Kyrgyzstan is bordered by Kazakhstan, China, Tajikistan and Uzbekistan. The demographic statistics of the country show almost 90% of the population is Muslim. Businesses and companies have paid heed to these demographics well and are now fully invested in shifting toward Islamic finance. It is now an emerging market for Islamic finance as more and more professionals and individuals turn their focus toward Shariah compliant modes of financing.
Kyrgyzstan is accurately following the roadmap to building a robust Islamic financing ecosystem. With continued development and improvement in the regulatory and legislative environment, and in strengthening institutional capacities to meet growing MSME demand, the Islamic financing market opportunity is estimated to reach between US$342.2 million and US$456.3 million going forward and with deposit potential in the range of US$402.6 million to US$536.9 million. Currently, three banks are providing Islamic banking products in the Kyrgyz economy.
The introduction of Islamic banking and finance in Kyrgyzstan faced obstacles that were mainly due to restrictions from mid-March to mid-May 2020, including the closure of borders, businesses and industries, which have had a strong impact on domestic demand, the driving force behind growth.
Review of 2021
2021 has been tough for economies globally. The recovery of domestic demand in Kyrgyzstan was fast and depending on the political context, the COVID-19 pandemic and the recovery in Russia. It was driven mainly by the rebound in remittances that began in July 2020 and by the positive contribution of agriculture to growth.
The Islamic finance industry, which has benefited from the suspension of business bankruptcy proceedings and deferrals, will benefit from the anti-crisis fund offering subsidized loans. Private consumption (82% of GDP) and, in turn, services (56% of GDP) suffered from the fall in remittances from Russia, and also from the rise in poverty and unemployment.
After rising sharply in 2020, inflation returned in 2021 to the 5–7% target set by the central bank of Kyrgyzstan, despite the recovery of domestic demand and the rise in oil prices. Monetary policy has a low policy rate (5% in December 2020). The average lending rate is high (17%), which slows down an impulse of credit to the private sector that is not subsidized. The capitalization and liquidity levels of the banking sector have remained stable thanks to the relaxation of prudential rules.
Foreign exchange reserves remain comfortable (US$1.7 billion in December 2020, 4.3 months of import coverage), making it possible to limit the depreciation of the som by intervening on the foreign exchange market.
The National Bank of Kyrgyzstan in 2021 submitted for public discussion the draft resolutions of the board of the National Bank, namely ‘On Approval of the Procedure for Accounting for Murabaha Operations’ and ‘On Amendments to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic’.
The purpose of the draft regulations is to define the accounting rules for the assessment, recognition and disclosure of information about Murabahah transactions. The presented draft procedure for accounting for Murabahah transactions was developed, including taking into account the requirements of AAOIFI Standard No 28, and is aimed at using a unified method of accounting and disclosing information on transactions by commercial banks.
Currently, two commercial banks of the Republic — EcoIslamic Bank and the Islamic window of Commercial Bank Kyrgyzstan — are offering operations based on Islamic principles of financing, with the application of the principle of accrual when taking into account the margin on the Murabahah transaction, according to which the bank calculates the amount of the monthly margin at the end of the reporting month.
2021 was successful for Kyrgyzstan’s financial sector as Kyrgyz and Budapest stock exchanges signed a memorandum of cooperation which will serve as a basis for further mutually beneficial cooperation between Kyrgyzstan and Hungary.
The stock exchanges of the two countries plan to exchange experience in the use of various financial instruments and exchange trading technologies. This will expand the geography and the number of participants in exchange trading in the two countries to attract investment.
The Budapest Stock Exchange is one of the largest in Central Europe. The signing of the memorandum between the two stock exchanges opens up new prospects and opportunities for the development of the stock market in Kyrgyzstan.
Stock exchanges will begin to explore the possibilities of helping companies to enter the European stock market for resident companies. Outreach to the business community will be carried out through the organization of conferences and training seminars starting in the near future.
Preview of 2022
The public deficit in Kyrgyzstan have not widened in 2021 and is expected to remain significant in 2022. The government and political elite have been unanimous in the decision to stop the previous practice of foreign interest lending due to President Sadyrbek Japarov’s new policy on foreign lending.
The government’s previous deficit was financed by concessional loans and foreign grants, such as the US$592 million (7% of GDP) from the IMF and the World Bank, received in 2020.
These loans have increased the public debt and are held by multilateral and bilateral lenders (62%) and Chinese Eximbank (38%). Thus, the government of Kyrgyzstan plans to change its debt policy probably with a focus on Islamic debt instruments.
It is expected that the Kyrgyz Islamic banking market will also grow in 2022. Kyrgyzstan’s central bank also announced on the 13th October 2021 that its board has made a decision to issue a banking license to JSC Commercial Bank of Kyrgyzstan for the right to introduce Islamic banking operations through an Islamic window in national and foreign currencies.
Other local commercial banks and institutions are also looking for an opportunity to introduce Islamic operations through windows.
And finally, representatives of the financial and private sectors, industry business associations, as well as government agencies of Kyrgyzstan have visited the Astana International Financial Centre (AIFC) where parties reached an agreement on cooperation, in particular between the AIFC and the Union of Banks of Kyrgyzstan, and also via the Russian–Kyrgyz Development Fund.
Within the framework of the memorandum, the Union of Banks of Kyrgyzstan and the AIFC agreed to work on the development of securities and venture capital markets, Islamic and green finance, as well as training programs. Thus, 2022 is expected to be very interesting in terms of the development of the Islamic ecosystem of Kyrgyzstan through cooperation with the AIFC.
In conclusion, today there are interstate agreements between the countries of the Eurasian Economic Union (EAEU) regarding plans to form a common financial market for the EAEU. This should create conditions for free access of participants to the financial markets of the union.
The insurance sector is expected to be one of the first to receive united rules for regulation and mutual market access. Kyrgyzstan was the first country among the Central Asian countries to incorporate Islamic finance in its economy, but still, the share of Islamic banking in the banking sector of Kyrgyzstan allows entrance into the market by new players.
The further rapid development of the financial sector in Kyrgyzstan shows us good sustainable levels. For example, in the Russian banking system, these banking indicators are much lower; there are more risks in this part. When implementing new projects related to investments in fixed assets, a business needs long-term, inexpensive resources.
One of the tasks for the Kyrgyz Republic’s economy is to create large aggregators of products of small- and medium-sized businesses. Businesses in Kyrgyzstan are ready to interact with global investment players.
Daniyar Mamyrov is the managing partner of Sarakhsi Advisory. He can be contacted at [email protected]