Finding a proper way of financing in the process of fiscal decentralization is a challenging task facing many countries across the globe. This is also a critical issue in the Republic of Azerbaijan. That is, significant deficiencies observed in local governance financing present one of the challenging problems at present. This research identifies that the key problem hindering the effective functioning of municipalities is closely related to the present form of financing. Through examining available sources of municipal financing in the Azerbaijani context, it is concluded that that there should be more focus on a grant type of intergovernmental transfers with an emphasis on county-specific corrections. The research is based on a content analysis of documents, laws and background research, as well as an evaluation of semi-structured (e-mail) interviews conducted with twelve fieldworkers who have been closely involved in work with local governments in Azerbaijan. The research could a useful source for researchers, experts in the field, policy practitioners and students.