching an Open Banking platform and integrating fintech solutions.

The regulator has updated prudential rules, strengthened corporate governance and external audit requirements, and improved outsourcing standards for NBCOs. Additionally, NBCOs have been authorised to conduct money transfers and currency exchange operations without the need for account opening, enhancing their service flexibility.

A key regulatory focus is meeting NBCOs’ demand for low-interest liquidity, especially in the national currency. Prior to the manat’s devaluation in 2015, most microcredit funding originated from foreign sources. However, over the past decade, the CBA’s policy has prioritised de-dollarising the financial market, which has led to a significant reduction in external donor support.

According to the CBA Strategic Framework for the Microfinance Model, as of the end of 2024, funds attracted from non-resident investors—around 42% of which are in foreign currency—accounted for 27.5% of total liabilities in the microfinance sector. However, Azerbaijan’s underdeveloped market for derivative financial instruments limits the ability of financial institutions to hedge foreign currency exposure. This constraint has hindered the growth of capitalisation for NBCOs relying on foreign funding.

To address these challenges, starting August 1, 2025, the CBA will roll out a three-year programme granting banks and NBCOs access to a new financial mechanism. This instrument will allow institutions to hedge (insure against risk) foreign currency funds attracted from abroad once converted into manats. The hedged funds will then be used to provide loans and leasing financing to micro, small, and medium-sized enterprises, family farms, and self-employed individuals.