Islamic financing in Kyrgyzstan was established in 2006 with the support of the IsDB pilot project based on commercial bank EcoBank (currently EcoIslamic Bank). The aim of implementing Islamic principles of financing was to bring more economic freedom, sustainable competition in the financial market along with traditional banking and lending, and reviewing and adapting changes in the legal framework due to new global processes.
In 2018, the share of Islamic banking in the banking sector of Kyrgyzstan was 1.6% and in the microfinance sector it was 6%; by 2020 the indicators slightly decreased to 1.2% and 5.6% respectively. By looking at the numbers we can say that the share is meager; however, Kyrgyzstan has prepared a good regulatory framework for the Islamic finance sector to develop and gain more market share. In 2020, Kyrgyzstan has several players in Islamic financing — pilot bank EcoIslamic Bank, first licensed by the National Bank of the Kyrgyz Republic (NBKR); the Islamic Financial Center in Bakai Bank (Islamic window); in the microfinance sector there are Mol Bulak Finance and small Islamic microcredit companies Ak Nur Capital, Ak Karzhy, Kompanion Invest; and there is also leasing company Ijara Company Kyrgyzstan.
At this time, Islamic principles of financing have been legislatively introduced not only in the banking sector, but also in other financial markets such as insurance and securities. However, in practice, there are still future improvements to be made to provide Islamic insurance services (Takaful) or the issuance of Islamic securities (Sukuk).
Review of 2020
The major legislative role held by the NBKR is of great interest and it is making efforts for the development of the Islamic financing sector. The NBKR has established the Department of Islamic Financial Products under the Department of Supervision and Licensing Methodology. The NBKR is also working to introduce tools that will help Islamic finance organizations cope with liquidity during unstable economic and political situations.
The legislative framework for Islamic finance is quite large and in a constant process of improvement. The Jogorku Kenesh (Parliament) is considering amendments and additions to the Civil Code of the Kyrgyz Republic as part of Chapter 34-1 ‘Financing in accordance with Islamic principles of financing”, where the main operations are described and explained. As of today, the regulatory and legal framework for Islamic finance has all the necessary documentation for the establishment and operation of Islamic banks and microfinance organizations in the Kyrgyz Republic.
In 2020, in different regions of the country, the number of branches and customer service locations has increased. As a part of investing in business projects (as a shareholder or investor), the Islamic Financial Center has expanded its presence in the market with several branches and savings banks throughout the country.
The coronavirus pandemic has made its own adjustments to the development plans for Islamic finance. Some commercial banks had projects to open Islamic windows, including the two largest state banks — RSK Bank and Ayil Bank — but at the moment these organizations are in standby mode to obtain a license from the NBKR.
Preview of 2021
Despite the economic and political crisis in Kyrgyzstan, the potential for the development of Islamic finance remains large and underestimated. However, all active players in the market need to make every effort to disseminate and explain Islamic finance instruments to the public.
A lack of Islamic economic specialists has forced managers to hire specialists from Islamic countries to manage and regulate costs, and to learn technologies to render services to clients in the process of Islamic finance implementation. The need to introduce Islamic economic disciplines in universities is growing due to objective processes, the geopolitical position in the world, an increase in demand for highly qualified personnel with such specialization and the growing demand for an Islamic finance market.
Conclusion
As in many countries where Islamic finance is practiced, the main instruments for Kyrgyzstan clients are transactions such as Murabahah, Ijarah, Mudarabah and Qard Hasan. Since Kyrgyzstan is an import-oriented country, Islamic finance organizations have a large share in the trading sector, but nowadays Islamic finance is also expanding to agricultural, construction and personal lending.
The further implementation of Islamic finance in the Kyrgyz Republic will help to develop the real economy, meet the needs of all segments and achieve transparency in the financial sector. Also, Islamic financial instruments can be viewed as an opportunity to mobilize domestic resources and attract additional investments from large investors and international corporations to the country’s financial markets.
Aidai Suranaeva is the director of Crowe Horwath Kyrgyzstan. She can be contacted at [email protected].