Islamic Finance Market in Kazakhstan Opens New Investment Opportunities

Rapid progress has been visible in the global Islamic finance market recently. According to S&P Global Ratings Agency’s Islamic Finance Outlook Report, the worldwide volume of Islamic finance reached $2.1 trillion at the beginning of 2019 and is growing at 5% annually. A further boost has been provided by digitization. The 2018 Thomson Reuters Islamic Finance Development Report estimated that its assets will rise to $3.8 trillion by the end of 2023. Kazakhstan, which has a 70% Muslim population, is no exception to the increasing popularity of Islamic finance.

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After its independence in 1991, the Kazakh government embraced Islamic finance by becoming a member of the Islamic Development Bank (IDB) in 1995 and establishing IDB’s regional office in Almaty in 1998. Significant measures to further promote Islamic finance in Kazakhstan began in the late 2000s. 

Muhammad Rafiq.

The first law, “On amendments and additions to some legislative acts of Kazakhstan on the organization and activities of Islamic banks and Islamic finance,” was adopted on Feb.12, 2009. The key amendments included creating a supervisory and legal framework of Islamic banking in the “Law on Banking,” to allow the issuance of Islamic securities in the “Law on the Securities Market,” and to consider the possibility of creating Islamic investment funds in the “Law on Investment Funds.” 

Then in March 2010, Al Hilal Islamic Bank was set up as the first Islamic bank in Kazakhstan and the entire Commonwealth of Independent States (CIS) region. With an asset base of 60.315 billion tenge ($134 million) in 2022, the bank has branches in Almaty, Astana and Shymkent, where Sharia-compliant products are being offered to its individual and corporate customers. 

Al Hilal Islamic Bank also launched its retail banking products in 2017. The second Islamic bank in Kazakhstan, Zaman Islamic Bank, started its operations in 2017 after upgrading its traditional banking license to an Islamic banking license. Zaman Islamic Bank had assets of 23.651 billion tenge ($52 million) in 2021, and its branches are operating in Almaty, Astana and Ekibastuz to cater Islamic banking needs of corporate and individual customers. 

Islamic banks are regulated by the National Bank of Kazakhstan and the Agency for Regulation and Development of the Financial Market. In addition to the regulators, the Sharia Board is an independent controlling authority in every Islamic bank, which ensures the compliance of banking activities with the Islamic rules of Sharia. There are other Islamic insurance, leasing, and finance companies that operate in the country, including Kazakhstan Ijara Company and Al Saqr Finance. 

Kazakhstan’s domestic and regional Islamic finance market has accelerated following the launch of the Astana International Financial Centre (AIFC) in 2018. The AIFC has targeted Islamic finance as one of the critical areas of development due to its dormant potential. It has adopted essential steps to extend training and education in the Islamic finance sector. 

Under the Islamic Finance Master Plan of Kazakhstan for 2020-2025, the AIFC has outlined some key initiatives and recommendations to foster a more diverse and innovative Islamic finance industry over five years. The ambition of the master plan is to achieve growth of the country’s Islamic banking assets from 1% to 3% by 2025. 

The AIFC has also introduced the first handbooks for Kazakhstan’s Islamic finance industry, including “Guidelines on Islamic Banking and Financial Products” and “Sukuk Guidelines.” In March 2020, the AIFC Stock Exchange (AIX), listed for the first time an Islamic-compliant Sukuk issued by Qatar International Islamic Bank. 

In 2022, the AIX introduced its first sharia-compliant Exchange Traded Notes called iX Islamic ETNs. Later that year, the AIX announced cross-listing of three Sukuk issuances of the Islamic Development Bank of 1 billion euros ($1 billion) (Green Sukuk), $1.5 billion (Sustainability Sukuk) and $2 billion (Traditional Sukuk) with five years maturities. These examples establish AIX as a potential Sukuk listing venue.

In 2011, another law, “On amendments and additions to some legislative acts of Kazakhstan on the issues of Islamic finance,” was introduced that allowed the issuance of sovereign Islamic securities and expanded the list of the corporate issuers of Islamic securities. Islamic banks were permitted to undertake trading activities and share profit and loss with the customers. Kazakhstan has adopted legislative amendments three times in 2009, 2011 and 2015 to promote Islamic finance.

Islamic banking deposit products in Kazakhstan include interest-free demand deposit products, mudaraba (investment deposit) and wakala (agency services under the Islamic banking activities). Major financing products include murabaha (trade finance), Ijara (leasing), Qarza e Hasna (lending without charging a fee), Musharaka (financing of production and trade on partnership basis), Sukuk (Islamic securities), and the shares and units of Islamic investment funds. Issuance of sovereign Islamic securities is also permitted. 

The government of Kazakhstan is keen to popularize Islamic finance products. The Damu Entrepreneurship Development Fund is a concessionary financing project for promoting small and medium-sized businesses (SMEs) in Kazakhstan. In 2020, the government concluded agreements with the Al Hilal Bank Limited for 10 billion tenge ($24 million) and with Kazakhstan Ijara Company Limited for 3 billion tenge ($7 million) through murabaha and Ijara products of Islamic financing to make further lending to the SMEs on preferential conditions. The Damu Fund has recently supported a ceramic granite-producing company ZERDE-Keramika Aktobe through Islamic finance. 

Most sectors of the economy in Kazakhstan can make use of Islamic financing products except for businesses engaged in the production of tobacco and alcohol, gambling, ammunition and weapons. A separate tax regime in Kazakhstan provides tax incentives for Islamic banking products, including exemption from VAT. Fees for processing transactions with Islamic financial instruments in the Central Securities Depository have been abolished. The capital requirement for obtaining an Islamic bank license in Kazakhstan is 10 billion tenge ($22 million). 

Evidence of yet another initiative of Kazakhstan to develop a robust Islamic finance industry in the country is the creation of standards by the Accounting and Auditing Organization for Islamic Financial Institutions in line with the general principles and foundations of International Financial Reporting Standards. These standards include additions to the chart of special balance sheet accounts for Islamic finance operations and instructions for accounting and preparation of financial statements by Islamic banks. 

Thanks to these developments, Kazakhstan has been included among the top 15 countries with a developed market for Islamic finance, according to the Global Islamic Economy Report 2022. Despite the introduction of an extensive legal framework, the report offered recommended measures, including promotion of Islamic finance products through marketing, permission to open Islamic banking windows in traditional banks, and extensive fintech in Islamic finance operations.

The growth of the global Islamic banking industry is phenomenal. In Pakistan, Meezan Bank Limited, the premier Islamic financial institution, has topped the country’s entire banking sector by posting a net profit of 45.141 billion Pakistani rupees ($155 million) on Dec. 31, 2022, with a 58% growth rate. 

Substantial developments, tangible support from the government and the non-exploitative nature of the Islamic finance products would accelerate the growth of this industry in Kazakhstan, which would trickle down to other CIS countries. Kazakhstan’s Islamic finance market can also diversify investment options.

The author is Muhammad Rafiq (Pakistan), a senior banker based in Kazakhstan with an interest in Central Asian studies.

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