Azerbaijan modernizes microfinance through digitalization Adopting innovations

In recent years, the key efforts of Azerbaijan's Ministry of Economy and Central Bank (CBA) have prioritized expanding lending to small businesses and facilitating access to preferential loans for entrepreneurs, especially in regional areas. Non-bank credit organizations (NBCOs) have played a crucial role in this effort, showing notable profit growth. The regulator is now focusing on broadening NBCOs’ access to new financial instruments and fully digitising operations, while also updating prudential regulatory standards in this sector. The prospects for the development of the sector were discussed at the recent Innovative Solutions for Sustainable Microfinance conference in Baku.

Having overcome the negative impact of the 2014–2017 energy crisis and the business downturn during the COVID-19 pandemic, Azerbaijan’s microfinance sector has achieved steady growth in recent years. Last year, the country’s 54 non-bank credit organizations (NBCOs) reported nearly threefold profitability growth, driven by rising interest income from their expanding loan portfolios and improved operational efficiency among small credit institutions. In the same period, NBCOs' loan portfolios grew by 25%, while return on assets (ROA) and return on equity (ROE) doubled compared to the previous year, reaching 10% and 24% respectively. This positive trend has largely continued into the current year, with loans to small businesses increasing by 33%. As of October 1, 2024, NBCOs' microcredit portfolios were valued at 630 million manats ($370 million).

"The assets of domestic non-bank credit organizations (NBCOs) are projected to double by the end of next year, exceeding 1 billion manats ($588 million). The NBCO branch network has also expanded, now totalling 302 locations, while the number of employees has reached 3,500, and the client base exceeds 700,000 borrowers," announced Khayyam Ismayilov, head of the Credit Institutions Supervision Department at the Central Bank of Azerbaijan (CBA), speaking at the recent Innovative Solutions for Sustainable Microfinance conference.

This positive outlook for the sector is not solely due to favourable market conditions in recent years, but also to the concerted efforts of the Central Bank, the Azerbaijan Microfinance Association (AMFA), and the Small and Medium Business Development Agency (KOBİA). These entities have aimed to expand microcrediting and improve access to financial services for small and medium-sized businesses (SMEs) and individual entrepreneurs. This aligns with the government’s strategic goal, as small and micro-businesses account for approximately 97% of all registered taxpayers in the country and provide employment for nearly half of Azerbaijan’s working population.

In this context, a key task identified by the CBA and the Ministry of Economy is the reform of the microcredit market to enhance the competitiveness of its participants, diversify financial instruments, and encourage the introduction of new products and services that simplify entrepreneurs' access to loan capital. "The Central Bank has developed new credit risk management regulations, with one of the top priorities being the strengthening of the institutional capacity of microfinance organizations. These regulations have been discussed with the Azerbaijan Microfinance Association (AMFA) and market participants, and feedback has been received. The new rules are expected to be adopted soon," announced CBA Director General Toghrul Aliyev during the forum.

He added, "work is underway to update prudential regulations, strengthen corporate governance requirements, improve outsourcing standards, and enhance external audit requirements for non-bank credit organizations. Additionally, new initiatives are being implemented to protect the rights of financial service consumers, aimed at promoting inclusivity and improving risk management in microfinance organizations."

As part of the Financial Sector Development Strategy for 2024–2026, Azerbaijan plans to establish a new microfinance model. Drawing on international best practices, this model will develop effective legal and regulatory mechanisms, diversify funding sources, and offer additional products and services to boost the competitiveness of the entire sector. Notably, upcoming legislative initiatives by the Central Bank of Azerbaijan (CBA) will allow non-bank credit organizations (NBCOs) to facilitate money transfers and currency exchanges without requiring clients to open accounts. Additionally, based on global experience, the general conditions and regulatory mechanisms for online lending in the microcredit sector will be outlined.

The CBA's broader policy of expanding the use of alternative monetary tools—including the introduction of the OpenBanking platform to promote widespread fintech solutions, and enhancing access to various payment systems and e-platforms—will have a positive impact on the operations of NBCOs as well.

Among other measures, new requirements for information security in the microfinance sector have also been established. "The Central Bank places special emphasis on the application of digital technologies, including in the microfinance sector. We pay close attention to ensuring information security and effectively managing cybersecurity challenges," noted Toghrul Aliyev. In this regard, the CBA's strategy includes a dedicated action plan for digital financial initiatives. This plan encompasses specific regulations, open banking, digital identification, and cybersecurity initiatives aimed at strengthening the sector's resilience and safeguarding its operations.

The implementation of innovations and the digitalization of the microfinance sector are enhancing the quality, scale, and efficiency of financial services, fully supported by the Azerbaijan Microfinance Association (AMFA), noted AMFA Chairman Jalal Aliyev during the conference. "The expansion of technological capabilities has elevated the relationship between financial institutions and their clients to a new level," said Aliyev. He added, "The increased use of the internet and mobile communication has opened up new opportunities for delivering financial services through alternative channels. Social networks, with their broad reach, now provide platforms that allow financial service consumers to directly access loans."

According to Mammad Musayev, President of the National Confederation of Entrepreneurs (Employers) Organizations of Azerbaijan, there is a need for the widespread adoption of alternative financial instruments in the country. "Factoring could become a valuable tool for non-bank credit organizations (NBCOs) in the future, as it can facilitate access to financial resources and optimize capitalization opportunities for small and medium-sized enterprises," he stated. Another key goal for the Central Bank of Azerbaijan (CBA) and AMFA is to meet the liquidity needs of NBCOs with low interest rates, primarily in the national currency, as this is crucial for sustainably addressing the growing market demand for loan resources from SMEs.

Overall, conference participants agreed that sustained market demand for small loans, regulatory reforms, the expansion of financial instruments, and additional support for the microfinance sector from regulators will contribute to further improvement in industry performance.