BAKU, Azerbaijan, June 17. Under a base-case scenario, Islamic banking assets in Azerbaijan could reach approximately USD 2.7 billion by 2035 representing 5 percent of total projected banking assets in 2035, a new report by the Islamic Development Bank Group reveals.
“Under a best-case scenario, assets could reach USD 3.6 billion (at 10 percent penetration rate),” reads the report of the Islamic Development Bank Institute (IsDBI) and the International Islamic Trade Finance Corporation (ITFC) titled “Islamic Finance in Azerbaijan: Breaking New Ground” launched during the IsDB Annual Meetings in Baku.
IsDBI and ITFC note that Azerbaijan’s Islamic finance opportunity extends beyond banking and capital markets to encompass development finance, social finance, and takaful (Islamic insurance).
“The IsDB Group has provided cumulative financing of USD 1.29 billion across 81 projects in Azerbaijan with the ICD deploying Shariah-compliant Small and Medium Enterprise (SME) financing through Rabitabank (USD 15 million) and Turan Bank (USD 15 million). Azerbaijan’s insurance market, with AZN 1.35 billion in premiums (1.1 percent of GDP) is significantly underpenetrated compared to the OECD average of 6.2 percent, creating an opportunity for takaful. Global Islamic social finance potential is vast, with zakat alone estimated at USD 200 billion to USD 1 trillion annually, but Azerbaijan would need to build institutional foundations from scratch,” the report says.
IsDBI and ITFC analysts believe that a phased development roadmap requires action across five pillars: (1) regulatory reformṣ; (2) sector development; (3) capacity building; (4) awareness building; and (5) regional positioning, thereby establishing Azerbaijan as the Islamic finance hub for the CIS region.
“Azerbaijan currently ranks 46th in the Global Islamic Fintech Index. This reflects the developed infrastructure with high digital banking penetration, internet/mobile infrastructure and developments in regulation governing the fintech sector. Azerbaijan’s relatively advanced digital government ecosystem and fintech ambitions could support this transition. Especially utilizing sandbox environment for Islamic fintech, the country could position itself as a niche innovation hub between Central Asia, the Caucasus, and Türkiye,” the report reads.
The authors of the report point out that with the development of Islamic finance instruments in Azerbaijan liquidity management will have a growing importance.
“With Islamic market development, the development of Shariah-compliant liquidity management instruments and interbank mechanisms will be of the growing importance to support the banks with the Islamic banking windows and ensure efficient market functioning,” says the report.
