Consumer lending in Azerbaijan Playing with fire or a risk-free bet?

Over the past decade, Azerbaijan has introduced a series of reforms aimed at strengthening the legislative framework and prudential regulations to optimise the banking sector’s operations. These measures, led by the Central Bank of Azerbaijan (CBA), were designed to enhance oversight and rules governing consumer lending. The reforms became particularly urgent following the 2014–2015 oil market crash, which caused a sharp devaluation of the manat and triggered a banking payment crisis.

Since then, these reforms have significantly improved the resilience of domestic banks. However, in the first ten months of this year, the volume of non-performing loans rose by nearly 14%, while consumer lending continues to expand, now accounting for almost 60% of banks’ portfolios.

One of the main objectives of Azerbaijan’s Socio-Economic Development Strategy for 2022–2026 is to strengthen the non-oil economy and raise the contribution of small and medium-sized enterprises (SMEs) to 35% of the country’s GDP. To achieve this goal, new preferential financial instruments are planned, with the banking sector playing a central role in channelling capital into the real economy.

However, the level of financial penetration by private credit institutions in Azerbaijan remains limited. In recent years, private banks have provided no more than 40% of financing for the non-oil real economy, while the remaining 60% comes from direct state budget allocations, state-owned banks, and government funds.

According to recently published statistics from the CBA, over the first ten months of this year, lending by private banks increased by 7.5%, reaching more than 21.842 billion manats ($12.85 billion). This marks a strong indicator of expanding activity by commercial banks in the loan market. For comparison, during the same period, state-owned banks issued loans worth approximately 7.561 billion manats ($4.45 billion) — almost three times less than private institutions — with slightly lower growth of 5.7%. Meanwhile, lending in the non-bank credit organisation (NBCO) segment declined by 2.5%, amounting to around 1.765 billion manats ($1.04 billion).

However, as the saying goes, “the devil is in the details.” A closer look at loan distribution by economic sector reveals that the lion’s share — 59.6% of the total credit portfolio — consists of consumer loans to households, exceeding 18.583 billion manats ($10.93 billion), with significant growth of 9.1%. By comparison, in the first ten months of 2023, consumer loans accounted for no more than 30% of the total credit portfolio.

A significant portion of the “credit pie” was allocated to real estate operations, including mortgages, amounting to 4.626 billion manats ($2.72 billion, 14.8% of the portfolio), as well as to trade and the services sector — nearly 4.223 billion manats ($2.48 billion, 13.5% of the portfolio). The construction sector received around 1.832 billion manats ($1.08 billion, 5.9%), while transport and communications were allocated 2.124 billion manats ($1.25 billion, 6.8% of the total credit portfolio).

In contrast, strategically important sectors such as agriculture and industry received only a minimal share of overall bank lending. During the reporting period, loans to the agriculture, forestry, and fisheries sector amounted to 571.39 million manats ($336 million, 1.8% of the portfolio), while the industrial and manufacturing sector received somewhat more — about 1.693 billion manats ($996 million, 5.4% of the total portfolio).

The figures clearly indicate that Azerbaijani banks remain insufficiently engaged in providing loan capital to the economy’s productive sectors. Several factors contribute to this situation. Despite periods of high liquidity — particularly during the pandemic years of 2020–2021 and the 2023 recession — domestic banks often cannot offer the low-interest, long-term loans that are crucial for industry and agriculture. Excessive liquidity is not always beneficial, as idle funds held by banks generate little or no income.

Unlike fast-turnover sectors such as trade and services, the conditions imposed by commercial banks — including collateral requirements, credit insurance, high interest rates, and commissions — are often too burdensome for industrial entrepreneurs. Combined with relatively high deposit rates and the absence of substantial domestic sources of “cheap” capital, such as mutual or pension funds, domestic banks simply lack the capacity to reduce loan margins.

Under these circumstances, the main outlet for commercial banks with high liquidity remains the household segment, which inevitably drives the continued growth of consumer lending.

What risks are associated with the excessive growth of consumer lending? The answer is clear: history provides a warning. A decade ago, Azerbaijan — like almost all oil-producing countries — was hit hard by the 2014–2016 energy crisis. The manat suffered a more than twofold devaluation, triggering mass loan defaults. Over the following years, the number of banks in Azerbaijan fell from 45 to 25.

In the period leading up to the crisis, the domestic market had experienced a consumer lending boom. Many local banks, in a shortsighted bid to expand their customer base, simplified access to unsecured loans, extending credit to as many household borrowers as possible. This, in turn, significantly increased systemic risk and contributed to the severity of the crisis.

This negative experience was carefully analysed, and in the years that followed, the Central Bank and the Ministry of Finance carried out a comprehensive cleanup of the financial market. Reforms were introduced to strengthen oversight of the banking sector. In particular, mechanisms for protecting depositors’ funds were established, prudential regulations were tightened, lending conditions are now strictly monitored, a database of borrowers’ credit histories was created, deposit dollarisation was sharply reduced, and — most importantly — consumer loans are no longer tied to foreign currencies.

These reforms have continued in recent years. For instance, the regulator introduced changes to credit risk management, including expanded life insurance requirements for consumer loans, and strengthened oversight of lending-related risks.

Nevertheless, a certain level of risk remains. According to the Central Bank, the volume of overdue loans in Azerbaijan as of November 1 this year amounted to 544.8 million manats ($320 million), representing an increase of 21.3% since the beginning of the year and 13.55% year-on-year. Although the growth rate of non-performing loans is significant, overdue loans still account for only 1.7% of the total banking credit portfolio, indicating that the regulator maintains effective control over risks in this area.

More concerning, however, is highlighted in the CBA’s semi-annual Financial Stability Report: in the first half of this year, domestic banks wrote off 56.6 million manats ($33.3 million) of non-performing loans, with 61.1% of all write-offs attributed to consumer loans.

Over the past couple of years, household lending volumes have once again been rising. This growth has been supported by increases in nominal household incomes through several social programmes, which boosted pensions, benefits, and salaries. At the same time, strong demand for consumer loans has been driven by active banking policies, including preferential credit schemes and promotional card campaigns.

Overall, the high demand for consumer lending is a common phenomenon across the post-Soviet space, including Azerbaijan, with younger generations continuing to borrow despite relatively high interest rates.

For instance, in neighbouring Kazakhstan, high import dependence means that a consumer credit boom can accelerate inflation — as demand is directed toward imported goods, currency fluctuations directly impact prices. While restricting household lending is unrealistic, given that consumer demand accounts for about half of the country’s GDP, ignoring the risks of non-payment is equally dangerous.

In response, on November 24, 2025, Kazakhstan introduced updated consumer lending regulations aimed at improving financial discipline and preventing excessive indebtedness among borrowers with a history of overdue loans. Developed by the Agency for Regulation and Development of the Financial Market (ARRFM), these measures tighten debt-to-income requirements and prohibit unsecured loans for certain categories of borrowers.

Until recently, in Uzbekistan, the share of consumer and microloans also reached around 50%, while non-performing loans in the total banking portfolio remained at approximately 4%. According to Standard & Poor’s, strict regulatory measures introduced by the Central Bank of Uzbekistan in 2023 helped curb the rapid growth of retail lending, reducing its pace to 20% in 2024.

Azerbaijan will likely need to follow a similar path. As noted in April 2025 by Shahin Mahmudzade, Executive Director of the Central Bank of Azerbaijan, certain measures are being prepared, and new rules for regulating consumer lending are planned for implementation.