Kazakhstan Continues to Develop its Islamic Finance

_{Alibek Nurbekov, Head of the Islamic Finance Department at AIFC}

Islamic finance is the fastest-growing segment of the global banking industry, with more than 300 banks offering Sharia-compliant products and services. Kazakhstan, Central Asia’s largest economy, is leading the region’s modern expansion of this ethical finance system.

The Islamic banking sector, based on ethical principles codified some 1,400 years ago, represents roughly $1.7 trillion or 70% of total Islamic finance assets, with commercial banking accounting for the majority. Digitalization is providing a major boost to this form of banking, which has the potential to grow to $3.8 trillion in assets by 2023—with an average projected growth rate of 10% per year, according to the 2018 Thomson Reuters Islamic Finance Development Report.

Market penetration of Islamic finance in Central Asia remains low, but Kazakhstan is ramping up its services and activities in a bid to cement its position as the region’s leading hub. The launch of the Astana International Financial Centre (AIFC) on July 5, 2018 has helped accelerate the country’s development of its domestic and regional Islamic finance market. The ambition is to increase Islamic banking assets from 1% to 3% of the country’s total banking assets by 2025.

“We are already number one for Islamic finance in all the post-Soviet countries, which speaks highly of Kazakhstan, and we see it as having huge potential for growth,” says Alibek Nurbekov, Head of the Islamic Finance Department at AIFC. “Islamic finance is seeing double-digit growth around the world right now, so our plan is to build on our leadership and continue to attract new investors.”

On Aug. 15, a Moody’s Investors Service forecast supported the view that Islamic finance looks set to grow substantially in the Commonwealth of Independent States (CIS) nations over the next five years. “Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan are set to lead this expansion of Islamic banking,” says Svetlana Pavlova, Assistant Vice President and Analyst at Moody’s. “These countries have large Muslim populations, and are notable for their governments’ commitment and progress in establishing better legal and regulatory infrastructure for Islamic finance.”

Community-Minded Banking

One of the major attractions of Islamic finance is its prioritization of social and ethical standards and fairness, with the sharing of profit, risk and liability. Islamic banking and investment principles prohibit activities contrary to Islamic law, such as speculation without identifiable assets; charging interest (riba) or late fees on borrowed money; investing in forbidden industries including gambling, illegal drugs, pornographic entertainment and weapons that can cause collateral damage; and transacting in forbidden commodities such as tobacco, alcohol and pork.

Common Islamic finance transactions include profit sharing between a bank and customer (mudharabah), joint venture investment partnerships (musharakah), leasing (ijarah), safekeeping (wadiah) and “cost plus” (murabahah), in which a requested item is purchased by a bank that then charges the buyer the cost plus their profit, paid in fixed installments, rather than charging interest as with a conventional loan.

Other transactions include qardh al-hasan, an interest-free, benevolent loan; takaful, Sharia-compliant insurance based on collective investment and mutual assistance; salam, a forward-financing transaction in which a seller guarantees to supply specific goods at a future date in exchange for advance payment; and istisna (progressive financing), a contract to manufacture or process goods, or build a structure, according to a specified timeline, which is paid according to the progress of the job. Sukuk, or Sharia-compliant Islamic bonds, provide the holder with partial ownership of an underlying asset, and a corresponding portion of earnings generated by that asset.

“We want to use Islamic finance and developments in financial technology to enhance financial inclusion and financial stability throughout Central Asia,” says Nurbekov. “Its biggest strength is its inclusivity. Islamic finance instruments allow for a more diversified investor base among investors unable to use conventional instruments.”

 Kazakhstan Leads Region in Islamic Finance

Since the launch of the AIFC, Kazakhstan, with a 70% Muslim population, has attracted an increasing amount of Islamic finance activity. The AIFC, which uses English as its main language and follows British common law, is the largest platform in the region providing businesses access to Islamic finance—an alternative source of financing for government and private projects—and it offers a comprehensive regulatory and legal regime consistent with international best practices and standards.

AIFC’s Islamic finance industry participants include Islamic banks, asset management companies, investment funds, takaful and retakaful (reinsurance) companies, leading international Islamic financial institutions and other Islamic financial organizations. The AIFC—in Kazakhstan’s capital, Astana, which was renamed Nur-Sultan on March 23 in honor of former President Nursultan Nazarbayev—is developing the local and regional talent pool, and offers training and certification programs for Islamic finance professionals.

But it is not only Muslim countries that are embracing Islamic finance. As Nurbekov notes: “Three of the five stock exchanges in the world that are very active and vibrant in establishing and providing Islamic financial instruments are in non-Muslim markets—the Luxembourg Stock Exchange, London Stock Exchange and Ireland Stock Exchange. It’s growing everywhere, including the European Union and Southeast Asia.”

“Islamic finance is one of the key pillars of the Astana International Financial Centre. We have created a favorable legal and regulatory environment for Islamic finance and banking, takaful and the Islamic capital market in accordance with the best international standards. I am proud to say that Kazakhstan holds the leading position in the Islamic finance sector in the EAEU and CIS regions. We are pleased with the developments so far, and we are looking into the future with optimism.”

Kairat Kelimbetov, Governor, Astana International Financial Centre

At the AIFC Islamic Finance Conference at the Astana Finance Days event on July 1–4, participants discussed the development of Kazakhstan’s Islamic finance industry. Presentations included the Roadmap for Islamic Finance in Kazakhstan; the recent report of the Islamic International Rating Agency (IIRA) on the main macroeconomic factors that affect Kazakhstan’s sovereign rating; and a workshop hosted by subsidiaries of the Islamic Development Bank that discussed the use of Islamic financial instruments to develop the private sector.

The conference offered a big-picture view of the potential for regional growth of the Islamic finance industry and Kazakhstan’s role within it. The country plans to develop the sector to create alternative financing sources for state and municipal projects, as well as private ones.  

In July, the AIFC announced plans to issue sukuk—Islamic financial certificates defined by the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) as “securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets.”

“We want to play a significant role in Kazakhstan, and are working with the Ministry of Finance in the next two years to issue the first sovereign sukuk here,” confirmed AIFC Governor Kairat Kelimbetov at Astana Finance Days 2019.

The AIFC has commissioned Malaysia-based ZICO Shariah, a leading Sharia advisory service provider, to develop a comprehensive five-year masterplan for Kazakhstan to develop its Islamic finance industry.

In another key initiative, the AIFC has been working with the Islamic Development Bank (IsDB) to create a favorable legal and regulatory environment around Islamic finance, takaful and the Islamic capital market. The partnership has created the conditions for Islamic securities to be issued on the AIX, and the first sukuk issuances are now in the pipeline.

“We are further developing the Islamic finance ecosystem, and currently, in the framework of the IsDB technical assistance grant, we are developing Kazakhstan’s Islamic Finance Master Plan,” says an AIFC spokesperson. “Our close cooperation with the IsDB is supported by the AIFC’s role as the IsDB Governor office for Kazakhstan, which allows us to coordinate the IsDB pipeline projects in Kazakhstan. Moreover, Dr. Bandar Hajjar, President of IsDB Group, is a member of the AIFC Management Council.”

To promote the AIFC as a regional hub for Islamic finance, the AIFC Islamic Finance Advisory Council has been established, and includes international experts. A legal framework has been created in accordance with the best Islamic finance practices and principles, and representatives of the AIFC have joined the Technical Committee of the Islamic Financial Services Board (IFSB) and working groups that develop IFSB standards. The AIFC Central Shari’ah Advisory Board has also been established with leading scholars.

Such AIFC initiatives are already making an impact, with Kazakhstan rising from 31st to 24th in the Global Islamic Finance Report’s Islamic Finance Country Index in 2018. Kazakhstan now holds the lead position in Islamic Finance among the nine post-Soviet countries, according to ThomsonReuters and DinarStandard’s Global Islamic Economy Indicator.

Written by Gabe Kirchheimer and Arif Durrani for Bloomberg Media Studios.