Kazakhstan — Islamic finance in 2021
A choice between evolutionary and revolutionary growth
Doing a review of Islamic finance in Kazakhstan is not an easy task. Kazakhstan was an early starter — in 2009 it was the first country in the former USSR to introduce Islamic banking and finance. There are many positive factors playing well for Kazakhstan:
· the strong support of Kazakhstan government for Islamic finance as an alternative funding source;
· the establishment of Astana International Finance Center (AIFC) as a regional equivalent of the DIFC;
· and, of course, the spectacular growth numbers (30.3% annualized) of the Islamic banks’ assets over the last three years. The conventional banks’ assets grew a “meagre” 11–12% also annualized.
Let’s add some gloom to the rosy picture above:
· the total assets of Islamic banks in the country are paltry 0.25% of all banking sector assets;
· the Shariah compliant physical person’s deposits are the miniscule 0.01%;
· and the number of the Sukuk issued in Kazakhstan is equal to the number of the Sukuk issued in the Russian Federation which had not adopted any Islamic finance laws at all. So, a single Sukuk for both countries.
Review of 2021
Still, 2021 was an eventful year for Islamic finance in Kazakhstan:
· Islamic finance assets grew to 87 billion tenge (KZT) — over US$200 million;
· The state DAMU Entrepreneurship Development Fund signed agreements with Al-Hilal bank and Kazakhstan Ijara Company to provide them with KZT13 billion (US$30 million) in preferential financing to support the SMEs;
· A new digital Islamic bank Tayyab was set up in the AIFC
· The Agency for Regulation and Development of Financial Market signed an MoU for mutual cooperation with the AAOIFI.
Preview of 2022
The further growth of the industry in Kazakhstan will largely depend on the successful implementation of the Master Plan of the Development of Islamic Finance in the Republic of Kazakhstan for 2020–2025. The goals are very focused — to grow the global investment base, to raise liquidity in Islamic finance markets and to become a regional Islamic finance center.
The plan is not very specific, which on one side may show that the legislators were not sure of the ways to achieve the stated goals, but on the other hand, may give the government additional flexibility to adapt to the charging market environment.
In 2022 Kazakhstan’s first digital Islamic bank Tayyab will likely get its first competitor — Al Saqr Finance, the Shariah compliant finance company, will turn itself into a digital bank. The long expected launch of Qatari Al Rayan bank may take place jointly or independently of the Al Saqr’s launch.
Surprisingly enough, the neighboring Uzbekistan holds the key to the success of the AIFC in becoming the regional Islamic finance center. Uzbekistan with its fairly large regional economy has been struggling to pass its own Sukuk law (some optimists, including the author, had bravely expected it to become effective by early summer in 2021).
There is a substantial pent up demand for Sukuk issuances by Uzbekistani large industrial and finance companies. If the AIFC can start converting its numerous Islamic finance marketing tours to the CIS countries into actual Sukuk issuances, the effect will be difficult to overestimate.
For over 10 years the development of Islamic finance in Kazakhstan had been skidding. The same problems are faced in many developing markets, namely:
· Expensive and insufficient local funding;
· Devaluation risks for foreign investors;
· The lack of “long money”;
· The lack of familiarity with Islamic finance among mostly secular population;
· The insubstantial size of the local market.
So, in 2022 we do not expect Al Rajhi Bank, Dubai Islamic Bank or Malaysia’s Maybank to set up multiple offices in Kazakhstan. So, the key role will lay with the government, and this gives us a unique opportunity to test the commitment of President Tokayev to Islamic finance.
There are great many things that an enlightened government can do — from issuing sovereign and sub-sovereign Sukuk to offering government guarantees to selected private Sukuk issuers; from offering subsidized liquidity to Islamic banks to joint infrastructure projects with the Islamic Development Bank; and so the list continues…
So, going back to the 2020–2025 Master Plan: to get liquidity one must have more investors; to get more investors one must have more financial products to offer. To get the investment products, the AIFC must offer incentives to the issuers, such as easy registrations, regulation consulting, joint marketing, etc.
The Sukuk issuance market is very competitive, but the AIFC may and should become the market of choice for Shariah compliant securities denominated in Uzbekistani Soms (UZS), Russian Rubles (RUB) and Azerbaijani Manat (AZN).