Financial Crime World

Azerbaijan’s Financial Sector Seeks Compliance with Global Standards

Overview of Azerbaijan’s Financial Sector

Azerbaijan’s financial sector is dominated by banks, which hold approximately 95% of total assets. Despite a non-banking sector that is underdeveloped and struggling following the devaluation of multiple currencies in 2015, the country’s banking system remains robust.

Key Developments in 2022

  • In 2022, the number of banks operating in Azerbaijan was reduced to 25 after the Baku branch of the National Bank of Pakistan voluntarily closed its operations.
  • The Central Bank has maintained a stable exchange rate for the manat, keeping it at 1:1.70 against the US dollar since April 2017.

Growth and Performance

Azerbaijan’s banking system experienced significant growth in 2022:

  • Lending increased by 31.5%
  • Deposits grew by 28%
  • Loans to households rose by 11.1%
  • Net bank profits soared by 70.1% due to high interest margins
  • The share of impaired loans in total lending declined substantially from 4.2% in 2021 to 0.3% in 2022

Deposit and Loan Dollarization

Deposit dollarization fell slightly from 49.4% at the end of 2021 to 48.4% a year later, while loan dollarization declined from 25.8% to 19.7%. Broad money expansion rose from 18.7% in 2021 to 23.6% in 2022.

Areas for New Business Development

Financial experts identify several areas that hold promise for new business development in Azerbaijan’s financial sector:

  • Financial and wealth management
  • Trade finance
  • Working capital
  • Lending
  • Microfinance services, with very few lenders currently operating in this space
  • Leasing, particularly for equipment financing in industries such as manufacturing, agriculture, healthcare, and transportation

Increasing Global Integration

Azerbaijan’s banks are increasingly seeking to establish correspondent relationships with US banks, while private institutions are looking to attract foreign equity investors. The European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), and some German financial institutions have already taken equity stakes in several Azerbaijani banks.

Growing Demand for Financial Services

The country’s growing wealth has also raised interest in financial and wealth management services, offering opportunities for businesses operating in this space to tap into the emerging demand.