BAKU, Azerbaijan, July 28. The global financial system is undergoing a profound transformation. Rising geopolitical uncertainty, shifting international investment flows, and countries' efforts to reduce reliance on traditional sources of capital have made financial sector diversification a key pillar of long-term economic resilience.
Against this backdrop, Islamic finance is steadily moving beyond its status as a niche segment to become one of the fastest-growing areas of the global financial industry. According to international estimates, global Islamic finance assets have already reached several trillion dollars, with the industry continuing to expand at an annual rate of around 10%.
In response to these trends, Azerbaijan is steadily building the legal and institutional framework needed to develop Islamic finance. Rather than viewing it as an alternative to the conventional banking system, the country sees Islamic finance as an additional channel for attracting investment, broadening its financial market, and strengthening economic ties with the wider Islamic world.
New phase in financial sector diversification
The Annual Meetings of the Islamic Development Bank (IsDB) Group, hosted in Baku, marked an important milestone in advancing this strategy.
The event brought together government officials, international financial institutions, and private-sector representatives to discuss sustainable development, infrastructure, the digital economy, food and energy security, and ways to deepen economic cooperation among member states.
As Ali Abdullah Sharafi, Assistant Undersecretary for International Financial Relations of the Ministry of Finance of the United Arab Emirates (UEA), told Trend in an exclusive interview, the Baku meetings served as an important platform for developing joint approaches to common challenges.
"These meetings once again served as an important platform for constructive dialogue among member countries to shape development priorities, exchange knowledge and best practices, and strengthen economic cooperation. Against the backdrop of the rapidly evolving geopolitical and economic landscape, particularly the recent developments affecting the Gulf region, the discussions held during this year's meetings carried added significance. They provided an opportunity to address emerging challenges, enhance economic resilience, and identify new avenues for sustainable and inclusive growth," he said.
According to Sharafi, regional integration goes beyond expanding trade and investment. "Regional integration extends beyond merely strengthening economic and trade ties; it also entails knowledge exchange, capacity building, and addressing shared challenges, which ultimately fosters more inclusive and sustainable development across member countries," he added.
For Azerbaijan, this approach aligns closely with its broader economic agenda. In recent years, the country has actively diversified its economy by investing in transport infrastructure, digital technologies, renewable energy, and non-oil industries. That diversification strategy is now increasingly being extended to the financial sector as well.
Islamic finance as a new source of capital
One of Azerbaijan's key priorities is the development of a comprehensive Islamic finance ecosystem that will enable the country to attract new sources of capital and strengthen its position in global financial markets.
In this context, Chairman of the Islamic Development Bank (IsDB) Group Dr. Muhammad Sulaiman Al Jasser told Trend in an exclusive interview, Islamic financial instruments should be viewed not as a substitute for conventional finance but as a means of expanding the country's investment opportunities.
"We also want to diversify sources of finance, so that both investors and the government have a wider range of instruments to choose from. Sukuk and other Islamic finance instruments will now be available, enabling Azerbaijan to get access to a deep market," he said.
According to Al Jasser, the global Islamic finance market has already reached a significant scale. "Islamic finance today is a market of about $3.5 trillion, so this also gives access to a bigger market, while maintaining access to traditional markets. In effect, it broadens the base and increases the availability of finance for projects needed at this stage of development," he noted.
He emphasized that Islamic finance has the potential to support projects across a wide range of sectors. "It is about diversifying sources of finance, which in turn supports the wider diversification of the economy - whether in agriculture, industry, digital development, or renewable energy. There is already a lot that the country is doing, and even more that it can do going forward. We believe Islamic finance can provide additional support to that process," the IsDB Chairman added.
A central element of this ecosystem is sukuk - asset-backed Islamic securities structured in accordance with Sharia principles. According to a joint study by the Islamic Development Bank Institute and the International Islamic Trade Finance Corporation (ITFC), Azerbaijan could issue its first sovereign sukuk worth up to $500 million by 2030.
Achieving this objective will require the introduction of an appropriate legislative framework, further regulatory reforms, and sufficient market demand. To support this effort, Azerbaijan is currently studying international best practices in sukuk market development with the aim of adapting them to the country's financial system.
Building a new financial ecosystem
The initiative extends well beyond the capital market. Azerbaijan has already prepared legislative amendments required to introduce Islamic banking.
At the initial stage, the country plans to adopt an "Islamic windows" model, allowing conventional banks to offer Sharia-compliant financial products without establishing standalone Islamic banks. Pilot projects are already underway at the International Bank of Azerbaijan (ABB) and Rabitabank. Over time, customers are expected to gain access to products such as Murabaha, Ijara, Istisna, Mudaraba, and Wadiah.
Shahin Mahmudzade, Director General of the Central Bank (CBA), told Trend, the IsDB Annual Meetings gave additional momentum to the development of Islamic finance in the country.
"We believe that the event made a significant contribution to strengthening cooperation with international financial institutions, establishing new partnerships, and recognizing Azerbaijan as a regional financial center. That meeting was a significant impetus, especially in terms of intensifying institutional cooperation in the field of Islamic finance and building an Islamic finance ecosystem," he said.
According to Mahmudzade, once the legislative amendments take effect, the Islamic banking market is expected to expand significantly. "With the entry into force of legislative changes at the next stage, it is expected that both the number of banks offering Islamic banking products and the range of products offered will increase," he noted.
Based on the current projections, Islamic banking assets in Azerbaijan could reach $2.7 billion by 2035 under the baseline scenario and as much as $3.6 billion under a more optimistic market outlook.
Why Islamic finance matters for Azerbaijan
The development of Islamic finance offers Azerbaijan several strategic advantages.
First, it broadens the country's pool of potential investors by opening access to capital from the Gulf states and other members of the Organization of Islamic Cooperation (OIC).
Second, it creates new sources of long-term financing for infrastructure and investment projects.
Third, it promotes greater financial inclusion by offering products tailored to individuals and businesses that have traditionally avoided conventional banking services for religious reasons.
In addition, the Islamic finance model is based on tangible underlying assets and fosters a closer link between the financial system and the real economy, helping channel investment into productive sectors.
As Shahin Mahmudzade noted, the expansion of Islamic finance is also expected to diversify the country's financial market by attracting new participants. "The development of Islamic finance in Azerbaijan and the emergence of new Islamic finance products can contribute to the diversification of the financial sector. This mainly creates new opportunities in terms of attracting financial resources from the Gulf countries, integration of the population and business subjects who don't use traditional financing products due to their religious beliefs into the financial sector," he said.
According to Mahmudzade, Islamic finance will also strengthen financing for the real economy. "It should be taken into account that since Islamic financial products are asset-based, this model enables further strengthening of the relationship between the real sector and the financial sector. In this regard, the development of Islamic finance can strengthen the prospects of Azerbaijan becoming a regional hub of Islamic finance," he added.
Azerbaijan strengthens its position as a regional financial hub
The development of Islamic finance forms part of Azerbaijan's broader strategy to establish itself as a regional financial center.
The decision to host the Islamic Development Bank Group's Annual Meetings in Baku underscored the growing interest of international financial institutions in Azerbaijan and its economic outlook.
During the forum, agreements worth approximately $6 billion were signed. The parties also concluded a financing agreement worth around $436.7 million for the reconstruction of the Garabagh irrigation canal.
In addition, the Comprehensive Economic Partnership Agreement (CEPA) between Azerbaijan and the United Arab Emirates, which entered into force in April 2026, is expected to create new opportunities for trade in services, investment, and deeper financial cooperation.
These developments are closely interconnected. The expansion of Islamic banking enhances Azerbaijan's appeal to international investors, while stronger economic ties with foreign partners generate greater demand for new financial instruments.
Financial diversification as a new driver of growth
Azerbaijan is gradually shaping a new model for the development of its financial system by combining conventional banking with Islamic financial instruments.
The planned launch of a sukuk market, the introduction of Islamic banking, ongoing legislative reforms, and close cooperation with the Islamic Development Bank are all expanding the country's access to international capital while strengthening the resilience of its financial system.
As the global Islamic finance industry continues to grow rapidly, Azerbaijan has an opportunity not only to attract new investment but also to reinforce its role as a regional financial hub connecting the markets of Europe, the South Caucasus, Central Asia, and the Gulf region.
For this reason, the development of Islamic finance is increasingly viewed not simply as a banking reform, but as an integral part of Azerbaijan's broader strategy to diversify its economy and strengthen its position within the evolving global financial architecture.
