Kazakhstan seeks to expand Islamic banking

ALMATY – Kazakhstan, the first post-Soviet state to create a legislative foundation for developing Islamic finance, is making far-reaching plans to expand this financing model.

Kazakhstan intends to become the regional Islamic centre by 2020, the government has announced. The country is awaiting the opening of its second Islamic bank and is continuing to develop legal conditions to permit Islamic finance. The most recent step was Prime Minister Karim Massimov’s March 29 signing of a “road map” for developing the system.

Legal revisions and the first Islamic bank

In 2009, after President Nursultan Nazarbayev ordered a bill on Islamic financing, the government revised existing laws on banks and the securities market and several other laws pertinent to Islamic financing.

“We were the first the post-Soviet country to begin producing a model of Islamic banking acceptable to a secular society,” said Zaratkazy Nurpeisov, board chairman of Fattah Finance, the first company in Kazakhstan to provide financial services in accordance with Sharia Law.

Currently, several Islamic “pioneers” are registered and operating in Kazakhstan.

The first Islamic bank to operate in Kazakhstan was the Al Hilal Bank (UAE) in 2010. It has a head office in Almaty and branches in Astana and Shymkent.

Kazakhstan has great potential for Islamic banking, Al Hilal Deputy Board Chairman Mohamed Berro said.

“We have the support of the head of state, the government and the legislatures (at different levels). … There are problems, but we are solving them,” he said.

Currently, the bank serves only large legal entities, giving preference to corporate clients in oil and gas, rail transport and other infrastructure industries, although Al Hilal recently agreed to invest 1.5 billion KZT (US $10.1m) in KazPochta, the national postal system.

The bank intends to invest about US $200m (29.6 billion KZT) in Kazakhstan over two years, according to Al Hilal data.

Islamic financing model offers new opportunities, stability

“The spread of Islamic financing could play a considerable part in developing both the Kazakhstani financial sector and our state as a whole,” said Aibek Bekzhanov, a specialist in Islamic financing from the Almaty Regional Finance Centre.

“The development of Islamic finance ... will put Kazakhstan in a favorable light for foreign investors who prefer to operate in accordance with Sharia Law,” Bekzhanov said. “Such investors are widely represented in the Middle East, Malaysia and even Europe.”

The main difference between Islamic financing and secular financing is that Islamic model forbids charging or receiving interest on money.

Another difference is that all parties agree to share the risks and rewards in proportion to their involvement. Sharia Law forbids investing in the gaming industry or in the production and sale of tobacco and alcohol, arms and munitions.

“The (global) crisis has had little effect on states where Islamic financing is the foundation of the economy,” Bekzhanov said. “The special features that differentiate Islamic finance from traditional finance can also play a part in establishing a certain stability in the Kazakhstani financial market.”

“Islamic financing will create additional sources of support for financial stability in the economy, since the Islamic financing sector is the fastest-growing one in the world,” Erlan Baydulet, chairman of the Association of Islamic Finance, said.

Islamic players thin on the ground

Apart from having its first, and so far only, Islamic bank, Kazakhstan can claim only a few players in Islamic financing.

Fattah Finance is functioning successfully, and the Association for the Development of Islamic Finance is advancing the ideas of Sharia financing. Furthermore, Takaful, the first Islamic insurance company, is operating.

“For the full functioning of Islamic financing, we need a regulated infrastructure,” Nurpeisov said. “Matters of taxation, customs, insurance companies and the securities market must be clearly defined.”

Kazakhstani law regulating the financial sector is still undeveloped, Bekzhanov agreed.

“There are still gaps in the laws regulating banking activities with respect to Islamic lenders,” he said. “There is virtually ... no law to regulate Islamic insurance.”

A 2nd Islamic bank

For about a year, financial insiders and the media have been considering opening a second Islamic bank. Unlike the Al Hilal, which works with large companies, the second bank would serves as more of a retail financial institution.

Officials in the summer of 2010 announced their intention of opening a second such bank. The Development Bank of Kazakhstan, Fattah Finance and AmanahRaya (a Malaysian state firm) are working on the project.

Various deadlines have come and gone, but the parties still have not applied to license or register the bank. A dispute over an AmanahRaya-owned offshore bank back in Malaysia is delaying the process, Nurpeisov said.

Nurpeisov said he hopes the new bank would emerge in 2013.

‘Road map’ should facilitate expansion

The road map Massimov signed in March sets out what legal steps Kazakhstan needs to take to make itself the Central Asian Islamic financial centre.

In particular, the document envisages close co-operation with Malaysia, a leader in Islamic financing.

The laws described in the road map will take effect this year, Nurpeisov predicted.

“The improved legislation will open up channels,” he said. “Foreign participants will come directly to us, and perhaps the state will also be interested in setting up local Islamic banks.”

Islamic banking is still incomprehensible and complex to Kazakhstanis, said Farida Mutaliyeva, director of the Finance Ministry International Financial Relations Department. “We must continue to hold seminars and training sessions, so that the public comes to understand ... this form of financing.”

“Arab banks are renowned for their enviable liquidity,” she said. “Our task is to attract these resources to Kazakhstan.”