Non-performing loans in Azerbaijan
A non-performing loan is one where the payment deadline has passed but the borrower is unable to repay. For the borrower, it is a source of stress; for banks, a risk; and for the wider economy, a warning signal.
According to official statistics from the Central Bank of Azerbaijan under the indicator “loans of credit organisations”, the volume of overdue loans stood at 557.5 million manats (approximately $328 million) as of 1 February 2026.
By 1 March, this figure had risen to 562 million manats (around $330 million), marking an increase of about 0.8% compared with 1 February.
The annual trend also shows a notable rise. As of 1 March 2025, the volume of non-performing loans was 480.1 million manats (approximately $282.5 million). Compared with this, the March 2026 figure of 562 million manats represents an increase of around 17%.
What does past experience show?
The issue of non-performing loans in Azerbaijan did not emerge overnight. It is the result of several major waves over time.
One of the most significant occurred in the mid-2010s. In 2015, the manat sharply depreciated — a devaluation that made the national currency weaker while the US dollar strengthened.
How is devaluation linked to bad loans?
Imagine you took out a loan of $10,000. When the manat weakens, the equivalent value of that debt in the national currency increases. If your income is in manats but your debt is in dollars, repayment begins to feel as if the debt itself is growing.
This is why the volume of non-performing loans surged after 2015. A clear example is the figure recorded on 1 April 2017, when bad loans exceeded 1.59 billion manats (approximately $935.3 million).
The state later stepped in. In February 2019, a government mechanism was introduced to address part of the bad loan burden. It included compensating exchange rate differences on foreign currency loans held by individuals. The legal framework was based on presidential decrees aimed at resolving non-performing loans and setting out implementation mechanisms. Following this, the downward trend in bad loans became more pronounced.
This is reflected in the long-term data from the Central Bank of Azerbaijan. According to official statistics, overdue loans stood at 893.1 million manats in 2020 (approximately $525.4 million), 719.4 million in 2021 (around $423.2 million), 593.7 million in 2022 (about $349.3 million), and 437.8 million in 2023 (approximately $257.6 million). Over several years, this showed a steady decline.
However, the trend began to shift again in 2024. By the end of that year, the figures started rising once more, reaching 562 million manats as of 1 February 2026.
Why are non-performing loans rising?
There is rarely a single reason behind an increase in bad loans. More often, it is the result of several overlapping factors. At its simplest, the gap between people’s incomes and expenses is widening.
Inflation — the steady rise in prices — is felt in everyday life. The cost of bread, rent, transport, medicines and children’s needs is gradually increasing. At the same time, incomes — wages or daily earnings — are not growing at the same pace.
As a result, household budgets come under pressure. Experts frequently highlight this link, noting that weak growth in real incomes limits borrowers’ ability to repay and contributes to a rise in overdue loans.
A simple example illustrates the point. You take out a bank loan to buy a car, with a monthly payment of 450 manats (around $265). At the same time:
- fuel prices increase
- food costs rise
- school-related expenses appear
- spending on healthcare and medicines grows
Meanwhile, your salary remains unchanged or increases only slightly. In such a situation, the first missed payments often occur on the loan. Households prioritise essential needs — food, transport to work and utility bills — while loan repayments are delayed by a month or two. This is often where the problem begins.
A second important factor is the rapid expansion of consumer lending. Consumer loans are typically taken out for everyday needs or desires — buying furniture or a phone, financing home repairs, purchasing a car or covering wedding expenses. The higher the level of household indebtedness, the greater the risk that non-performing loans will increase.
A third factor is high interest rates. An interest rate is the price paid to a bank for using a loan. The higher the rate, the heavier the monthly repayment becomes.
Economist Natig Jafarli, explaining the situation, says that delays most often occur on consumer loans. According to him, interest rates are excessively high, and some borrowers try to cope by taking out loans from several banks at once. In other comments, he also notes that high rates on consumer lending create an additional financial burden for households.
A fourth factor is lenders’ approach to risk. In some cases, loans are issued too easily: fewer documents are required, checks are superficial, and a “take now, deal with it later” approach prevails.
The Central Bank of Azerbaijan requires banks to introduce early warning systems for non-performing loans and procedures to identify risks in a timely manner. The very existence of such requirements suggests that proactive risk management remains a key issue.
A fifth factor is business lending. When economic activity slows, sales decline and the cost of raw materials rises, making it harder for small businesses to service their debts on time. Official statistics also show that business loans account for a significant share of non-performing loans (NPLs).
What do economists and official data say?
Official statistics answer the question “how much?”, while experts are more focused on explaining “why?”.
First, it is important to clarify a key official term. Under the prudential framework of the Central Bank of Azerbaijan, a non-performing loan (NPL) is defined as a loan where payments on the principal or interest are overdue by more than 90 days. In other words, while “overdue loans” and NPLs may sound like synonyms, they are measured differently in statistics. Without understanding this distinction, the figures can be misleading.
For example, in the Central Bank’s statistical bulletin for January 2026, banks’ NPL portfolio is estimated at around 794 million manats (approximately $467 million), accounting for about 2.6% of the total loan portfolio. This suggests that while the problem exists, it is not at a level that would trigger systemic alarm.
This view aligns with that of MP Vugar Bayramov. He notes that if the share of problem loans were to reach a risky threshold — for example, exceeding 3% — it could be considered a serious issue. At present, he argues, the figure is not critical.
Economist Eldeniz Amirov takes a similarly cautious stance on the growth of consumer lending. In comments to Modern.az, he described the overall expansion of the loan portfolio as a positive development, while warning that a rising share of consumer loans could have negative consequences. In other words, lending itself is not the problem, but excessive debt accumulation increases risks.
Natig Jafarli, for his part, points to sharper concerns. He highlights high interest rates and the tendency of some borrowers to cover current expenses by taking out loans from multiple banks, both of which can increase arrears. At the same time, he argues that it is not entirely fair to place responsibility solely on borrowers: when incomes fall and expenses rise, people often resort to borrowing simply to cope.
The position of official institutions is more measured. The Central Bank of Azerbaijan has tightened requirements for banks’ risk management while also using tools such as capital buffers to support financial stability. In its 2024 report, the regulator noted that, amid rapid credit growth, it introduced a countercyclical capital buffer — a move that indirectly signals rising risks when the credit market begins to overheat.
What does this growth mean — and what can be done?
First, what does a rise in non-performing loans mean for ordinary people?
As noted earlier, it has several consequences:
- More pressure on household budgets. As arrears grow, penalties and additional interest accumulate.
- Debt spirals. People may take out new loans to repay old ones, creating a “snowball effect” where debt rises rapidly.
- Psychological strain. Collection calls, warnings and fears of legal action increase stress levels.
What does it mean for banks?
When issuing loans, banks already factor in the risk of non-repayment. But as bad loans increase, they are required to set aside provisions — essentially reserving part of their income. This reduces profitability and can limit their ability to issue new loans.
There are broader economic risks as well.
When banks become more cautious, lending conditions tighten and the overall volume of credit declines. This can slow business activity. Small businesses, in particular, may struggle to access financing, which in turn affects growth.
What can the state and regulators do?
There is no single solution, but several approaches stand out:
- Stronger risk assessment in banks. This includes more careful verification of borrowers’ income and better measurement of debt burdens, such as the ratio of monthly payments to income. The Central Bank’s requirement to introduce early warning systems is part of this effort.
- Improving market conditions. While interest rates are market-driven, greater transparency and competition in consumer lending could reduce the overall burden. Natig Jafarli has also argued that lowering interest costs could help stimulate economic activity.
- Financial literacy. Borrowers need to assess more carefully, before taking out a loan, whether they will realistically be able to repay it.
- Targeted support and restructuring. Assistance for vulnerable groups and mechanisms such as extending loan terms or revising repayment schedules can ease pressure. A previous example is the 2019 state programme compensating exchange rate differences on foreign currency loans.
Taken together, these measures do not eliminate the problem entirely, but they can reduce risks — both for individuals and for the financial system as a whole.
