Banking sector strengthens as capital, credit and digitalization advance

Azerbaijan’s banking sector is demonstrating renewed resilience and disciplined growth, supported by stronger capital buffers, rising credit activity and rapid development of digital financial infrastructure. Recent data published by the Central Bank of Azerbaijan (CBA) show that the industry is entering a phase defined by improved financial soundness, technology-led modernization and heightened attention to cybersecurity.

The total capital of the banking sector increased by 765.4 million manat over the year, a growth rate of 12.1 percent, and rose by 458.7 million manat since the beginning of the year. Monthly figures also maintained positive momentum with a one-percent increase. This expansion reflects a deliberate effort by banks to reinforce their buffers at a time of global financial uncertainty, creating additional protection against inflationary pressures, regional risks and potential fluctuations in credit quality.

Special capital, the core component of banking capital, reached 6.463 billion manat after an 11.5-percent increase since January, supported by higher profitability and stronger internal risk controls. Bank reserves also continued to rise, reaching 613.2 million manat—an 18.6-percent annual increase—indicating a prudent approach to credit growth and a readiness to absorb possible shocks. With total sector capital standing at 7.010 billion manat as of August, compared with 6.618 billion manat at the end of last year, the market is showing clear signs of long-term consolidation and improved investor confidence.

Credit activity also continued its upward trend. Total credit to the economy reached 31.169 billion manat as of November 1, marking a moderate monthly uptick of 0.4 percent. The cautious pace suggests the CBA’s supervisory policies are working to encourage economic activity without allowing an overheated credit cycle. On an annual basis, lending increased by 2.4 billion manat, or 8.3 percent, reflecting stronger consumer demand, revived business activity and improving conditions in sectors benefiting from ongoing state reforms. State banks held 7.561 billion manat of the portfolio, slightly down from the previous month but up 7.9 percent year-on-year, signaling continued involvement in priority investment areas. Private banks maintained their leading position with 21.842 billion manat and a solid annual increase of 8.8 percent, driven by competitive lending and the rapid rise of digital loan platforms. Non-bank credit organizations, with 1.765 billion manat, saw steady but more restrained growth in line with rising regulatory oversight.

Lending to the real sector reached a record level, although structural imbalances remain visible. Overdue loans amounted to 544.8 million manat, a relatively modest share of the overall portfolio, yet still a reminder of vulnerabilities in segments exposed to global commodity cycles and fluctuating demand. Household lending continued to dominate with 18.584 billion manat, growing 12 percent annually. While this expansion reflects rising consumer confidence and wider financial access, it also underscores the importance of monitoring household debt accumulation as part of long-term financial stability planning.

Sectoral lending patterns presented a mixed picture. Loans to transport and communication surged by more than 17 percent, supported by infrastructure development and the rapid expansion of the digital economy. Trade and services also posted growth, reflecting strong internal demand. In contrast, construction and utilities experienced noticeable declines, indicating cautious lending sentiment in industries historically associated with slower investment cycles and a higher likelihood of non-performing loans. Industry, manufacturing and agriculture recorded steady gains, signaling continued support for non-oil diversification efforts.

Parallel to these financial developments, Azerbaijan’s banking sector is undergoing a rapid digital transformation. A growing number of banks have integrated open banking services, bringing the country closer to European digital finance standards and fostering competition among financial and technology companies. The Instant Payments System (IPS) has expanded dramatically, with transaction volumes growing twenty-five-fold thanks to the adoption of the AZQR standard. This shift toward fast, low-cost payments is accelerating the move to a cashless economy and enhancing transparency across commercial transactions.

As digitalization accelerates, cybersecurity has become a strategic priority. On October 30, the CBA and the Electronic Security Service launched a cooperation initiative aimed at strengthening information security across the financial system. The partnership emphasizes the importance of proactive defenses against emerging cyber threats, particularly as digital transactions multiply. Deputy Chairman Vusal Khalilov highlighted the need to build national cyber resilience, while new public education efforts aim to improve digital literacy and strengthen consumer protection.

Overall, Azerbaijan’s banking sector is entering a period defined by strong capitalization, controlled credit expansion and fast-moving technological modernization. While uneven sectoral lending and rising household debt still require policy attention, the general trajectory points toward a more resilient, competitive and digitally advanced financial system that is increasingly well-positioned to support the country’s long-term economic ambitions.