BAKU, Azerbaijan, February 20. Azerbaijan plans to launch Islamic banking products in 2026, with the first offerings already entering the market under the Central Bank’s special regulatory framework, while efforts continue to strengthen the country’s legal and regulatory framework for these services, Shahin Mahmudzade, Director General of the Central Bank (CBA), said in an exclusive interview with Trend.
He outlined the measures taken to introduce Islamic finance products to the Azerbaijani market, including relevant legislative amendments, incentive mechanisms, and international cooperation.
Mahmudzade explained that under the special regulatory framework, beginning from 02.02.2026 for a period of 1 year, "Rabitabank" OJSC has begun offering products based on "Mudaraba," allowing legal and individual clients to invest funds, which are then used to finance businesses through the "Murabaha" mechanism. Additionally, starting this year, "International Bank of Azerbaijan" will offer Murabaha-based financing for resident legal entities and individual entrepreneurs for immovable and registered movable property.
The Director General noted that once legislative changes on Islamic banking take effect, banks will be able to offer various financing models under an "alternative window" framework: project-based contracts (Istisna), sales-based financing (Murabaha), lease-based financing (Ijara, analogous to traditional financial leasing), profit-and-loss sharing (Mudaraba), and deposit-like products (Wadi’a). Non-bank credit organizations will provide Istisna, Murabaha, and Ijara financing only.
The CBA had planned to submit amendments to legislation on Islamic banking to the government by the end of 2025. The Director General also elaborated on the ongoing work related to proposed amendments to the Civil Code, the Law of the Republic of Azerbaijan “On Banks,” and the Tax Code.
“This is one of the key priorities. The relevant draft amendments to the Civil Code, the Tax Code, and the Laws of the Republic of Azerbaijan ‘On Banks,’ ‘On Non-Bank Credit Organizations,’ ‘On State Duty,’ ‘On Credit Bureaus,’ and ‘On Privatization of State Property’ have been submitted for legal review. The draft amendments are expected to be submitted to the government in the near future. Following their adoption, the next stage will involve establishing a prudential regulatory framework to address the risks arising from the implementation of Islamic financial products,” Mahmudzade emphasized.
The Director General also addressed the issue of value-added tax (VAT) treatment for Islamic financial transactions. He noted that financial services provided under alternative (Islamic) banking operations are intended to be subject to the same tax regime as conventional banking services, thereby ensuring tax neutrality between conventional and Islamic banking activities. According to Mahmudzade, this approach is reflected in the draft legislative amendments currently under preparation and will be submitted to the relevant state authorities shortly.
The introduction of Islamic banking products through the “Islamic banking windows,” or “alternative window,” model is expected to enhance financial inclusion, attract new customer segments, and diversify product offerings, thereby generating additional revenue streams for banks. The expansion of deposit instruments is also anticipated to strengthen banks’ liquidity positions.
Mahmudzade reiterated that no banks currently operate in Azerbaijan in full compliance with Islamic banking principles and clarified the prospects for establishing fully-fledged Islamic banks. “Selecting the appropriate model requires a phased approach. As noted, in the near term, Islamic banking will be implemented through the ‘Islamic window’ model. The establishment of standalone Islamic banks may be considered at a later stage, taking into account the practical results of introducing Islamic financial products and overall market development dynamics,” he said.
He also outlined steps being taken to establish a regulatory framework for sukuk issuance. With the support of the Islamic Development Bank, the CBA is implementing a technical assistance project to develop the legal and regulatory framework for sukuk as an Islamic financial instrument.
“Unlike conventional bonds, sukuk does not create a pure debt obligation; rather, it represents an investor’s ownership interest in a specific asset or project, directly linking financing to real economic activity. This characteristic makes sukuk an instrument that can provide additional financial resources for business entities, strengthen investor confidence, and diversify access to capital markets. For small and medium-sized enterprises (SMEs), sukuk can facilitate resource mobilization and improve access to long-term financing through structured mechanisms implemented via financial institutions.
In the context of infrastructure development, sukuk can serve as an alternative financing channel in capital-intensive sectors such as energy, transport, industry, and real estate by providing long-term and stable funding. International practice demonstrates that project-based sukuk structures are widely used to finance large-scale infrastructure projects and help diversify funding sources while attracting investor interest,” Mahmudzade stated.
He added that the potential emergence of a domestic sukuk market could further expand cooperation with international financial institutions, particularly in strengthening regulatory and institutional capacity and promoting technical knowledge exchange. In the medium to long term, this approach could support the gradual expansion of Azerbaijan’s capabilities in Islamic finance instruments across the region and contribute to building foreign investor confidence.
Additionally, the CBA has identified international cooperation as a priority in developing Islamic finance. Mahmudzade noted that Azerbaijan is studying regulatory models, Sharia supervisory mechanisms, and capacity-building programs based on the experience of countries such as Türkiye, Pakistan, and Malaysia, as well as through cooperation with the Islamic Development Bank.
“Alongside establishing the necessary regulatory and institutional framework for the implementation and development of Islamic finance, building human capital with the required expertise in this field is considered one of the main priorities. For this purpose, advanced practices from Türkiye, Pakistan, and Malaysia are being examined, and within the framework of cooperation with the Islamic Development Bank, regular participation in knowledge exchange and professional training programs is ongoing and will continue in subsequent stages,” he emphasized.