Azerbaijan accelerates financial sector digitalization OpenBanking platform to boost FinTech growth

Over the past five years, Azerbaijan has consistently expanded its cashless payment infrastructure, making significant progress in the digitization of banking services and the overall payment operating environment. To accelerate these processes, in January of 2024, the Board of the Central Bank of Azerbaijan (CBA) approved the "Financial Sector Development Strategy for 2024–2026."

This document outlines the implementation of corporate governance mechanisms within the domestic financial sector, strengthening transparency, and attracting FinTech companies as part of the plans to introduce an OpenBanking platform in the country. The achievements in implementing this new strategy and the promising plans for this track were highlighted at the 8th International Banking Forum (IBF 2024) that began on December 3 in Baku.

The new strategy of the Central Bank of Azerbaijan (CBA) is focused on expanding financial accessibility, increasing the coverage of industry services, and diversifying financial instruments, while also improving the supervisory system and managing network risks. However, its primary goal is to accelerate the digitalization of the financial market and liberalize the national payment system, creating a favourable environment for market participants and consumers.

Specifically, the strategy aims to utilize alternative monetary and credit instruments, including the implementation of an OpenBanking platform in the country. This will facilitate the widespread adoption of FinTech solutions and provide access to various international payment systems through the use of new digital platforms and tools.

The OpenBanking tools will provide payment systems and FinTech companies with access to banking data, while clients will gain more comprehensive information, enabling them to make transactions, open accounts, obtain loans, analyze their data, and optimize their credit load and tax burden. These tools will also simplify financial accounting and automate payment processes. With the implementation of Open API systems in banks (an ecosystem of various tools), all this information will be available through third-party developers' software interfaces, securely protected by blockchain technologies. As a result, banking clients will no longer need to rely on cumbersome apps or pay high banking fees, as more convenient and affordable solutions will be available. Clients will also be able to consolidate various information related to cards, accounts, loans, and deposits across one or multiple banks using a single software interface.

The prospects of implementing OpenBanking solutions in Azerbaijan, the digitalization of the operational environment, and the adoption of Environmental, Social, and Governance (ESG) standards became the central theme of most speeches at the 3-4 December IBF 2024 forum. The event, organized at the initiative of the Central Bank of Azerbaijan, with the support of the Azerbaijan Banks Association (ABA) and the Ministry of Digital Development and Transport, brought together nearly a hundred participants from the financial sector, including bank leaders, regulators, representatives from the FinTech industry, associations, and international financial institutions. In addition to the main eight panel sessions, this year’s forum also features a variety of supplementary activities, including meetings, webinars, workshops, lectures, contests, and more.

"Several banks in Azerbaijan are ready to implement OpenBanking mechanisms, and the rest will complete their preparations in the near future," stated Vusal Khalilov, Director General of the Central Bank of Azerbaijan, during his speech at IBF 2024. "The 'Open Banking' concept and the 'Open Finance' initiative are aimed at creating a transparent, inclusive, and efficient financial ecosystem, and this approach opens up new opportunities for banks, FinTech companies, and consumers. For banks, it means additional revenue sources, optimized services, and improved customer experience. FinTech companies will have the opportunity to collaborate with banks and leverage advanced financial solutions, while consumers will benefit from a wider choice, transparency, and access to secure services."

According to Khalilov, the digital transformation of the banking sector and its sustainable development are strategically important for Azerbaijan and are key components of the regulator's Financial Sector Development Strategy, which includes the implementation of risk-based supervision, the development of OpenBanking, and the growth of cashless payments.

"In particular, the transition to Risk-Based Supervision (RBS), requires the development of RegTech and SupTech solutions, as well as significant efforts in data management, not only for the Central Bank of Azerbaijan (CBA) but also in applying data management approaches for banks and other supervisory entities," emphasized the director general of the CBA.

According to him, in 2024, there was a 66% increase in cashless transactions using cards. At the same time, the new law on payment services and payment systems is enhancing market transparency and competitiveness, providing consumers with more convenient services. Currently, the CBA has licensed 14 electronic payment organizations, eight payment institutions, and one payment system operator.

"One of the key factors in ensuring sustainable and secure banking is the development of a competitive digital payment ecosystem: over the past three years, the volume of transactions processed through the national payment system (AZIPS, XÖHKS, and AÖS) has increased by 3.6 times, reaching 60.6 billion manats [$35.6 billion] in the first 10 months of this year," said Zakir Nuriyev, President of the Azerbaijan Banks Association (ABA).

According to him, in 2024, 63.8% of all cashless transactions in the country were conducted using payment cards. At the same time, Nuriyev believes that the focus remains on modernizing the infrastructure of the Instant Payment System, developing the Open Banking platform, and implementing a sandbox environment for innovative solutions.

Another key focus of the Central Bank of Azerbaijan's (CBA) strategy is the implementation of Environmental, Social, and Governance (ESG) criteria in the country’s financial system, which emphasizes corporate and social responsibility. This approach encourages companies and financial market participants to contribute to societal welfare, address climate change issues, and support environmental balance.

Banks that follow ESG criteria primarily focus on clients' efforts to reduce waste, preserve biodiversity, combat the effects of climate change, and more. To promote sustainable financing for "green" initiatives, Azerbaijan plans to create incentive mechanisms for banks and other market participants, including preferential loans for environmental protection projects.

"Azerbaijani banks need to develop strategies to support growth based on ESG standards and promote 'green' financing for sustainable banking," said Vusal Gasimli, Executive Director of the Center for Economic Reform Analysis and Communications (CERA), during IBF 2024. "The CBA's approved 'Green Taxonomy' is an important and timely step in achieving the strategic goals of sustainable development and the 'green' transition in the financial sector." This document defines types and subtypes of "green" activities across various sectors of the economy, establishes criteria for their technical classification, and covers 10 sectors.

Summarizing the first day of the International Banking Forum, Vusal Khalilov noted that the results of the financial sector development strategy through 2026 and its impact on the market will become evident in the near future. "Overall, we are nearing the end of the first year of the strategic period, and a detailed report will be provided based on the outcomes. We assess these results highly, as the efforts involve not only the CBA team but also all structures and participants in the financial market."