Financial Crime World

Azerbaijan’s Financial Sector: Unlocking Its Potential

Despite strong hydrocarbon export revenues, Azerbaijan’s financial sector still accounts for only 31% of its gross domestic product. This article explores the reasons behind this underperformance and identifies areas where external support can make a significant impact.

The Dominance of Banking

The banking sector remains the main driver of the financial sector in Azerbaijan, accounting for an impressive 93% of financial sector assets. While growth has been seen since the 2008-2009 global financial crisis, there is still room for development and improvement.

Key Statistics:

  • Banking sector assets: 93%
  • Gross domestic product (GDP): 31%

Regulatory Framework: A Work in Progress

Azerbaijan’s government remains committed to aligning its policy, legal, regulatory, and institutional frameworks with international standards and good practices. External support will be necessary to achieve this goal, particularly in the areas of banking, microfinance, and insurance.

Regulatory Challenges:

  • Banking
  • Microfinance
  • Insurance

Supporting Non-Bank Financial Institutions

Donor agencies could provide valuable support for non-bank financial institutions, such as leasing companies and microfinance providers, which have shown strong growth potential. External expertise could also help to strengthen regulation and build capacity for supervision in the insurance sector.

Areas of Support:

  • Leasing companies
  • Microfinance providers
  • Insurance sector

Channeling Resources into the Economy

The government should aim to channel resources earmarked for non-hydrocarbon sector development through private sector commercial banks into the economy. This would require support from external funding agencies, particularly in areas such as trade finance and SME credit lines.

Key Areas of Support:

  • Trade finance
  • SME credit lines

Equity and Quasi-Equity Investment

Donors may want to consider providing more equity or quasi-equity investment to Azerbaijani banks, which have limited access to foreign capital markets. This would help to address the capital needs of many banks in the country.

Benefits of Equity Investment:

  • Addressing capital needs
  • Supporting economic growth

Microfinance Sector: A Bright Spot

The microfinance sector has shown strong growth potential, with Accessbank and FINCA dominating the market. However, smaller microfinance providers may benefit from more active support from external funding agencies.

Key Players:

  • Accessbank
  • FINCA

Business Climate Reforms

Finally, donor agencies could provide support for business climate reforms in Azerbaijan, particularly in areas such as corporate governance and disclosure, bankruptcy procedures, and asset foreclosure.