The an opportunity? We, Azerbaijanians, are quite

emergence era of non- banking Fin Tech in Azerbaijan: a threat or an
opportunity? We, Azerbaijanians, are quite familiar with banking services but
what about “shadow banking”? And furthermore what about using these shadow
services by our smartphone applications or some particular ERP software?
“Shadow banking” or non-banking Fin Tech is quite a newborn field, especially
in Azerbaijan. To assess conditions for the emergence of this field and
threats and opportunities behind of it, we should become clear about its
concepts, be able to understand its purposes: when to use, how to use and
many many questions like these. Non-banking Fin Tech companies offer similar
bank services via technological applications but do not hold any bank
license. Their main purpose is to finance borrowers who have money deficit
through lenders who have money surplus. The financial system in Azerbaijan is
dominated by banks (95%), and the rest includes mostly non- banking and micro
finance institutions. Generally, entrance of the non- banking institutions to
the market makes the financial system more diversified and benefits varied
needs of clients. Usually, banks in Azerbaijan offer bundled packages to
consumers, however, NBFIs’ offerings have individualistic characteristics and
that’s why they are specialized in their service fields such as credit unions
or insurance services. Although both bank and non-banking intermediaries
serve for the similar segment of the market, there are times when these two
cannot interfere each other’s share since their availability for people is
different. Today, the structure of the financial system in Azerbaijan is
under the control and supervised by the government and the Central Bank, many
financial measurements, reformations are considered to be realized in order
to develop a financial system in Azerbaijan such as Strategic Road Map
(2016). Some of such regulations aim providing digital transformation of
banking and non- banking services; pursuing development of private credit
unions, convenient information flow among these unions and other micro
finance institutions; increasing financial literacy and etc. (the 4.3rd;
3.1st; 5.2th items of The Plan of Actions in the Strategic Road Map: 2016).
As a result, we became more associated with mobile banking, electronic bill
payments, money transfers day by day as our banks have started to implement
these types of innovations. Nevertheless, our financial system still has a
large room to improve fin tech, especially in the non- banking sphere. From
other financial models in the developed countries, we see how important to
have good working non- banking fin tech companies within the country due to
its benefits (like cost optimization, fast service, accessibility, more
competitiveness etc.), however, we all know innovations always come with
threats and obstacles. The benefits and opportunities of non- banking fin
tech: First of all, non- banking financial technologies will create healthier
lending- borrowing system. At the end of 2016, in the Azerbaijani financial
market, there was defaulted credit lines more than 1 billion. According to
the economist- journalist Heydarov, the reason behind this huge financial
mess was inefficient information screening policy of banks (2016). About 5-
10 years ago, we did not have enough NBFIs- especially credit bureaus and
sufficient expertise about borrowing-lending processes. At that time, any
particular borrower could get a credit line from a bank and if defaulted,
this borrower could get another loan from another bank to repay the previous
one. The direct effect of this problematic loan taking stages had to be bad
credit scores but since our banks did not take the importance of management
of credit screening, searching consumers’ financial backgrounds seriously at
that time, and the absence of concerning body, they ended up in the middle of
1 billion defaulted credits. In 2014 the Central Bank of Azerbaijan put some
limitations on loan taking, on the other hand, in the long run, its effect
can be undesirable; less borrowing, less investment, slow economic activities
etc. Nevertheless, a new objection about creating non- banking financial
technologies is the most optimal solution: they are more specialized in these
issues, so they are good at the risk insurance of loans, connecting lender
and borrower. From the side of the borrower, it is easy because all the
appointments regarding borrowing, information screening can be done online
through the applications of non- banking fin tech; so cost of borrowing and
administrative and general expenses can be reduced. From the side of the
lenders, it is already safe to lend, there are no high risks of default (and
good news for borrowers again- less risks, less interest rates on loans!).
From the perspective of the banks, they will already have information about
their clients through the databases of non- banking institutions which also
reduces their costs (Azvision). Actually, this issue was one of the main
objectives of the Strategic Road Map 2016: to optimize screening processes,
one priority among the concerning development of financial services was about
providing information transparency, exchange of data among financial
intermediaries. Additionally, non- banking fin tech innovations substitutes
banking services in a way of more cost-effective and fast. Of course, non-
bank fin tech companies cannot totally replace banks since they are
specialized in some particular field of banking services such as pension and
mutual funds, investment, mortgage finance, insurance etc. and not licensed
from the central and national bank regulations. On the other hand, they are
considered preferable from the side of both non- bank business starter and
consumer because of low costs. Establishment procedures and getting a license
is costly unlike non- banking companies which can be organized in a form of
mobile applications and software. In fact, cost of starting a bank business
varies between in 500,000$ and 1million$ (Offshorecompany). While starting
and running a brick and a mortar bank requires that much capital, non-
banking fin tech reduces a significant amount of general and administrative
expenses. Therefore, it is a kind of incentive to an Azerbaijanian investor
to start his or her business in a form of non- bank. Additionally, the most
desirable opportunity would be from the perspective of the consumer: applying
for a loan to start a farm or getting an insurance for a car would require
several administrative procedures, and therefore, it will be again costly in
terms of money and time. Moreover, its accessibility gives an opportunity to
people who live in remote and rural places of Azerbaijan. Even the idea of
microfinance and NBFIs mostly rely on helping small and medium
entrepreneurship of lender-borrower affairs whose access to commercial banks
and other financial institutions which are not convenient. For small
investors, in rural regions, this type of financing gets so popular in the
developing countries, too. Another opportunity of the emergence of non-
banking fin tech is competitiveness within the market. In the developed
countries, the number of NBFIs is significantly increasing annually and the
entrance of the new competitors is observed to the market which is in favor
of the society; this competition reduces borrowing costs on loans and
increases interest rates on deposits, therefore, increases loan taking and
depositing processes. The increasing demand for borrowing enhances economic
activities and boost the economy. At the end, it plays a role in decreasing
unemployment rates, crucial contribution of small and medium sized
entrepreneurship to GDP. Furthermore, an establishment of new infrastructure
and a developed financial system will make Azerbaijani market interesting for
the foreign investors. It is already observed in the neighbor Ukrainian
financial market: the implementation of new financial innovations between the
years 2010- 2015 has caused an increase in foreign banks assets. Threats for
non- banking fin tech: Most known threat of financial technology is about
their data security. Understandably, lenders and borrowers have concerns
about the safety of loan and interest rates they are transferring to each
other via internet; such safety concerns directly affect demand for non-
banking technologies. For example, recently famous Italian bank Unibank was
hacked and 400, 000 accounts were stolen. This case reminds financial
intermediaries in Italy that they “need massive investment to avoid loss of
confidence”. As the bank representative said, “The protection and security of
its customers’ data is a top priority for UniCredit, and within the framework
of the recent business plan ‘Transform 2019′, the group is investing 2.3
billion euros to strengthen and make its IT systems more and more
effective” (Express). Recently, new solutions such as UTM technologies,
Endpoint Security, Encryption Data at rest were developed against hack risks.
These tools can be effective to organize non- banking fin tech work in
Azerbaijan in terms of consumer concerns. Another threat to the progress of
non- banking sector and its technological advances can come from
Azerbaijanians’ national psychology. People lost their trust in banks during
the transition period after USSR recession. As a result, average person here
would prefer to lend his or her money to someone familiar rather than
depositing it in the non- banking sector. To restore this confidence, people
should be encouraged to work with banks, non- bank services, fin tech
innovations. Low interest rates on loans, increasing financial literacy,
informative sessions can be helpful. Also, non- banking fin tech applications
must be convenient and user- friendly to get popular in Azerbaijan. Here is
the final question arises: what does the current situation of Azerbaijan say
and promise about the application of non- banking fin tech? As we already
know, in 2015 Azerbaijan went through great currency devaluation and it
affected banks and non- banking organizations crucially. Some went bankruptcy,
some banks announced transforming into non- banking service provider such as
PARA NBCO due to insufficient capital and liquidity (Azernews, 2016). After
such economic default, our financial intermediaries were looking for recovery
rather than implementing innovations. But as time passed, the government put
its attention to restructure financial system; Strategic Road Map 2016
achieved some of its goals. It is anticipated that by 2020, liquidity and
capitalization problems will be solved, new financial institutions
(especially non- banks) will be started. More specifically, until 2025,
acceleration of consolidation will be a priority and huge gaps between the
financial basis of banks and non- banks will be eliminated (Report, 2017).
This project will help to reorganize financial system in a more diversified
way (meaning more involvement of microfinance and non- banks institutions);
specific attention will deal with new loan product establishment by non- bank
financial institutions to offer different credit alternatives to the
consumers. Currently, according to the Financial Market Supervision Authority
(FIMSA), we have more than 40 credit unions, some insurance services.
However, there is lack of statistical and informational data about their activities
and outcome of the usage rate of fin tech. But in order to boost non- banking
financial technology implementation, projects, and startups should be
appreciated and considered as a priority from the side of government, bank
and non- banking sector, university administration. And such projects should
also focus on dealing with consumer concerns and adopting more technological
advances. Sources:,,contentMDK:23268764~pagePK:64168182~piPK:64168060~theSitePK:8816097,00.html

Top 17 Roles of Non-Bank Financial Intermediaries (NBFIs)–-tehlil.html