On the 17th March 2010, the Kazakh financial market regulator issued a first in the history of modern Kazakhstan — a license to carry out Islamic banking operations for Al Hilal Islamic Bank. ADLET ALIYEV discusses the prospects of Shariah compliant banking in the country.
There are two models of commercial banks that exist and can be applied in Kazakhstan.
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Banks operating according to the classic western standard, the basic principles of which are the following: money is a commodity, and the value of money depends on the duration of its use (money has a time value);
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Banks operating in compliance with the principles of Shariah: according to which money is not a commodity but a means of investment, and the value of money can be expressed only through a finite income received from the investment of the money that denies the time value of money without connection with business activity.
To determine the purpose of Islamic banking in Kazakhstan — either as an experiment in the Kazakh banking business arena or the creation of a marketable financial structure that provides a specific service — one first needs to consider the current state of Islamic banking in the world.
Despite the fact that to date, the share of assets of Islamic financial institutions is variously estimated at a relatively modest figure of less than 1% of the assets of the global banking industry, they occupy a prominent niche in the global financial banking industry.
The number of Islamic banks in the world according to various sources exceeds 400. The difficulty with the exact calculation of this index is that for example in European countries, and even in Turkey, banking law does not distinguish between conventional and Islamic banks. Therefore, in such countries the statistics can not officially identify any banks as Islamic, as all the banks are of the same type of banking license.
In this case, banks can hold a standard banking license but position themselves as an Islamic financial institution, just by declaring that they provide financial services in accordance with the requirements of Shariah.
According to an Ernst & Young report, the total assets of Islamic banks worldwide in 2011 reached US$1.3 trillion, and the forecast for the next three years shows this figure could reach US$2 trillion by the end of 2014. The annual average growth rate of total assets of Islamic banks in the last four years has been 19%, and in 2011 the sector assets grew on average by 24%. By comparison, in developed countries this figure for conventional banks has averaged less than 3%, while in developing countries it reached 14%.
According to the final data of the Statistics Agency National Census in 2009 the number of followers of Islam in Kazakhstan is 11.2 million, or 70.2% of the total population. According to the Turkish news portal Haber Vaktim, at the end of 2011 the number of Muslims was 7.13 million people, or 47% of the population of Kazakhstan. Figures vary, but, nevertheless, I am pleased that many Kazakhstan citizens consider themselves Muslims.
Talking about the number of Muslims in the country, it is necessary to clarify the following. There is an informal graduation of Muslims into three main types according to the intensity of faith:
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The most numerous. This includes people who have a very basic understanding of Islam, do not follow strictly the canons, but consider themselves Muslims.
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Muslims who are familiar with and share the basic tenets of Islam, including as a rule committing the Friday prayer in the mosque.
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Muslims who know the Quran and Hadiths of our Prophet (May Allah bless him and grant him peace) —strictly adhering to all regulations of Islam and committing five daily prayers.
Muslims of the latter group are loyal clients of Islamic banks. They tend to deal only with Islamic banks, as they know exactly what Ribais and why it is forbidden for Muslims. As for the Muslims of the two other groups, they are potential customers for Islamic banks. In this case, it takes time for faith to become stronger in the heart of the Muslim, and for him to begin to understand the requirements of Shariah and follow them, including provisions relating to the business of monetary relations. But it does not mean that an Islamic bank is a kind of closed institution serving only Muslims. Quite to the contrary, Islamic banks should not make any distinctions between their customers by religion.
Being a business institution the bank strives to provide its services to the greatest number of different clients. A regular client considers an Islamic bank as a bank — not giving value to the word ‘Islamic’ — and compares the cost and quality of its services with conventional banks when making the choice. And a Muslim from the latter group when choosing a bank will be making a choice only between Islamic banks, completely eliminating a conventional bank as an option.
The number of Muslims who strictly observe the instructions of Shariah and are seriously studying Islam in Kazakhstan is growing steadily. The growing interest of our young people in Islamic education can prove this. To date, thousand of Imams retrain annually in the institute for improving the skills of Imams at the Spiritual Governance for Muslims of Kazakhstan (SGMK). SGMK has also opened eight Madrassas, including the Almaty Abu Hanifa Madrassa.
The country also has more than 40 children’s pensions, created by a non-profit association of Islamic cultural centers, where about 2,000 pupils and students receive moral education based on the norms and principles of Islam. The Kazakh-Egyptian Islamic University Noor successfully operates in Almaty. Every year it enrolls up to 600 students. About 400 Kazakh students study in foreign Madrassas and Islamic universities, including the prestigious universities of as Al-Azhar and the International Islamic University of Islamabad.
According to the Agency for Religious Affairs, as of October 2012 after the re-registration there were 2,228 mosques in the republic. Arriving at Friday prayers in any Kazakhstani mosques, one can see that both the mosque and its adjacent area are crowded with Muslims. It is very encouraging that the vast majority of them are young people. But tomorrow, these young people of Kazakhstan will become good earning workers and professionals, middle managers and senior managers in different companies; and as both private clients and business leaders, they will seek to avoid cooperation with conventional banks.
To meet the needs of the Muslim population of the country we should objectively develop Islamic banking in Kazakhstan. Islamic bank by its nature is a perfect example of a successful conservative financial institution for conventional Kazakh banks. It is a model that can dynamically grow and generate sufficient profit without participating in speculative trading in financial markets.
I should point out that the Kazakh financial market regulator of the National Bank and legislators have already done a lot to develop the legal infrastructure for Islamic banking in Kazakhstan. Among them are amendments to the Law on Banks and Banking Activities. The Law on the Securities Market, on Insurance, and the Law on Leasing will also be amended very soon. However, there are still a lot of changes to be done in the area of taxation, as well as changes to the Civil Code. Learning from the experience of the application of Islamic instruments by the first Kazakh Islamic bank there is a need to make further amendments to the banking legislation, etc.
In conclusion, I would like to point out that the development of Islamic banking and Islamic finance in general is beneficial for the Kazakh financial market, because:
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It provides customers with a more diverse range of alternative choice of banks providing services and financing;
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It enhances open competition among financial institutions, giving customers additional benefits in reducing the price of service and increasing the quality of service;
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The developed legal framework for Islamic finance will attract into the Kazakh market major long-term investments from the Middle East.
Adlet Aliyev is the chief dealer at the treasury of Al Hilal Islamic Bank in Kazakhstan. He can be contacted at
[email protected]
.