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. This region holds immense potential for Islamic Finance. The Kyrgyz Republic, Tajikistan, and Uzbekistan ranked 38th, 46th, and 49th, respectively, while Turkmenistan lagged significantly behind, securing the 85th position.
Islamic Finance in Central Asia
The Islamic Development Bank (IsDB) has been a major partner in the development of Central Asia since the early 1990s. Its mission is to alleviate poverty, promote human development, science, technology, Islamic banking, finance, and enhance cooperation among member countries.
The IsDB focuses on six strategic pillars, including economic and social infrastructure support, inclusive social development, cooperation between member countries, private sector development, Islamic finance sector development, and capacity building.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.—Zawya News
