Islamic finance in Kazakhstan: still showing promise…
Kazakhstan became the first of the former USSR countries to legislate Islamic finance.
On February 12, 2009 the law on Islamic banks and Islamic finance was adopted. Over the next 12 years several amendments had also been introduced. The law had mandated every Islamic bank to have a Shariah Board to oversee their activities. Islamic securities could now be issued by specialized finance companies. And a whole range of Islamic finance transactions, including even the Tawarruq, had now been authorized.
The development of Islamic finance in Kazakhstan went from top down. All legislative changes were initiated by the President himself. Such political will is usually sufficient for successful implementation of Islamic finance in any country. In Kazakhstan, this just did not work.
The law is now 12 years old. Out of 28 banks only 2 are Islamic — Al Hilal (a sub of Abu Dhabi Commercial Bank) and a locally grown Zaman-bank. The share of Islamic banking assets in the entire banking system of Kazakhstan is still under 0.3%. The Government’s Concept for financial market development to 2030 had planned that by 2020 the share of Islamic banking would have reached 3–5% of the total banking system of the Republic. Some experts had even put this number at 10%. Well, these forecasts were off by a bit.
Local expert usually cite the following problems (this list seems to travel from one presentation to another, irrespective of the country):
1. The lack of qualified personnel;
2. The lack of knowledge and understanding of Islamic finance among customers;
3. The difficulty of adapting Islamic finance principles to the laws of Kazakhstan;
4. Unresolved issues in accounting for Islamic finance products;
5. Uncertainty in tax treatment of IF services by tax law.
Let’s start from the beginning:
I. The lack of qualified personnel
Upon declaration that Kazakhstan was a secular state, the authors of Islamic finance law decided to rid of the Arabic terms and used their common equivalents and principles accepted in the Republic. Such adoption had greatly reduced the need for IF specialists, since good financiers and accountants could adjust. They are to just adopt an additional operating Code, the AAOIFI Standards — to many other codes they operate with already. The Shariah Board will check and verify everything. Not too complicated.
II. The lack of knowledge and understanding of Islamic finance among customers
Islamic financial principles forbear the use of hidden fees, fines and penalties. That’s why (for example, in Malaysia), the IF appeals not just to Muslims, but to all those who can count well. Customers are rational beings and look for good deals, so it is more important for a bank to sell a benefit, not the form. It should be noted that in 2019 Al Hilal and Zaman-bank together spent $22,400 on advertising, while the top 3 conventional banks in Kazakhstan spent $19.5 million. If you don’t advertise, no one will know your product. If no one knows, it is irrelevant whether they understand Islamic finance. The presence or absence of fines for late payments may just be more important than whether the product is “green” or conventional.
III. Difficulty in adapting Islamic finance principles to the laws of Kazakhstan
The law of 2009 made provisions for realization of the great majority of Islamic finance products available in the industry. The law should not be blamed, that it had not gotten more flexible overtime. Those changes in law that had been implemented 12 years ago were truly revolutionary for the time and the place.
IV. Unresolved issues in accounting for Islamic finance products
Hardly a valid argument. Anything that is permitted in law can be accounted for, whether there is a specific accounting rule for it, or not.
V. Uncertainty in tax treatment of Islamic financial services by tax law
Also doubtful:
· Murabahah and Tawarruq margins are VAT exempt under Kazakhstan tax code;
· Idjarah margin is VAT exempt also;
· There is no VAT taxation of margins on Islamic finance investment deals.
Conclusion 1: there is no real impediment to the development of Islamic finance in Kazakhstan, except the lack of desire to develop it. There is no other way to explain a decade-old stagnation of the industry despite the presence of numerous positive, or at least neutral development factors.
Conclusion 2: the Islamic finance services seem to target Muslims only. It is difficult to imagine that predominantly secular people who learned to trust and to live with conventional banks, would drop everything overnight and run to become customers of the 2 small unknown Shariah compliant entities. We keep waiting and expecting, and they still do not run…
Islamic finance is not a religion. It is a financial business. So, the Islamic financial services should be sold to those who are interested in business. In business, not just religion.
