Kazakhstan: from Promises to the Islamic Economy
Many of the countries that are trying to develop Islamic finance keep making the same mistake — they believe that the faith is most important factor, and that the people are prepared to pay extra for new and unfamiliar services, as long as they are Shariah complaint. It may happen this way, but most often it doesn’t. The customers have their family members to feed, clothe and care about. It is often easier to take a cheap plain vanilla loan (to buy a car), than to deal with Murabaha at an Islamic bank, or some other investment company that has to pay the VAT on the margin.
What are the key advantages of Islamic Finance? Clearly, it is the fairness — the absence of fines and the transparency of transactions. This is exactly what is to be sold to prospective customers. The Benefit and the Advantage. Thus, Islamic finance would appeal not only to Muslims but also to the consumers of any confession.
The absence or at least a limit on fines is a really big advantage. But it can lose its significance, if the transaction margin is higher than at conventional banks. If the balanced approach is used, then any reasonable person (who took math at school) will select Islamic finance products over its conventional equivalents.
Kazakhstan: the reality:
· A region with acceptable legal environment, which was adapted in accordance with the specifics of Islamic economic model;
· The desire of the political elite to develop Islamic finance sector;
· Available although rudimentary Islamic finance infrastructure;
· Large percentage of ethnic Muslims in the country (86%).
Kazakhstan: the task — to grow the Islamic finance sector.
Kazakhstan: the proposed solution:
In analyzing the current legal environment in the Republic of Kazakhstan, the following should be noted — the banks are able to obtain special Islamic banking licenses; most Shariah compliant transaction are permitted; Sukuk issuance is permitted for banks and specialized organizations; banks and leasing companies do not pay the VAT on the margins of Murabahah, Tawarruq and Ijarah deals.
Why do we need banks? They act as intermediaries in our quest for money and credit. Sometimes we need money, sometimes we want to buy goods. The cash consumer financing can be accomplished with the use of Tawarruq.
To make Islamic finance truly available and appealing to the masses, the product has to easy-to-understand, cheap and Shariah compliant. Not all experts accept Tawarruq, but it has a potential become a real universal product during this “transition period”.
A truly functioning Islamic finance system needs the following for proper performance:
1. A source of funding — a great idea would be to set up an interbank platform for Islamic banks to replenish liquidity. A Tawarruq instrument can be used within the platform without any objections from the conventional banks. In reality, the conventional banks could place their excessive liquidity on this interbank platform for the Islamic banks to draw.
2. A lending opportunity — so far in Kazakhstan there are only 2 banks that could offer Tawarruq for clients. And these banks are VAT exempted with respect to Murabahah transactions. This tax exemption ideally should apply to other companies as well.
Within just a few years, a new segment of retail Islamic finance can be developed, with the customers acquiring the taste for Islamic finance products. Murabahah, Ijarah and Islamic mortgages are likely to follow Tawarruq into the market. The process can be accelerated, if Kazakhstan authorities disregard the risk of monopolization and bring in a large investor as a liquidity source and use its funds to develop the market.
The large amount of Tawarruq receivables over the several years will trigger the development of the securities market — bring in those Sukuk on Tawarruq and Murababah.
Placing and drawing of funds on Islamic interbank market would create an acceptance of Islamic finance products among conventional banks, so the latter can become Sukuk investors. Securitization of assets and refinancing — these steps are important in creating a self-sustaining Islamic finance system.
So, to address the task at hand the following actions are necessary:
1. To create conditions for the mass launch of the people’s retail product — a Tawarruq consumer financing. All participants are VAT exempt.
2. To create interbank capital platform for Islamic banks — the liquidity may be supplied from the government bodies.
3. To create a capital market by underwriting of the Sukuk using the Islamic banks’ portfolios as underlying assets.
One cannot start walking until he gets up.
