Financial support for small businesses in Azerbaijan New perspectives and reforms

In recent years, Azerbaijan has been steadily implementing reforms to improve the business climate and strengthen support for small and medium-sized businesses (SMEs) in the non-oil sector of the economy. A key task in this direction is expanding entrepreneurs' access to preferential financing through state funds, as well as simplifying bank lending, developing the "green" loan sector, and promoting venture capital for startups. The future of optimizing lending for SMEs and microbusinesses was a central topic at the recent First National Financial Accessibility Forum held in Baku.

One of the key objectives of the "Azerbaijan’s Socio-Economic Development Strategy for 2022–2026" is to increase the share of production by small and medium-sized businesses (SMEs) to 35% of the country's GDP. Additionally, there are plans to raise the employment rate in the non-resource-based SME sector to 60%. To achieve these goals, the strategy aims to further optimize the business climate by creating an ecosystem with efficient fiscal regulation, subsidized loans, and other incentives for the private sector, and, importantly, developing new preferential financial instruments for the SME sector. These tasks are crucial, as the conditions set by commercial banks often prove to be burdensome for entrepreneurs, especially concerning collateral requirements, loan insurance, and so on. Moreover, for a number of reasons, financing projects for small businesses and micro-entrepreneurs in the agricultural sector is not always attractive to domestic banks.

In recent years, however, large-scale reforms have been implemented in the SME lending sector. Banks are expanding their lending programs for entrepreneurs, and the legal framework for non-bank credit organizations (NBCOs) in this field has been broadened. Among the initiatives of the Central Bank, conditions and regulatory mechanisms for online lending in the microcredit sector have been developed, and there are plans to expand the use of alternative monetary and credit instruments, including the introduction of the OpenBanking platform and the application of fintech solutions. Last year, the microcredit portfolio grew by almost a third, and it is forecasted that by the end of this year, the assets of domestic NBCOs could double and exceed 1 billion manat ($588 million). The branch network of microfinance organizations is expanding (currently 304 institutions), and their client base – mainly individual entrepreneurs and small businesses – exceeds 700,000 borrowers.

As noted by the Director General of the Central Bank of Azerbaijan (CBA), Fuad Isayev, at the First National Financial Accessibility Forum, the credit portfolio of domestic microbusinesses and SMEs has increased by 46% over the past three years, which is equivalent to an average annual growth of more than 15%. "In recent years, the government has implemented a number of measures to support SMEs, including preferential lending, the introduction of credit guarantee mechanisms, and interest rate subsidies," said Isayev. "These instruments help reduce credit risks and are accompanied by regulatory relaxations from the CBA. As of the end of 2024, the volume of loans issued by banks to SMEs reached 6.5 billion manat [$3.8 billion]."

A significant role in supporting SMEs and addressing their issues with accessible financing is played by the Entrepreneurship Development Fund (SIF), which operates within the Ministry of Economy. This key state donor organization has been providing entrepreneurs with low-interest and long-term loans for over three decades.

"More than 52,000 entrepreneurs have benefited from the preferential lending mechanism in Azerbaijan through the Fund, and the total volume of concessional loans issued to entrepreneurs by the Fund has exceeded 3.3 billion manat [$2 billion]," said Eldar Hamidov, Deputy Chairman of the Board of the SIF, during the forum. "We are working to ensure that every year an increasing number of entrepreneurs can take advantage of the preferential lending mechanism. It is no coincidence that in 2024, the number of entrepreneurs receiving loans through the Fund increased by 74.7% compared to 2023, reaching 7,222. Moreover, the volume of loans issued grew by 28%, reaching 248 million manat [$146 million]."

In turn, according to Rustam Aliyev, Head of the Partner Relations Department at the SIF, the Fund is developing new projects related to the use of funds: "I expect that the upcoming projects will offer special benefits in terms of both the loan term and the loan amount, including plans to simplify financing for 'green' projects." 

He noted that previously, to obtain a loan of over 1.5 million manat ($882,000), joint financing from the borrower was required, but this requirement has been removed for “green” projects. Entrepreneurs implementing “green” initiatives can now receive loans of up to 10 million manat ($5.9 million) for a term of up to 10 years, with the borrower's own contribution being only 25%, while the remaining 75% will be provided by the Fund as a concessional loan. Additionally, for projects in the field of renewable energy sources (RES), it is possible to receive SIF loans at an annual interest rate of 5%.

A key priority of the Fund's activities is also financing entrepreneurs implementing projects in Azerbaijan’s liberated territories. In particular, SMEs operating in the Karabakh region have submitted 22 projects under the guarantee and subsidy mechanism, with the total amount of approved loans for these projects reaching 32.3 million manat ($19 million). The projects financed under this SIF mechanism cover sectors such as services, tourism, and agriculture and have been implemented in Shusha, Khankendi, Aghdam, Jabrayil, and Khojaly.

A relatively new financing mechanism for innovative entrepreneurial initiatives in Azerbaijan is the attraction of venture capital funds. Today, the country is home to over 230 startups, half of which have reached the investment stage.

"Through acceleration and incubation programs, as well as various hackathons held in Azerbaijan recently, local startups have managed to attract $1.3 million in investments, with a significant portion—about $1 million—provided by the international acceleration platform StartUp Guys Wise," said Rashad Khaligov, Deputy Chairman of the Board at the Innovation and Digital Development Agency under the Ministry of Digital Development and Transport, during the forum.

According to him, venture investment in Azerbaijan is still in its early stages, but its role in developing the local innovation ecosystem is rapidly growing. Notably, another local venture fund, Caucasus Ventures, which currently holds assets worth $6.6 million, plans to invest approximately $1.5 million in 25 startups this year.

“Azerbaijani micro-, small and medium-sized enterprises have significant but not yet fully realized potential. Today, they provide about 15% of the added value in the economy and create 50% of jobs,” said Nataly Mouravidze, Head of the European Bank for Reconstruction and Development (EBRD) Representation in Azerbaijan, during the Forum. She emphasized that many enterprises in this segment are concentrated in low-value-added areas such as trade, transport, hotel, and restaurant business.

According to Mouravidze, SMEs have the advantage of flexibility and the ability to quickly adapt to changes. Moreover, companies that implement innovations will drive the next phase of Azerbaijan’s economic growth. "Digitalization is a key factor in this transformation. Technologies open new opportunities for small businesses: they increase efficiency, expand access to markets, and create conditions for competition with large companies. Automation, e-commerce, Internet of Things, micropayments – all this makes business more scalable and competitive," noted the EBRD representative.

According to her, in the coming years, the European Bank, together with its partners, will focus on enhancing competitiveness, providing consulting services, and financing SMEs, with a priority on developing initiatives in green financing, supporting women entrepreneurs, and increasing youth employment opportunities.