Photo: GCC

BAKU, Azerbaijan, June 17. The Gulf Cooperation Council (GCC) represents the most probable source of foreign direct investment in Azerbaijan’s emerging Islamic banking sector, reads the latest report by the Islamic Development Bank Group.

“GCC-headquartered Islamic banks collectively command assets exceeding USD 1 trillion and have demonstrated a sustained appetite for international expansion, particularly into Muslim-majority markets with underdeveloped Islamic finance ecosystems. Azerbaijan’s strategic location at the crossroads of the Caucasus, its hydrocarbon-based economic ties with the Gulf, and its growing geopolitical alignment with GCC states position it as a natural destination for Islamic banking FDI,” says the report of the Islamic Development Bank Institute (IsDBI) and the International Islamic Trade Finance Corporation (ITFC) titled “Islamic Finance in Azerbaijan: Breaking New Ground” launched during the IsDB Annual Meetings in Baku.

The IsDBI and ITFC analysts note that the GCC’s outward investment strategy has intensified in recent years, with the number of FDI projects reaching a record 1,973 in 2024.

“In the financial services sector specifically, major Islamic banks have pursued international expansion through a combination of greenfield branch openings, acquisitions, and digital banking investments. Several structural factors make Azerbaijan an attractive destination for GCC Islamic banking FDI. First, Azerbaijan’s existing energy-sector ties with Gulf states provide a natural bridge for financial sector cooperation. Second, the country’s strategic position along the Middle Corridor trade route linking China to Europe via Central Asia and the Caucasus creates demand for trade finance instruments, including Shariah-compliant varieties. Third, Azerbaijan’s relatively small and concentrated
banking market means that a well-capitalised GCC entrant could rapidly establish meaningful market share. Finally, the CBAR’s phased approach, beginning with Islamic windows before potentially licensing standalone Islamic banks, provides a low-risk entry mechanism for international institutions to test the market before committing to full-scale operations,” the report says.