Fitch: First slandalone Islamic banks may appear in Azerbaijan later

The Central Bank of Azerbaijan (CBA) plans to implement Islamic banking through the Islamic window model in the near-term, while standalone Islamic banks may be considered later.

According to Fitch Ratings, cited by Report, two conventional banks began offering Islamic products in 1H26 as part of the central bank"s regulatory sandbox, with testing scheduled in 2026-2027.

The agency notes that the potential of Islamic finance in Central Asia is being supported by ongoing reforms and growing interest from Gulf countries.

According to Fitch, regulatory initiatives across several Central Asian countries since the start of 2026 and increasing engagement with GCC investors and Islamic multilateral institutions are likely to support the Islamic finance industry"s growth potential in this region, Fitch Ratings says. Unlocking this potential would require sustained policy support, equal tax treatments, and greater public awareness and confidence, in Fitch"s view, as the Islamic finance industry is still underdeveloped across the region, with fragmented progress.

"Kazakhstan and Kyrgyzstan are poised to drive regional expansion over the next few years, while Azerbaijan and Uzbekistan are building early foundations. However, Fitch expects Islamic banks" domestic market share in Kyrgyzstan, Kazakhstan, and Tajikistan to stay below 1.5% of banking sector assets at end-2026. Enabling regulations, and significant unbanked populations, could catalyse growth. Islamic banking could enhance financial inclusion in central Asia, where a significant portion of the population remains unbanked: Tajikistan (45%), Azerbaijan (44%), Uzbekistan (40%), Kyrgyz Republic (28%), and Kazakhstan (13%) as of 2024, according to the World Bank," the agency says.

It further notes that few entities in GCC countries, including the Saudi Arabia-headquartered Islamic Development Bank (IsDB) Group, are involved in developing Islamic finance in Central Asia. IsDB funding to Central Asian countries exceeded USD10 billion as of April, with Uzbekistan, Kazakhstan, Turkmenistan, and Kyrgyzstan receiving the largest shares.

The agency believes that closer links with GCC countries could foster industry growth, as seen with GCC investors" support for the Islamic finance industry in the UK, Turkiye, Malaysia, and Kazakhstan.

At the same time, the agency draws attention to existing constraints. Despite the fact that the majority of the population in the region"s countries is Muslim, the level of awareness and trust in Islamic financial instruments remains limited, and sensitivity to Sharia-compliant principles varies.

Among the main supply-side challenges, Fitch highlights gaps in legislation, a limited range of products, underdeveloped branch and digital networks, the absence of sustainable and profitable business models, weak competitiveness of products outside the religious aspect, as well as a limited number of Islamic investors and other market participants.

The Chairman of the Central Bank of Azerbaijan, Taleh Kazimov, stated recently that the legislative package on Islamic finance could be approved as early as 2026. This would allow local banks to officially offer Islamic banking products to customers.

According to him, all necessary legislative documents have already been prepared and are currently in the coordination stage.

"I hope these documents will be approved this year. After that, all our banks will be able to enter the market with both Islamic credit products and deposits," the Central Bank chief noted.