Where Azerbaijani business is headed ADB highlights imbalances, government seeks solutions

For the sixth consecutive year, Azerbaijan has continued implementing financial and fiscal incentives for small and medium-sized enterprises (SMEs) as part of ongoing tax reforms and efforts to liberalise the business environment.

In January last year, the Central Bank of Azerbaijan (CBA) approved the Financial Sector Development Strategy for 2024–2026, aimed at expanding financial accessibility, diversifying services, and strengthening transparency and stability in the credit market. Ensuring SMEs have access to preferential financing was identified as a key condition for developing the non-oil sector. These trends were discussed during the Baku presentation of the Asian Development Bank (ADB) report, “Asia Small and Medium-Sized Enterprise Monitor 2025.”

A central goal of the Socio-Economic Development Strategy of Azerbaijan for 2022–2026 is to increase the contribution of SMEs to 35% of GDP, while boosting employment in the non-oil SME sector to 60%.

To achieve these targets, the government plans to further optimise the business environment by creating an ecosystem with effective fiscal regulations, credit subsidies, and other incentives for the private sector. Importantly, new preferential financial instruments will be introduced specifically to support SMEs.

In recent years, the Azerbaijani government has introduced a series of measures to support small and medium-sized enterprises (SMEs), including concessional lending, credit guarantee mechanisms, and interest rate subsidies. This support is particularly crucial, as the terms offered by commercial banks—such as collateral requirements and credit insurance—are not always feasible for entrepreneurs.

Importantly, concessional financing schemes for SMEs have existed for more than 25 years in Azerbaijan, implemented not only through government funds and agencies but also in collaboration with international financial institutions (IFIs) and other global donor organisations. This cooperation has supported both large infrastructure and production projects—where local SMEs often act as subcontractors—and rural development initiatives, providing direct assistance to SMEs in service and production sectors alike.

Partnerships between IFIs and domestic private entities have helped stimulate sustainable development across certain economic sectors, contributing to the efficient management of socio-economic and business-oriented infrastructure.

Nevertheless, according to the local office of the European Bank for Reconstruction and Development (EBRD), Azerbaijan’s SMEs still hold significant untapped potential. Currently, SMEs contribute about 15% of the country’s value added while generating roughly 50% of jobs. However, a large share of these enterprises is concentrated in sectors with relatively low value added, such as trade and services, transport, hospitality, and catering, rather than in manufacturing.

At the same time, evolving global economic trends highlight the need to incentivise domestic SMEs to engage in higher-value and innovative activities. These include renewable energy projects, startups and incubator programmes, e-commerce, digitalisation, zero-waste production, and the deployment of Internet of Things (IoT) services, among other emerging sectors.

One of the international donor institutions that has long supported modern initiatives in Azerbaijan’s SME sector is the Asian Development Bank (ADB), with which the country has successfully cooperated for more than 25 years. During this period, the ADB has provided $5.3 billion in loans for the implementation of over 80 projects spanning transport, energy, finance, agriculture, healthcare, and other sectors.

According to the ADB report, “Asia Small and Medium-Sized Enterprise Monitor 2025”, the Central Bank of Azerbaijan’s (CBA) financial sector development strategy aims to expand financial accessibility, increase the diversity of financial services, and strengthen transparency and stability in the credit market. The report notes that the CBA has set a target to raise the total volume of business loans—including those extended to SMEs—to approximately 16.5 billion manats ($9.7 billion) by the end of 2026. This target is particularly significant, as ADB experts observe that in several regional countries, including Azerbaijan and Armenia, the share of loans directed to SMEs has gradually declined, while lending to large companies has expanded.

This trend was further confirmed during the conference “Innovative Solutions for Sustainable Microfinance”, held in Baku in October last year. According to Orkhan Mammadov, Chairman of the Board of the Small and Medium Business Development Agency (KOBİA) under the Ministry of Economy, lending to medium-sized enterprises fell by 27% in 2023 and the first eight months of 2024, while lending to small enterprises declined by 12% over the same period.

“SMEs have shaped the market in developing Asia and the Pacific, but it has remained very small, averaging 16.9% of total bank lending, equivalent to 10.7% of national GDP in 2024,” said Shigehiro Shinozaki, Executive Director of the ADB for Japan, speaking at the report presentation. “On average, 53% of SME loans were allocated to the services sector, followed by industry and agriculture: most Southeast Asian countries essentially follow this model.”

However, Shinozaki noted that sectoral distribution varies significantly depending on the region and the specific country: for example, in South Asia, around 40% of SME loans were directed to industry, while the lion’s share of SME lending in Tajikistan, Kyrgyzstan, and the Solomon Islands went to agricultural enterprises.

The share of SME loans in total bank lending and national GDP fluctuates significantly, depending on the level of exposure to external shocks and the corresponding government measures. According to an ADB expert, between 2020 and 2024, the average share of SME loans in total bank lending declined in 12 countries, while it increased in 8 countries.

“In some countries, like Azerbaijan and Armenia, the share of SME loans gradually declined, coinciding with expanded lending to large companies. In others, such as Uzbekistan, the share of SME loans increased due to enhanced government support through the newly established Business Development Bank,” said an ADB representative.

Highlighting the uncertainties facing global trade—from tariff disputes to the ongoing Russia–Ukraine conflict and broader geopolitical tensions—an Asian Development Bank (ADB) expert noted that, since SMEs play a critical role in national economies, these external challenges are prompting governments to reassess strategies and approaches for developing this sector, ensuring the creation of a resilient and sustainable growth ecosystem.

In this context, Azerbaijan and the ADB have been cooperating closely to expand SME access to financing and to develop innovative sectoral policies. Notably, the ADB recently launched a new Country Partnership Strategy (CPS) with Azerbaijan for 2025–2029, under which it plans to support projects in renewable energy, including battery energy storage systems (BESS), transport, finance, digital innovation, and the development of high-tech goods and services. The strategy also includes support for SMEs engaged in innovative service sectors, tech startups, small-batch manufacturing, subcontracting, and outsourcing.