Baku: Since 2026, practical steps have been taken to introduce Islamic finance instruments in Azerbaijan with the support of the Islamic Development Bank Group. Several banks have already started offering Murabaha and Mudaraba products within the regulatory sandbox framework. The introduction of Islamic finance instruments through the regulatory sandbox is a positive and pragmatic step. This approach demonstrates the commitment of the government and the Central Bank to building a sound ecosystem. At this stage, the market is still emerging; therefore, consolidated data on applications and financing volumes remains limited. As ITFC, the trade finance arm of the Islamic Development Bank Group, we are observing growing interest from both banks and corporate clients, particularly in Murabaha-based trade finance. Demand aligns with expectations for a market at an early stage of development. The focus should now be on scaling pilot transactions, strengthening Shariah governance, and enhancing institutional capacity . In this regard, ITFC designs and implements Trade Development initiatives and programs aimed at increasing export capacity, supporting cross-border and regional trade, and promoting Islamic finance.
According to Azeri-Press News agency, the ITFC views Islamic finance in Azerbaijan as being at an early stage of development with significant growth potential in the medium term. Growth will depend on the development of the regulatory framework, liquidity instruments, and the level of participation by banks. Trade finance is expected to serve as the main entry point to the market, given its compatibility with Islamic finance (Shariah-compliant) structures. Increasing demand from SMEs and participants in cross-border trade is anticipated. Over time, the market could expand to include sukuk and other investment products. The overall growth trajectory is promising but will be gradual, driven by market conditions.
ITFC is committed to expanding its footprint in Azerbaijan beyond the current approximately USD 103 million. The approach is to scale activities through partnerships with local banks via trade finance lines. Recently, agreements were signed with two local banks to support the private sector, particularly SMEs. New cooperation opportunities are being explored with government and quasi-government institutions to support trade and working capital needs. There is also potential to establish syndicated financing facilities and co-financing mechanisms. ITFC is integrating trade finance with trade development initiatives, prioritizing sectors that support economic diversification and SME growth. Discussions are ongoing, and a gradual expansion of trade finance activities is expected in the coming years.
Over the past three years, ITFC has continued to design and implement Trade Development Initiatives aimed at facilitating trade and strengthening capacity. Under the Trade Connect Central Asia+ (TCCA+) Initiative, ITFC partnered with the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) to launch a project on boosting exports through foreign direct investment in CIS countries and Azerbaijan. Private sector access to finance and efforts aimed at regional trade integration have been supported. In line with ITFC's global approach, food security, energy, and SME development remain key priority sectors. Trade-related infrastructure and logistics are also becoming increasingly important. The primary focus has been on combining financing with technical assistance to ensure sustainable impact. ITFC aims to deepen its engagement in sectors that enable trade.
Azerbaijan plays a strategic role as a gateway between Asia and Europe within the Middle Corridor. The country's investments in logistics and transport infrastructure position it as a regional trade hub. ITFC sees strong potential to support trade flows, value chains, and SME participation along this route. Beyond hydrocarbons, significant opportunities exist in logistics services, agro-processing, and light manufacturing. ITFC supports these areas through trade finance, capacity-building initiatives, and regional programs such as the Trade Connect Central Asia+ Initiative. Future cooperation is likely to focus on linking infrastructure with actual trade transactions.
ITFC continues to engage with stakeholders on large-scale trade finance frameworks in Azerbaijan. While no specific program has been formally announced, discussions are ongoing. Potential models include sovereign-backed or guaranteed trade finance facilities, as well as bank-intermediated financing mechanisms. These instruments could support strategic imports, exports, or priority sectors. ITFC's strength lies in structuring transactions, syndication, and mobilizing external capital. The objective is to create scalable platforms that encourage greater private sector participation.
SMEs in Azerbaijan face challenges, including limited collateral, high rejection rates, and restricted access to trade finance. Additional constraints include weak integration into international value chains and limited financial literacy. ITFC helps address these challenges by providing financing lines to local banks, enabling them to on-lend funds to SMEs. Risk-sharing mechanisms, letter of credit confirmation services, and capacity-building programs are also offered. Trade development initiatives help SMEs improve their export readiness and competitiveness. ITFC plans to increase financing volumes through partner banks and introduce more tailored instruments to integrate SMEs into regional and global trade ecosystems. Since 2024, ITFC has reactivated its financing line business in Azerbaijan and established partnerships with two local banks to support the trade finance needs of the private sector, particularly SMEs. ITFC has extended USD 10 million each to Rabitabank and TuranBank to facilitate SME access to trade finance solutions. Further cooperation with additional local banks is planned to stimulate trade flows in Azerbaijan.