LOANS UNDER NEW RULES

Non-bank credit organisations (NBCOs) in Azerbaijan are entering a new phase of development. Until recently, the role of these institutions was defined primarily by their capacity to facilitate relatively small loans outside the traditional banking system. The scope of NCOs' activities is expanding, and the regulator's approach is adapting accordingly. As opportunities increase, it is essential to ensure higher levels of capital, transparency and accountability to borrowers.

The Central Bank of Azerbaijan (CBA) is currently engaged in the drafting of regulatory rules on non-performing loans, the review of terms for the restructuring of overnight loans, the limitation of risk concentration, and the stimulation of business financing.

Economic growth calls for new rules

The necessity for additional reform is primarily driven by the substantial growth of the non-bank credit sector. As at 30 June, there were 53 non-bank credit organisations (NBCOs) operating in Azerbaijan, 14 of which had foreign capital involvement. The sector employs over 4,400 people, and in some cases the presence of non-bank organisations in the regions extends further than the branch networks of banks. They play a particularly important role in areas where access to traditional banking services for the public and businesses remains limited.

In his press-release, Mr Khayyam Ismayilov, Director of the Department for the Supervision of Non-Bank Credit Organisations at the Central Bank of Azerbaijan (CBA), informs that the organisations' liabilities and equity capital are also increasing. Furthermore, the growth in capital base is not solely attributable to retained earnings; existing investors are further increasing their investments in the companies. It is becoming increasingly evident that non-bank credit organisations are also becoming more active in the bond market. These organisations are successfully raising funds from the general public and institutional investors.

However, the loan portfolio constitutes the bulk of non-bank credit organisations' assets. As at 30 June 2026, the aggregate loan portfolio of non-bank credit organisations reached ₼681.6 million, having almost doubled compared with mid-2024. At the same time, ₼50.9 million, or 7.5 per cent of the portfolio, were accounted for by non-performing loans, the volume of which had risen by 20 per cent since the start of the year. Consequently, the market is expanding not only due to an influx of capital and an increase in borrowers, but also due to mounting risks that necessitate increased regulatory intervention.

The first major steps in this direction were taken in 2023. The collateral deposit mechanism was removed from the legislation and a unified supervisory approach was extended to all non-bank credit organisations. Organisations were required to submit information not only to the Centralised Credit Register but also to a private credit bureau. This development has enabled the expansion of the information base for assessing borrowers, thereby reducing the risk of individuals taking out multiple loans from different organisations at the same time.

Concurrently, the market is undergoing a process of elimination, with participants who are unable to meet the new conditions being phased out. Between 2025 and 2026, three non-bank credit organisations voluntarily surrendered their licences, whilst the licences of a further three were revoked due to non-compliance with the law. In this case, the reduction of the number of organisations is not the primary objective of the regulator. The objective is to establish a more sustainable sector, in which business expansion is supported by sufficient capital, professional management and reliable financial reporting.

Breaking the debt cycle

The changes that will be most noticeable to the public relate to payday loans. Their popularity can be attributed to the ease with which they can be obtained: a small sum is disbursed quickly, without lengthy assessment or the traditional bank's stack of paperwork. However, the high daily interest rate and short repayment term can turn such a loan into a serious financial burden. In the event that a customer fails to repay money owed on time and subsequently takes out a new loan to repay the previous one, a small debt can quickly become part of a constantly repeating cycle of debt.

The Central Bank of Azerbaijan (CBA) has already imposed specific restrictions on this product. The maximum amount for a daily loan is ₼500 manats, the daily interest rate is 0.3 per cent, and the repayment term may not exceed 45 days. The borrower's total additional costs are capped at the amount of the loan itself. To summarise, the customer is required to pay no more than ₼100 in interest, fees and associated costs following receipt of ₼100. Furthermore, it is prohibited to accept movable or immovable property as security for daily loans.

It is also important to note that the approach to overdue debt is changing. Previously, the restructuring of daily loans was not permitted. However, it has been demonstrated through practical experience that this prohibition does not guarantee the borrower's ability to resume their financial responsibilities. If a customer is unable to settle the debt within the stipulated period, the absence of a restructuring mechanism merely perpetuates the arrears.

The new procedure stipulates that, once 20 per cent of the debt has been repaid, the customer will be able to restructure the remaining amount for a further 45 days. Furthermore, this process must not result in additional costs or increase the established credit limit.

"A loan may be restructured once the customer has repaid 20 per cent of the outstanding amount. This will help to improve the situation regarding overdue debt. Even when restructuring, the customer must not incur any additional costs, and the total repayments must not exceed the established 100 per cent limit. Our focus is on the individual, that is, the borrower,” stated H. Ismayilov.

Restructuring is just one element of the future system. The Central Bank of Azerbaijan is also working on specific regulatory rules governing non-performing loans held by non-bank credit organisations. The objective is to enhance oversight of the lending process, the calibre of information, and the actions taken by organisations in the event of arrears.

"We are carrying out the necessary research in this area and continuing to work with organisations. Should any negative cases be identified, and if we are able to establish them in terms of legal requirements, appropriate action is taken to rectify them. Should there be any delays in the timely provision of accurate information, appropriate steps are also taken in this regard," noted Ismayilov.

The new mechanism should allow for the distinction between a borrower who is temporarily short of funds and a customer whose debt burden no longer corresponds to their income. In the former case, restructuring can restore payment discipline; in the latter, repeated extensions merely postpone acknowledging the problem.

The more expensive the loan, the greater the capital

Instead of implementing a uniform maximum rate across all products, the CBA has adopted an alternative approach. It links the cost of loans to the volume of liabilities that a non-bank credit organisation (NBCO) can take on. An organisation's reliance on its own capital is directly proportional to the proportion of expensive loans in its portfolio. This means that the fewer opportunities it has to finance growth through borrowed funds, the more it must rely on its own capital.

The average effective annual interest rate on consumer loans in the national currency within the non-bank credit organisation sector is calculated on a quarterly basis and published on the CBA's website. The current figure stands at 35 per cent. The level of risk is determined by applying a multiplier of 1.25 to the average market rate.

If the cost of loans does not exceed this benchmark, a non-bank credit organisation's total liabilities may reach ten times the amount of its capital. If more expensive loans account for between 25 and 50 per cent of the portfolio, liabilities are limited to three times the amount of capital. When these holdings account for more than 50% of the portfolio, the organisation is subject to a limit on its liabilities, set at the amount equal to its own capital.

Therefore, the non-bank credit organisation continues to have the formal capacity to establish interest rates according to the customer's risk profile and prevailing market conditions. However, the widespread granting of expensive loans restricts the organisation's access to debt financing and makes such a model less profitable. The regulatory framework redistributes risk from consumers to the company's shareholders, incentivising a more prudent lending policy that safeguards their own investment.

The objective is to ensure that customers are not charged a higher interest rate on loans. If a non-bank credit organisation complies with the established interest rate benchmark, it may raise liabilities up to ten times the amount of its capital," explained Ismayilov.

The minimum capital requirement for commercial non-bank credit organisations has been increased more than threefold – to ₼1 million. For new entrants, meeting this requirement is a condition for entering the market. Existing organisations must also maintain their capital at a level that allows them to cover risks and continue operations without excessive reliance on borrowing.

Entrepreneurs rather than consumers

The tightening of requirements for consumer loans is accompanied by incentives in another area – business financing. The requirements for setting aside provisions on business loans are less stringent than those for consumer loans. The Central Bank of Azerbaijan (CBA) is thus creating an economic incentive for non-bank credit organisations to increase their lending to micro and small businesses, the self-employed and family-run businesses.

'Our requirements regarding business loans are more lenient. The objective is to encourage non-bank credit organisations to issue business loans, with a particular focus on micro- and small business loans. Under the previous approach, there was no such distinction: consumer and business loans were not separated. It is important to note that different requirements apply to them,' emphasised Ismayilov.

Non-bank credit organisations may also engage in factoring, discounting bills of exchange, issuing guarantees, acting as insurance agents and carrying out leasing transactions. The next stage involves considering the possibility of permitting certain currency exchange transactions and fund transfers without the need to open an account. The diversification of funding sources is also a topic under discussion. This includes the integration of non-bank financial organisations into credit guarantee schemes. Consequently, the distinction between banks and non-bank entities remains, but the market itself becomes more multi-faceted.

The regulation of finance leases is also becoming one of the most significant elements of the reform. In legislation, the term 'leasing' is being replaced by 'finance lease', though it should be noted that the changes are not limited to terminology. In effect, a unified framework is being established for market access, the conclusion of contracts and the supervision of operators' activities.

A finance lease is an arrangement whereby an organisation acquires an asset and transfers it to a client for possession and use for a specified period in return for a fixed fee. This arrangement may be more convenient for business owners than a conventional loan, as they receive the asset necessary for their operations – equipment, a vehicle, or agricultural or industrial machinery – in place of cash. Concurrently, the asset functions as a financial security measure for the transaction.

Once the law comes into force, financial leasing will be permitted for banks, local branches of foreign banks, non-bank credit organisations (NBCOs), as well as specialised legal entities included in the Central Bank of Azerbaijan's (CBA) register. NBCOs will therefore be able to set up a separate financial leasing division alongside their loan portfolio.

For the first time, independent leasing companies will fall within the Central Bank's full supervisory remit. The law will come into force on 25 December. Thereafter, existing market participants will be given nine months to bring their operations into line with the new requirements and to submit an application for inclusion in the register. Only registered legal entities will be able to continue operating.

For non-banking companies, financial leasing can be a way to move away from relying too much on unsecured consumer loans. A leasing portfolio is linked to tangible assets and is generally structured over a longer term. This provides small businesses with an additional channel for renewing fixed assets without having to pay the full cost of the property up front.

However, the sector's prospects will depend on the cost of capital. Should non-bank credit organisations opt to raise funds at high interest rates, this will also have a negative impact on the customer by making finance leases expensive. It is evident that the introduction of a register and contractual rules alone is insufficient. The market’s development will require long-term sources of funding, credit guarantees, access to the bond market and, possibly, the involvement of state development institutions.