Islamic Banking is growing from a small base in Central Asian countries with financings of about $500 million as of September 30, 2023, S&P Global Ratings said in its report “Islamic Banking in Central Asia Remains Nascent,” published on February 27 this year.
UZDaily notes that although S&P Global Ratings considers the regulatory regime favorable to the development of Islamic banking, additional work reportedly remains in the areas of taxation and accounting.
The key success factor is the quality of financial products and their economic added value.
The report notes that Islamic finance is still at an early stage of development in six countries of the former Soviet Union with predominantly Muslim populations – Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. However, simply having a Muslim population is not enough to develop the growing Islamic finance industry. Even in countries where the authorities have created a significant regulatory framework, the level of penetration of such banking products among the population remains quite low. The low level of penetration can likely be explained by several factors, including the relative complexity of the financial product, the low level of wealth of the population, and the likely secular heritage of the republics. The rapid growth of Islamic banking in Tajikistan and Kyrgyzstan reportedly suggests that Islamic banks can compete with traditional ones.
The report notes that many countries in the region have small banking systems relative to the size of their economies. This is reportedly due to the following: 1) low level of welfare (Tajikistan or Kyrgyzstan); 2) the predominance of extractive industries in the structure of the economy (Azerbaijan and Kazakhstan); and 3) relatively low bank account penetration, with the exception of Kazakhstan.
As a result, the development of Islamic banking is hampered not only by factors specific to this sector, but also by the insufficient level of penetration of banking services among the population of these countries. Despite the fact that the majority of the population is Muslim, sharia principles reportedly do not influence the judicial systems of the mentioned six countries, unlike Muslim countries in the Middle East, where sharia influences individual legal norms.— Asia Plus
