The Muslim population of Kazakhstan makes up 47% of its total, giving it one of the lower percentages among the CIS countries, compared to Tajikistan’s Muslim population making up 95% of its total and Azerbaijan clocking in with 93.4%. However, this has yet to translate into an Islamic finance sector that represents the potential of these populations. REBECCA SIMMONDS explores the latest developments in the Islamic finance sector of Kazakhstan and Central Asia.
Legal and regulatory
In October 2013, deputy prime minister Kairat Kelimbetov was appointed chief of the country’s central bank, which was welcomed as a positive step for the development of the Islamic finance sector in Kazakhstan by the industry’s supporters. In 2013, following amendments made in 2011 to the country’s Islamic finance law of 2008, legislative changes to the law regarding Ijarah (or Islamic leasing) and Takaful were put forward by a special committee of the National Bank of Kazakhstan (NBK), which is responsible for Islamic finance development, to the government. The legislation is currently awaiting approval by parliament, with the expectation that it will be ratified and adopted at some point this year.
The Islamic Development Bank (IDB) has allocated a technical assistance grant to Kazakhstan which the NBK will put to use for the development of the country’s Islamic finance industry, with the drafting of a new Islamic banking law and obtaining the participation of overseas Islamic finance experts. Kazakhstan’s Roadmap of Islamic Financing, the national program set out for the development of the country’s Islamic finance industry until 2020 was presented in 2012 and in 2013 was augmented with the signing of a strategic partnership with the IDB spanning 2013-2015.
In November 2013, it was confirmed that the International Bank of Azerbaijan (IBA) was working with the Azerbaijan Ministry of Economic Development to draft legislation for the country’s fledgling Islamic finance sector that could be ready for submission to parliament by 2014. These followed adjustments made to the country’s tax regulations to ensure that financial institutions such as IBA were not indirectly penalized.
The Islamic Corporation for the Development of the Private Sector (ICD), the corporate financing arm of the IDB, has established Ijarah leasing companies in Azerbaijan (with the cooperation of the IBA), Uzbekistan, Tajikistan, Kazakhstan and Tatarstan in Russia and is currently in the process of establishing an Ijarah company in Kyrgyzstan. The Islamic leasing market in CIS countries is most developed in Kazakhstan, and the country’s Ijarah leasing company was established in April 2013, as the country’s first Islamic leasing company, with a paid-up capital of US$20 million. The business pipeline for the ICD-backed leasing companies in the region is promising, with a disbursement target of US$15 million for the first year. The leasing scope of the companies covers all areas, including healthcare, transportation, earth moving and construction and looks set to flourish given ICD figures that estimate that the leasing market will double by next year, reaching US$2.6 billion.
Banking and finance
Abu Dhabi-based Al Hilal Bank is the currently the sole Islamic bank in Kazakhstan servicing government and corporate clients only, however reports have stated that the bank is looking to enter the retail market towards the end of 2014. In June 2013, the ICD issued a mandate for the conversion of regional Kazakhstan bank, Zaman Bank to Islamic banking, promising an investment of 35% towards the bank’s subscribed and paid-up capital. It is anticipated that the bank will begin offering retail Islamic banking products by the end of the year. Zaman Group has also partnered with the ICD in the establishment of the Kazakhstan Ijarah Company.
In February this year, the Kazakh National Agency for Technological Development, the ICD and a private investor signed an MoU regarding the establishment of the Central Asia Renewable Energy Fund. The fund will invest in renewable and alternative power source projects in Kazakhstan for eight to 10 years. A list of projects eligible for investment by the fund has been approved and the fund’s initial target size is between US$50 million to US$100 million.
According to a recent study funded by the US Department of State, there is a high level of interest in the concept of Shariah compliant microfinance in Tajikistan and Kyrgyzstan, and at the end of last year, local reports stated that the Tajikistan government had confirmed that a draft law on Islamic finance was under consideration during a visit by a Qatari contingent, led by Faisal Saud Al Thani, the director of the Department for Development, Qatar Investment Authority.
Challenges and opportunities
The CIS countries possess high Muslim populations; despite this progress in the area of Islamic finance has been slow due to both a governmental declaration of secularism and a lack of knowledge among the population regarding Islamic finance. The ICD is considering the establishment of an Ijarah leasing company in Turkmenistan, and also taking on partners for its operations in Azerbaijan and Uzbekistan. Governance, education and manpower are all areas that pose difficulties for the development of the Islamic finance sector in the CIS countries, also hindered by complex regulatory and taxation systems, though these challenges are being tackled through the development of education programs by the NBK working with local universities, and the potential establishment of an Islamic finance center.
Despite the slow progress of the Islamic finance sector in the CIS countries, the market for Shariah compliant finance is present and once again moving. Whilst the emphasis has so far been on attracting external investment, the development of the internal market is a steady way to ensure the long term stability of the Islamic finance sector.