Before 1991, the concept of Islamic finance was a virtual ‘terra incognita’ in the former Soviet Union. Several decades of Communist Party rule had literally done away with the religious beliefs of generations of Soviet people.
In 1992, Tajikistan joined the OIC with a view to developing closer relationships with Muslim countries outside of the scope of Moscow’s influence. The efforts to promote Islamic finance in the region were headed by the IsDB which faced unpredictable and volatile politics, as well as the lack of knowledge about the basic principles of Islam.
The newly elected presidents of the Central Asian country often faced conflicting political currents — on one hand, the adoption of Islamic finance principles had brought promises of investment from the rich MENA countries, but on the other hand, many of the newly minted leaders remained suspicious that Islamic finance was a mere outlet for opposition religious insurgents.
The Law of the Republic of Tajikistan titled ‘On Islamic Banking activities’ was approved on the 26th July 2014. This law determined the legal and organizational basis of Islamic banking in the Republic of Tajikistan and was supposed to provide favorable conditions for conducting Islamic banking activities. And so, the seven years went by…
Many of surveys conducted in Tajikistan have shown overwhelming support for Islamic finance and banking. Unfortunately, a great majority of Tajikistan’s 9.5 million-strong population still know little about the principles of Islamic finance. It is not uncommon that a client comes to an Islamic finance institution and seeks ‘free’ rather than ‘interest-free’ loans.
Review of 2021
Currently, there are two banks in Tajikistan that operate in a Shariah compliant way: Tawhid Bank and Alif Bank. Tawhid Bank, a former conventional bank, was transformed into an Islamic bank in 2019. Among the products offered are Murabahah, Mudarabah deposits, debit cards and Ijarah. In 2021, Tawhid Bank received a Shariah compliant certificate for its Tawhid Pay banking app from AlHuda CIBE.
With the introduction of Tawhid Pay, a mobile application, the bank effectively launched the Islamic finance sector of Tajikistan into a new era of digital banking. This service is absolutely essential since one in four families in Tajikistan has members working abroad, mainly in the Russian Federation.
In October 2021, Tawhid Bank was awarded with a certificate as the ‘Best Islamic Bank’ in the Commonwealth of Independent States. Tawhid Bank has declared its international expansion ambitions but so far there have been no concrete details.
Alif Bank was founded in 2014 as a microfinance institution, and by 2021 had become a leading fintech entity in Central Asia. Now, Alif Bank is in possession of a full banking license. Despite the fact that the bank is not considered an Islamic bank from the legal standpoint, it largely acts as a Shariah compliant financial institution.
Supported by its formidable information technology department, Alif provides alif.mobi, the most widely used finance app in the country. Its business-to-consumer platform, alif.shop, is a leader in point-of-sale financing. The remittances are very important for the migrant population of Tajikistan, and Alif Bank offers the most competitive solution in the country.
Aside from remittance services, Alif Bank also promotes Alif Jummah, a Murabahah-based program of consumer goods sale. The bank is committed to leadership in Islamic finance and established its own technology academy that grows cadres for the bank and for the fintech industry in Tajikistan. In 2021, Alif Bank declared its ambitions to set up operations in the UK.
Preview of 2022
Unlike many established Islamic banks, both Tawhid Bank and Alif Bank do not have an issue with the so-called ‘legacy Islamic assets’ that come as a result of years of evolutionary development. This ”asset-light” model makes them more agile and technologically advanced.
The following developments are forecasted for 2022:
1. International expansion: Tajikistan’s market is fairly small and underdeveloped. Both banks are thus looking north to Uzbekistan and the Russian Federation for expansion. The UK-based shareholders of Alif Bank are keen on bringing its high-tech expertise to the UK, and perhaps, the UAE.
2. New cash products: The Shariah compliant population requires cash loans to serve their immediate financial needs. So, it is very likely that either one or both banks will launch a Tawarruq product within months.
3. The changes in tax law, although highly expected, are not likely to be passed in 2022.
4. It is also unlikely that the dominance of the two banks will be challenged in 2022.
Conclusion
It is difficult to operate an Islamic finance institution in Tajikistan. The key problems include the lack of suitable legislation, the imposed double taxation (the thorny value-added tax issue) and also the fact that Islamic finance operations are still not treated as banking operations by the authorities. Thus, the traditional conventional banks have tremendous tax advantages over the institutions working in Shariah compliant ways.
But the development of Islamic finance in Tajikistan is fueled by the financial openness of the country’s population, the unhindered enthusiasm of the banks’ top management, as well as the Islamic banks’ technological advantages. In a country where until very recently loans were issued to ‘friends’ and the ‘friends of the friends’, the aforementioned advantages are essential.
Dr Vladimir Malenko is the director of FairFinance. He can be contacted at [email protected].
Renat Edikhanov is the financial director of TH AMAL. He can be contacted at [email protected].