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.
