Azerbaijan plans to launch Islamic banking products in 2026, with the first services already entering the market under a special regulatory framework introduced by the Central Bank of Azerbaijan (CBA). In an interview with Trend, Shahin Mahmudzade, Director General of the CBA, outlined the country’s strategy for developing Islamic finance, including legislative reforms, tax adjustments, and international cooperation initiatives.
Starting February 2, 2026, Rabitabank OJSC began offering investment products based on the Mudaraba model. Under this structure, individuals and legal entities invest funds that are later used to finance businesses through Murabaha agreements. In addition, International Bank of Azerbaijan is set to introduce Murabaha-based financing for resident legal entities and individual entrepreneurs, covering immovable and registered movable property.
Mahmudzade noted that once legislative amendments come into force, banks will be able to operate Islamic finance services through an “alternative window” model. These services will include project-based financing (Istisna), sales-based financing (Murabaha), lease-based financing (Ijara), profit-and-loss sharing (Mudaraba), and deposit-like products (Wadi’a). Non-bank credit organizations will be limited to offering Istisna, Murabaha, and Ijara financing.
Draft amendments to the Civil Code, the Tax Code, and several laws, including those “On Banks,” “On Non-Bank Credit Organizations,” “On State Duty,” “On Credit Bureaus,” and “On Privatization of State Property,” have been submitted for legal review and are expected to be presented to the government soon. Following their adoption, the CBA plans to establish a prudential regulatory framework to manage risks associated with Islamic financial instruments.
The Director General emphasized that Islamic banking operations are intended to be subject to the same tax regime as conventional banking services, ensuring tax neutrality. Proposed changes related to VAT treatment are reflected in the draft legislative amendments currently under preparation.
According to Mahmudzade, the introduction of Islamic banking windows is expected to enhance financial inclusion, attract new customer segments, diversify banks’ product offerings, and generate additional revenue streams. Expanding deposit instruments may also strengthen banks’ liquidity positions. He added that no banks currently operate in Azerbaijan in full compliance with Islamic banking principles, and the establishment of standalone Islamic banks may be considered at a later stage, depending on market development and practical results.
The CBA is also working on creating a regulatory framework for sukuk issuance with the support of the Islamic Development Bank. Unlike conventional bonds, sukuk represent an ownership interest in an underlying asset or project rather than a pure debt obligation, directly linking financing to real economic activity. Such instruments could provide businesses with additional funding sources, strengthen investor confidence, and diversify access to capital markets.
Mahmudzade noted that sukuk could play a significant role in financing infrastructure projects in sectors such as energy, transport, industry, and real estate by offering long-term and stable funding. He added that the development of a domestic sukuk market could expand cooperation with international financial institutions, enhance regulatory capacity, and support Azerbaijan’s gradual expansion in Islamic finance across the region.
International cooperation remains a key priority in this process. The CBA is studying regulatory models and Sharia supervisory mechanisms in Türkiye, Pakistan, and Malaysia, while continuing knowledge exchange and professional training programs in partnership with the Islamic Development Bank. Mahmudzade emphasized that building human capital and strengthening institutional expertise are essential for the sustainable development of Islamic finance in Azerbaijan.