Kazakhstan on track to become Central Asia’s Islamic finance hub

Central Asia’s largest country Kazakhstan, with a Muslim-majority population of around 18mn people, is sustainably entrenching its role of becoming the region’s centre of Islamic finance and banking. As for the latest developments, it turned out at the first summit of the Organization of Islamic Cooperation (OIC) summit on science and technology held in the capital Astana last month that the Islamic Development Bank (IDB) will finance projects in Kazakhstan worth no less than $1bn in cooperation with the Astana International Finance Center, including infrastructure projects, agriculture and food industry ventures and technology partnerships. This comes on top of the 23 projects worth $500mn that have already been implemented by the IDB through Islamic funding over the past years.
Kazakhstan will also issue Islamic bonds, or sukuk, worth $300mn next year through the Development Bank of Kazakhstan, according to an announcement of Kazakh President Nursultan Nazarbayev during the Global Islamic Finance Awards ceremonies which were held as a parallel event to the OIC conference on September 10-11. The volume of those sukuk is the highest-ever Kazakhstan is issuing. Since 2012, when the country began issuing Islamic bonds, the total volume of sukuk issued through the Development Bank of Kazakhstan was just $57mn, according to Nazarbayev.
Kazakhstan now also has a second fully-fledged Islamic bank licensed to operate in the country. Previously, the sole Islamic financial institution was Al Hilal Bank, operating since 2010 in line with an intergovernmental agreement between Kazakhstan and the emirate of Abu Dhabi. Back in August this year, the country’s previously conventional Zaman-Bank became an official Islamic bank after receiving a respective licence from the National Bank of Kazakhstan.
According to Timur Rustemov, head of Zaman-Bank’s Islamic finance development unit, the bank sees large potential in Islamic consumer banking and also in financing of small and medium businesses which are seen as one of the main drivers to introduce and develop the Islamic financial system in Kazakhstan.
A rising penetration of Islamic finance among these customer segments would also lead to more interconnection with Muslim businesses and help jumpstart other segments of the industry, including takaful, as well as unlock opportunities beyond the financial sector, namely of a wider range of halal industries such as food, textiles and pharmaceuticals funded with Shariah-compliant financing.
Looking back, Kazakhstan was the first former Soviet state to issue Islamic finance guidelines in 2009. However, as of today, the country’s Islamic finance industry is still in its nascent stage with total assets of less than 1% of total banking assets in the country of around $100bn, but remains ahead of its local peers.
Kazakhstan’s government has issued a “Road map on the development of Islamic finance until 2020” that outlines the rollout and implementation of Islamic finance in the country and aims at creating the “best possible conditions” for the segment’s operations. To that end, Kazakhstan has become a member of leading international Islamic finance organisations, namely the Islamic Financial Services Board (IFSB), the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), and the International Islamic Financial Markets (IIFM).
There are, however, also some obstacles on the way to establish a sound Islamic banking system in Kazakhstan. Most of all, local financial groups and investors seeking to develop Islamic finance do not have enough skilled workforce at hand, let alone the market experience to create and promote a wider choice of Islamic corporate and retail banking products. One way to resolve this problem could be to establish more joint ventures or strategic alliances between local financial investors and foreign counterparts, which is where experienced players from the Gulf Cooperation Council, including from Qatar, could come into play.
Another issue is simply the lack of awareness about Islamic finance in the population, According to a survey conducted by the National Bank of Kazakhstan, 71% of a representative sample of people in the country never have heard of Islamic finance.
“This lack of awareness might be understandable in countries without a Muslim majority, however, among the 18mn-population of Kazakhstan, approximately 70% are Muslims. And those who have not even heard of Islamic finance are predominantly Muslims (46%),” the study noted, arguing that this may be attributed to the prevention of practicing religion under Communist USSR rule until 1991, whose impacts remain until today.
The study concludes that – apart from introducing a legal framework, including a specified tax regulation, to create an industry level playing field for Islamic finance institutions – a nationwide education plan, involving both the public and private sectors, would be imperative to the development of Islamic finance in Kazakhstan.