Non-performing loans: Azerbaijani banks shift to retail lending Overview by Khazar Akhundov

High volatility in the energy markets amid the crisis in the Strait of Hormuz, weakening monetary and macroeconomic indicators, tariff barriers, and trade wars are negatively affecting the global economy. Slowing GDP growth leads to declining incomes for both companies and individuals, increasing their debt burden. As a result, the volume of overdue bank loan payments is rising, a trend particularly characteristic of emerging markets, including post-Soviet countries.

In recent times, Azerbaijan’s banking sector has also been facing a noticeable increase in toxic assets, especially in the consumer lending segment. According to the Central Bank of Azerbaijan (CBA), in the first quarter of 2026, the volume of non-performing loans in banks increased by more than 18%.

One of the key objectives of the “Socio-Economic Development Strategy of Azerbaijan for 2022–2026” is the development of the non-oil economy and increasing the share of small and medium-sized enterprises (SMEs) in production to 35% of the country’s GDP. To this end, it is planned to introduce new preferential financial instruments, while a significant role in the capitalisation of the real sector of the economy is assigned to the banking sector.

Unfortunately, the depth of financial penetration by private credit institutions in the country remains insufficient. In recent years, private banks have accounted for less than 40% of lending to the real sector of the non-resource economy within GDP structure, while the remaining 60% has been provided through direct injections from the state budget, as well as funds from state funds and state-owned banks.

A similar situation has persisted this year as well. At the same time, according to recently published data from the Central Bank, the combined loan portfolio of banks and non-bank credit organisations (NBCOs) in the country amounted to just under 32.313 billion manats ($19 billion) in the first quarter of this year, with growth of only 1.2%. Moreover, even this modest increase was largely driven by state-owned banks (up by 1.3%), while lending growth by private banks was recorded at an unusually low level of 0.6%.

Unfortunately, even more pronounced imbalances are observed when examining the structure of loan capital across economic sectors.

In January–March 2026, the overwhelming share — 59.9% of the total credit portfolio — consisted of consumer loans issued to households, amounting to over 19.361 billion manats ($11.39 billion), with growth of 1.6%. To illustrate the dynamics, it should be recalled that relatively recently — in 2023 — consumer loans accounted for no more than 30% of the entire credit portfolio of banks and NBCOs. Such a sharp expansion of consumer lending is a concerning indicator. Notably, on the eve of the banking collapse a decade ago, the country also experienced an unprecedented boom in consumer credit.

The next largest share of the “credit pie” during the reporting period went to real estate operations, including mortgages — 4.665 billion manats ($2.74 billion), or 14.4% of the portfolio, as well as the trade and services sector — nearly 4.413 billion manats ($2.60 billion), or 13.7% of the credit portfolio. The transport and communications sector accounted for 7% of all loans, while construction received 5.8%.

However, strategically important sectors of the national economy received a very small share of lending. The extractive industry, electricity, gas, and water supply together accounted for only 1.9% of the total banking portfolio. Agriculture, forestry, and fisheries received 1.8%, while industry and the manufacturing sector accounted for just 5.2%.

The figures presented clearly indicate that a significant portion of the country’s private banks have so far failed to reverse the trend and evolve beyond the outdated concept of credit cash desks and pawnshops of the 19th century. They continue to prefer working with trade and service entities, as well as individuals in the field of consumer lending, rather than engaging in long-term financing of production and other sectors of the real economy.

However, it should be acknowledged that this position of the banks is driven by a number of objective factors. One of them is excessive liquidity — a long-standing issue in the domestic credit sector, where accumulated free funds in banks do not generate sufficient returns. Unlike fast-turnover segments such as trade and services, the collateral and credit insurance requirements imposed by commercial banks, combined with relatively high interest rates and fees, often prove too burdensome for entrepreneurs in the production sector.

The situation is further complicated by comparatively high interest rates on deposits and other attracted funding sources, as well as the absence in the country of a substantial source of “cheap” money (such as mutual investment funds, pension funds, etc.). As a result, domestic banks, operating with “expensive” loan capital, simply do not have sufficient flexibility to reduce loan margins.

In addition, the country’s credit market is characterised by a far from uniform level of competition: the sector’s main profitability is largely concentrated in several large banks that control a significant share of assets and generate the bulk of profits.

Large banks benefit from stronger liquidity positions and have better access to low-interest and long-term funding sources, including state and international capital. They also service budget-related and payment operations, including salary payments, which in turn makes it easier for them to finance projects with long payback periods — such as industry, construction, real estate, and others.

Smaller banks, by contrast, attract most of their liquidity through deposits offered at relatively high interest rates — for example, around 12%. As a result, their lending rates are also considerably higher. Their portfolios are therefore largely confined to the consumer market and short-term loans for trade-related projects.

On the other hand, the prudential standards and regulatory mechanisms introduced in recent years still bear the imprint of the 2015–2016 banking non-payment crisis, which was triggered by the collapse in the oil market and the devaluation of the manat, severely undermining the consumer lending market.

A visible outcome of that crisis was the reduction in the number of Azerbaijani banks from 45 to 21 today. Over the past years, the Central Bank of Azerbaijan (CBA) and the Ministry of Finance have focused their efforts on tightening monetary and credit policy rules. In particular, special measures were introduced to minimise dollarisation in both the lending and deposit segments, as well as to strengthen regulatory frameworks and control instruments over household financing.

Among other steps, the regulator revised credit risk management procedures, expanded life insurance requirements within consumer lending, and strengthened oversight of risks associated with loan issuance.

Nevertheless, current trends point to persistent risks in both business and consumer lending segments: excess liquidity continues to steer commercial banks toward the household sector, fuelling further expansion of consumer credit.

This trend poses the greatest risk in terms of rising non-performing loans (NPLs) — loans for which borrowers fail to meet payment obligations for more than 90 days. Such dynamics create risks not only for banks but for the financial system as a whole.

According to the Central Bank of Azerbaijan, as of April 1, 2026, the volume of overdue loans in the country’s banking system totalled 619.6 million manats ($364.5 million). This indicates that the stock of NPLs increased by 18.1% in the first quarter and by 28.65% year-on-year. In the business lending segment, the share of NPLs stood at 3.1% of the total corporate loan portfolio.

While the growth rate of toxic loans has been relatively high this year, the overall share of overdue loans in the total banking credit portfolio remains at 1.9%, suggesting that the regulator still retains control over risks in this area.

The rapidly expanding volume of consumer lending is being fuelled by banks’ policies promoting preferential campaigns for credit and instalment cards, as well as aggressive advertising by major retail chains encouraging citizens to live on instalments. This, in turn, stimulates demand for often unnecessary and overpriced goods.

Moreover, the problem of excessive household indebtedness is not unique to Azerbaijan — similar trends are evident across post-Soviet countries. For instance, according to research by Russia’s United Credit Bureau (OKB), borrowers aged 25–30 constitute the primary risk group for debt repayment violations, accounting for 55% of all overdue payments in microloans and consumer lending.

The OKB notes that this trend is unlikely to decline, given the relatively low level of financial literacy among young people, as well as their higher risk appetite and desire to increase consumption levels.

According to Vugar Bayramov, a member of the Milli Majlis (parliament) Committee on Economic Policy, Industry and Entrepreneurship, the increase in the volume of non-performing loans is a highly undesirable trend that requires immediate action.

“Banks need to revise their lending policies, paying closer attention to scoring systems and client selection. The scale of household indebtedness is striking: at present, more than 3 million citizens have active consumer loans,” Bayramov noted, stressing that these figures continue to grow, inevitably leading to a rise in the share of problem loans.

In the current situation, commercial banks must thoroughly assess borrowers’ creditworthiness, filter out high-risk clients in the consumer segment, and reduce the maximum limits on unsecured loans. Equally important are joint efforts by banks and the regulator to improve the financial literacy of the population.

A similar scenario has been observed in neighbouring Kazakhstan, where, due to high import dependence, the consumer lending boom has accelerated inflation more rapidly — demand shifts toward imports, and currency shocks are directly transmitted into prices. At the same time, abandoning household lending in Kazakhstan is not a viable option, as consumer demand accounts for about half of the country’s GDP. However, ignoring default risks is equally dangerous.

To address the issue, updated consumer lending regulations came into force on November 24, 2025, aimed at strengthening financial discipline and preventing excessive indebtedness among borrowers with a history of arrears. Kazakhstan also tightened requirements for the debt burden ratio and introduced restrictions on issuing unsecured loans to certain categories of borrowers.

In Uzbekistan, until recently, the share of consumer and microloans had also reached around 50%, while non-performing loans stood at about 4% of the total banking portfolio. However, the strict regulatory measures adopted by the Central Bank of Uzbekistan in 2023 helped curb the rapid growth of retail lending, reducing its pace to 20% in 2024.