In 2009, Kazakhstan was the first county of the Commonwealth of Independent States (CIS) to introduce Islamic banking and Islamic securities. Still, however, little progress has been made in terms of the development of the Islamic finance industry, apparently because of inherent deficiencies in the Kazakh law which has civil law jurisdiction and does not recognize many international legal concepts. To address this issue, the Astana International Financial Centre (AIFC) was officially launched in 2018. The AIFC is modeled on the Dubai International Financial Centre and it has its own English law-based laws and regulations and even its own court and facility for arbitration (in effect, a ‘one country, two systems’ arrangement has been introduced despite the fact that Kazakhstan is a unitary state). One of the core pillars of the AIFC is Islamic finance, as the AIFC aims to become an Islamic finance hub not only for Kazakhstan, but for the whole of Central Asia and the CIS.
Because of the aforementioned initiatives of the government of Kazakhstan, there are currently in fact two separate legal and regulatory frameworks for Islamic finance created in Kazakhstan, ie one legal framework under Kazakh law with civil law jurisdiction and another one under the AIFC law with common law jurisdiction.
Review of 2020
As far as the overall economy is concerned, in 2020 Kazakhstan suffered badly from the COVID-19 outbreak, the price decline in oil and other commodities and a stagnant banking sector. As such, its future economic growth in 2020–21 largely depends on attracting foreign direct investment into Kazakhstan for the development of infrastructure and regional trade.
That is why the importance of the 66 km Big Almaty Ring Motor Road concession project (a toll road around the city of Almaty), also known as BAKAD and finally reaching a financial close on the 7th August 2020, cannot be overestimated. BAKAD is a groundbreaking public–private partnership (PPP) project for Kazakhstan because it is the first large-scale PPP project in the Central Asian region structured with the involvement of international advisors and investors through an open, international competitive process and in accordance with international best practices. The BAKAD project is supported by, among others, international lenders and the IsDB. BAKAD, therefore, is expected to pave the way for more PPPs in Kazakhstan with the involvement of Islamic finance lenders and investors.
Thanks to the AIFC and its perks, the first Islamic bonds have been listed on the stock exchange of the AIFC, the Astana International Exchange (AIX). The first cross-listing on the AIX of Sukuk issued by QIIB with a primary listing on the London Stock Exchange happened in March 2020.
Interestingly, Islamic banking is so far the fastest-growing segment of the financial sector in Kazakhstan. As of the 1st August 2020, the total assets of the only two existing Islamic banks in Kazakhstan reached KZT72.1 billion (US$166.65 million), while a year earlier this amount was KZT57.4 billion (US$132.68 million), meaning that their combined assets grew by 25.6% year-on-year. As a good example of Islamic banking development, the Damu Entrepreneurship Development Fund for the first time signed an agreement with Al Hilal Bank in the amount of KZT7.5 billion (US$17.34 million) for the development of small and medium-sized businesses in April 2020.
Preview of 2021
The recent outbreak of COVID-19 shocked the world and in 2021, the government of Kazakhstan is expected to struggle to attract cheap financing in international capital markets and safeguard employment and the livelihoods of its people. To fight the pandemic, the Kazakh government has announced stimulus packages and will likely continue its support of Kazakh conventional banks channeling funds to the people; however, as many experts have noted, the ease of interest-based loans may create a debt trap for households and business firms in the long run, which will have a negative impact on the economic system.
To address these issues Kazakhstan plans to continue to develop the Islamic finance industry, including through the AIFC, in order to create alternative sources of financing for SMEs and state and municipal infrastructure projects. In 2021, therefore, more transactions are expected through AIFC cross-border Islamic financing from abroad (such as the Arab states of the Persian Gulf and Malaysia) for the purpose of financing SMEs and the implementation of big infrastructure projects like BAKAD in Kazakhstan.
Despite being home to a large Muslim population, Kazakhstan has not yet taken full advantage of Islamic finance. One may argue that Islamic finance is too complex to understand and to be used by the general population and SMEs in Kazakhstan. Because of the coronavirus pandemic and stagnant conventional banking sector in Kazakhstan, however, Kazakh SMEs do not have much choice any more as Kazakh conventional banks have effectively stopped financing SMEs. Islamic finance instruments, based on trade finance and risk-sharing mechanisms, therefore, can become a sound alternative for all Kazakh businesses independent of their religious views.
The Kazakh government should concentrate its efforts on attracting through the AIFC cross-border Islamic financing from abroad for the purpose of implementation of its big infrastructure projects, but it should not forgo further support and development of the domestic Islamic finance industry which can easily become a much-needed alternative source of financing for SMEs under the current legal frameworks of the AIFC and Kazakh law.