Islamic Finance is growing tremendously in Central Asia: Zubair Mughal

Islamic Finance, guided by Shariah principles, is a values-driven approach to investment that promotes justice and prohibits unethical, speculative, and usurious practices. It plays a pivotal role in supporting the real economy and boosting the global financial system’s resilience. Since the war of the Soviet Union and the emergence of new nation-states in 1991, the Muslim-majority republics of Central Asia have witnessed the introduction of Islamic banking and finance to the region. The Islamic Development Bank (IDB) has played a significant role in facilitating the expansion of financial projects in the area that adhere to Islamic principles, including the prohibition of usury or riba.

This report delves into the landscape of Islamic Finance in Central Asian countries, including Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. These nations are home to approximately 80 million people, with roughly 85 percent of the population identifying as Muslims. Kazakhstan has a Muslim population representing 71 percent, while the other four Central Asian countries have approximately 90 percent Muslim populations. This region holds immense potential for Islamic Finance.

Kazakhstan and Kyrgyzstan are pioneers in this field, having formally introduced Islamic financial institutions over two decades ago. Despite more than two decades of continuous efforts and initiatives by local Muslims, Central Asian states have made relatively modest contributions to the global Islamic Finance and Banking industry. However, Islamic Finance has significant growth prospects in these regions due to the sizable Muslim population and the presence of international Islamic financial institutions (IFIs), such as the Islamic Development Bank (IsDB) Group, as noted by UNDP in 2021. Refinitiv’s 2022 report indicates that in terms of Islamic Finance development, Kazakhstan is the fastest growing central Asian Islamic banking market in 2021 and ranked 24th globally, surpassing the global average, and leads the Central Asian markets. The Kyrgyz Republic, Tajikistan, and Uzbekistan ranked 38th, 46th, and 49th, respectively, while Turkmenistan lagged significantly behind, securing the 85th position.

Geographical representation of Central Asian Countries

As of 2022, the IsDB has funded 378 projects in Central Asia worth US$6.88 billion. In 2018, Kazakhstan hosted the IsDB’s Regional Hub responsible for operations in Central Asia. This hub plays a key role in coordinating the IsDB’s work in the region. The IsDB’s private sector arm, the Islamic Corporation for the Development (ICD), also plays an important role in Central Asia. The ICD provides Islamic financing and advisory services to support the development of the private sector in the region. The figure 1 represents the total funding for each country in Central Asia. In Kazakhstan, the IsDB has supported 69 projects with a total funding of 1,700 million USD, while in Kyrgyzstan, 71 projects have received 421 million USD in funding. Tajikistan has benefited from 92 projects with 663 million USD, and Uzbekistan has received funding for 123 projects, totaling 2,800 million USD. Turkmenistan has also received IsDB support for 23 projects, amounting to 1,300 million USD.

Fig 1: IsDB Funded Central Asian Projects

Republic of Kazakhstan

Kazakhstan has been making significant efforts to embrace Islamic Finance, becoming a regional hub for it in the Commonwealth of Independent States (CIS). The country started taking steps in this direction as far back as the early 1990s. These efforts were driven by the stability of Islamic financial institutions during the global financial crisis, the need to diversify funding sources, and attract long-term external investments for industrial development plans.

Since 2009, Kazakhstan has introduced various initiatives to support Islamic Finance, such as changes in legislation to promote Islamic banking and insurance (Takaful), the establishment of Islamic financial institutions (IFIs), and the issuance of Sukuk (Islamic bonds). Islamic banking in Kazakhstan accounts for a substantial portion of Central Asia’s Islamic banking assets, and the country is expected to further boost its Islamic banking sector thanks to digitalization and government support. Currently, three Islamic banks and two Islamic leasing companies operate in the market. The details of Islamic financial institution are shown in figure 2. According to Islamic Financial Services Stability Report 2022 (IFSB, 2022), the Islamic banking sector in Kazakhstan accounts for 70 percent of Central Asia’s aggregate Islamic banking assets. Despite this, Islamic banking assets in the country represented less than one-quarter of one percent of all banking industry as of the end of 2021. Other Islamic financial institutions (OIFIs), such as fintech companies, investment firms, financing companies, leasing and microfinance firms, and brokers and traders, assets growth rate 44% was recorded.

Fig 2: Islamic finance Institutions in Kazakhstan

Key milestones in the development of Islamic Finance in Kazakhstan include the enactment of a special banking law in 2009 and the establishment of the first Islamic bank in 2010 through an intergovernmental agreement between the UAE and Kazakhstan. Several other IFIs and Islamic leasing companies now operate in the market. Kazakhstan aims to continue expanding its Islamic Finance sector with a new master plan for 2020-2025, which includes goals to increase the domestic market share of Islamic Finance. Various educational and research centers have also emerged to promote Islamic Finance education in the country.

In terms of regulations, Kazakhstan has made amendments to its legislation to facilitate Islamic banking and insurance, enabling Islamic banks to operate effectively. Additionally, the Astana International Financial Centre (AIFC) was established as a platform for financial services and has been actively promoting Islamic Finance. Kazakhstan’s commitment to Islamic Finance reflects its aspiration to diversify its financial system and attract international investments, making it a notable player in the Islamic Finance landscape.

Kyrgyz Republic

Kyrgyzstan has been a frontrunner in the adoption and development of Islamic finance in Central Asia since gaining independence. It has shown a higher level of commitment and consistency in this regard compared to its Central Asian and Transcaucasian counterparts. According to the Islamic Financial Services Stability Report 2022, the Kyrgyz Republic has made significant steps in creating a favorable environment for the smooth functioning of the Islamic financial system. Notable improvements have been made in the legal and regulatory frameworks, particularly in the areas of risk management and corporate governance, which have contributed to the growth of the Islamic banking industry.

As of now, Kyrgyzstan boasts one full-fledged Islamic bank, EcoIslamic Bank, along with four Islamic banking windows. Furthermore, five Islamic microfinance institutions offer Islamic financing, underpinning the country’s commitment to expanding the reach of Islamic finance, the details are presents in figure 3. Takaful products are expected to enter the market in the near future, further diversifying the range of Islamic financial services available. By the end of 2021, the value of Islamic banking assets in Kyrgyzstan had increased by 28.78 percent year-on-year to approximately US$58.15 million. This represented a 1.5 percent share of the overall banking sector.

Fig 3: Islamic Finance Institutions in Kyrgyz Republic

A crucial aspect of the Islamic finance landscape in Kyrgyzstan is the legal and regulatory environment, which has been significantly improved to facilitate the functioning of the Islamic finance sector. Key milestones include introducing Islamic banking in 2006, creating Islamic banking windows within conventional banks, and amending various laws to accommodate Islamic finance. The National Bank of the Kyrgyz Republic (NBKR) has played a vital role in issuing resolutions and regulations to regulate and supervise Islamic financial transactions, risk management, and corporate governance.

However, despite the progress, Kyrgyzstan’s Islamic finance sector faces challenges. These include a shortage of qualified Islamic finance specialists, low public awareness, a tightly regulated industry, and a lack of empirical research on the Islamic finance sector in the country. To further foster the growth of the Islamic finance industry in Kyrgyzstan, it is recommended to develop a long-term strategic plan with clear actions and milestones, establish capacity-building programs, liberalize the industry to encourage innovation, promote research and development, and increase public awareness and financial literacy. With these steps, Kyrgyzstan is well-positioned to continue its journey towards a more robust and diversified Islamic finance sector.

Republic of Tajikistan

Tajikistan’s journey into Islamic finance and banking began in 1996 when the country became a member of the Islamic Development Bank (IsDB). Since then, Tajikistan has received around $500 million for the implementation of 60 projects, and the National Bank of Tajikistan (NBT) became an observer member of the Islamic Financial Services Board (IFSB) in 2010.

The government of Tajikistan initiated the introduction of Islamic banking in 2009, with the aim of promoting financial system resilience and stability through Islamic finance. They sought inspiration from countries like Kazakhstan, Kyrgyzstan, Malaysia, and Indonesia. The Islamic Banking Law was enacted in 2014, and over the subsequent years, the NBT developed more than 25 regulatory and legal frameworks to oversee and regulate Islamic financial institutions.

To facilitate the growth of Islamic banking in Tajikistan, the NBT established the Consultative Council for Islamic Banking Services in 2017. Key milestones in the development of the Islamic financial sector in Tajikistan include the establishment of the first Islamic leasing company, Asr Leasing, in 2013, the founding of the first regulated Islamic microfinance institution, Alif Capital, in 2014, and the establishment of a full-fledged Islamic bank, Tawhid bank, in 2019, as shown in figure 4. In Tajikistan, Islamic assets accounted for 1.1% of its all banking assets as of the end of 2021.

Fig 4: Islamic Finance Institutions in Tajikistan

As of mid-2022, Tajikistan’s banking sector consists of 15 banks, including two state banks and two Islamic banks, with two Islamic banking windows also operating. Tawhid bank is the first full-fledged Islamic bank in Tajikistan, and Alif Bank offers digital Islamic banking services. Furthermore, microfinance institutions Imon and Humo have received licenses to open Islamic windows. In Central Asia where Tajikistan was one of the fastest growing Islamic banking markets, the introduction of takaful will shore up the region’s Shariah-compliant financial industry. Tawhid Bank, one of Tajikistan’s full-fledged Islamic banks, announced in February 2022 an agreement with AlHuda CIBE to set up a takaful operator.

The preconditions for the development of Islamic banking in Tajikistan include a significant Muslim population, challenges in the conventional banking system, a lack of alternative non-banking financing, the development of Islamic finance infrastructure, and the economic viability of Islamic banking. To further promote Islamic finance, recommendations include raising awareness, introducing Islamic finance education in schools, sharing knowledge with other countries, attracting international Islamic institutions, and standardizing products and operations. Educating the local population about Islamic finance is considered crucial for its success in Tajikistan.

Republic of Uzbekistan

Uzbekistan is developing its Islamic finance sector, which has the potential to serve its large and conservative Muslim population. The government has introduced various initiatives and laws, including the establishment of Islamic banking and finance infrastructure, the issuance of Sukuk, and the provision of Islamic financial services by microcredit institutions. Several banks are preparing to operate under Shariah principles and have signed cooperation agreements with the Islamic Corporation for the Development of the Private Sector (ICD) to open Islamic windows. Apex Insurance is the first and only Takaful operator in the country. Uzbekistan had 41 insurance companies operating as of September 2022, including 33 general and 8 life insurers. Taiba Leasing, established by the ICD in 2011, is the first standalone company in Uzbekistan offering Islamic financing products, focusing on leasing various types of equipment and machinery.

In April 2022, the President of Uzbekistan signed a law allowing microcredit institutions to provide Islamic financial services. The ICD and SQB Securities signed a Memorandum of Understanding in January 2021 to develop Islamic finance and capital markets in Uzbekistan, with a focus on introducing Sukuk and other Islamic finance instruments. The Uzbek government plans to launch the Tashkent International Financial Center, which will facilitate the development of the Islamic banking industry and introduce new instruments, such as Sukuk and Shari’ah-compliant swaps and repos. Islamic finance education is also on the rise in Uzbekistan, with academic institutions offering courses in the field.

A 2020 study by the UNDP found that 56% of individuals and 38% of businesses in Uzbekistan do not take loans due to religious beliefs. However, more than 60% of individuals and businesses do not have a full understanding of how Islamic finance products work. The Uzbekistan 2030 strategy is a positive step for Islamic banking, as it calls for the introduction of Islamic finance criteria and procedures in at least three commercial banks. This will make it easier for people in Uzbekistan to access Islamic finance products and services.

However, the development of Islamic finance faces challenges, including the need for an enabling legal and regulatory framework and the scarcity of skilled human capital. The government aims to address these issues and promote the growth of the Islamic finance industry by developing a strategic roadmap, adopting international prudential standards, and launching awareness campaigns. Furthermore, the introduction of Islamic FinTech and collaboration with international institutions are expected to facilitate Islamic financing in Uzbekistan.

Republic of Turkmenistan

Islamic finance is still in its early stages of development in Turkmenistan, with no Islamic banks or other financial institutions (IFIs) currently offering Shari’ah-compliant financing to the local population, despite demand. Government support is essential for encouraging the development of Islamic finance initiatives in the economy. Recently, the International Islamic Trade Finance Corporation (ITFC), a member of the Islamic Development Bank (IsDB) Group, partnered with the State Bank for Foreign Economic Affairs of Turkmenistan (SBFEAT) to organize a three-day Islamic trade finance workshop for local financial institutions and relevant public enterprises. The workshop covered a variety of Islamic financial products and services, with the aim of developing a thriving Islamic finance sector in Turkmenistan and increasing international trade. One positive sign for the development of Islamic finance in Turkmenistan is the interest shown by some local financial institutions and relevant public agencies at the ITFC’s Islamic trade finance workshop.

About AlHuda CIBE: AlHuda Center of Islamic Banking and Economics (CIBE) is a well-recognized name in Islamic banking and finance industry for research and provide state-of-the-art Advisory Consultancy and Education through various well-recognized modes viz. Islamic Financial Product Development, Shariah Advisory, Trainings Workshops, and Islamic Microfinance and Takaful Consultancies etc. side by side through our distinguished, generally acceptable and known Publications in Islamic Banking and Finance.

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