Islamic banking has only 1.5% of the total market share of the overall banking sector in Kyrgyzstan. The National Bank of the Kyrgyz Republic (NBKR) is the main state regulator that is responsible for the strategic actions regarding the introduction and development of the Islamic banking industry in Kyrgyzstan. In 2017, NBKR issued a strategic document for the period of 2018–22 whereby it was defined a targeted indicator for Islamic banking industry development: the share of Islamic banking assets in Kyrgyzstan should grow 5% by 2022 from the current 1.5%.
Kyrgyzstan’s banking and finance sector is made up of commercial banks, state commercial banks and non-banking financial–credit organizations, including a specialized financial–credit organization (FCCU OJSC), microfinance companies, microcredit companies, microcredit agencies, credit unions and exchange offices.
Numerically, the industry, as of the 22nd March 2022, consists of 23 commercial banks; three of them being state-owned. Five major banks hold 55% of banking sector assets and 49% of the credit portfolio. All banking institutions in Kyrgyzstan are universal in terms of the type of business.
Regarding information on non-banking financial–credit organizations, there are nine microfinance companies, 87 microcredit companies, 38 microcredit agencies, one specialized FCCU OJSC, 92 credit unions and 387 exchange offices.
Islamic banking
In order to provide much-needed competition, NBKR allowed conventional banks and conventional non-banking financial institutions to operate in the framework of Islamic windows. According to NBKR, as of October 2022, the following financial institutions are operating on Islamic principles in the territory of the Kyrgyz Republic:
1. One pilot Islamic bank: EcoIslamicBank.
2. Three Islamic windows of conventional banks: Bakai Bank, JSC Kyrgyzstan, OJSC Aiyl Bank.
3. Two Islamic windows of a conventional microcredit company: MBulak MCC, MCC Bailyk Finance.
4. Four fully-fledged Islamic microcredit companies: Kompanion-Invest MCC, Ak Karzhi MCC, Bereket Finance MCC and Ak Nur Capital MCC.
5. One Islamic leasing company: CJSC Leasing Company Kyrgyzstan.
Review of 2022
In 2022, NBKR planned to increase indicators reflecting the availability of banking services; increase the level of financial intermediation of the banking system, ie banking system assets should account for 55 % of GDP; and to also increase the share of financing based on Islamic principles up to 5% of the total loan portfolio in the banking sector.
According to 2022 year-end results, OJSC Aiyl Bank received a license to conduct Islamic banking operations through an Islamic window in national and/or foreign currency. The board of NBKR adopted the corresponding decision on the 26th October. At present, OJSC Aiyl Bank is taking appropriate measures to prepare for the practical launch of the Islamic window in its activities. Financing on Islamic principles will be provided by OJSC Aiyl Bank for various purposes: consumer, business development, construction, agricultural development, the purchase of cars, motor vehicles and equipment.
The two conventional banks, OJSC RSK Bank and OJSC Aiyl Bank, have been conducting preparatory work to obtain a license from NBKR according to Kyrgyzstan’s Cabinet of Ministers’s approved project, ‘Lending to the Agro-Industrial Complex’, as the government has allocated KGS10 billion (US$118.44 million) for the purpose of issuance of soft loans and financing, including in accordance with Islamic principles. It is also reported that the Shariah board and the Department of Islamic Finance have started operations in OJSC RSK Bank.
These banks will be able to carry out financing operations in accordance with Islamic principles, including within the framework of the ‘Lending to the Agro-Industrial Complex’ project, after obtaining the appropriate license from NBKR.
The main goal of the project ‘Lending to the Agro-Industrial Complex’ is to support the agricultural sector in the development of agro-industrial clusters (clusters of milk, meat, fish, sugar, chicken eggs, vegetables, fruits, vegetable oil, cotton, cereals and legumes) through concessional lending and financing and leasing including through Islamic principles.
Preview of 2023
2023 promises to be more interesting in the Islamic finance sector since the Ministry of Economy and Commerce has proposed a draft concept for the development of the Islamic economic platform in Kyrgyzstan for 2022–27.
The document was developed to ensure accelerated growth through the achievement of sustainable and efficient functioning of the Islamic economy and finance sectors. According to this concept, the population of Kyrgyzstan will be able to receive services and products in a competitive environment.
The draft concept sets out a purpose and vision for the formation of Kyrgyzstan as a regional center for Islamic economics and finance for the 2022–27 period, and declares the place and role of the Islamic economy as an alternative model in the development of Kyrgyzstan and forms a meaningful framework for improving the regulatory legal framework.
Conclusion
To achieve this goal, the government of Kyrgyzstan plans to solve the following tasks:
• systemization of Islamic economics and finance
• raising awareness and training
• systemization, identification of the Halal industry and assistance in further development
• strengthening the Islamic financial sector
• launch of Islamic securities (Sukuk) and Islamic insurance (Takaful)
• strengthening the management system in accordance with Shariah
• systemization and development of Islamic mortgage housing finance
• systemization and assistance to the development of Islamic leasing
• promoting the growth of the Islamic fashion industry and Halal tourism, and
• systemization of the state Zakat and Waqf system.
Daniyar Mamyrov is the partner at Sarakhsi Islamic Finance and Legal Advisory. He can be contacted at [email protected].