ANALYSIS: Kazakhstan’s Islamic finance market starts to grow

Eight months after Kazakhstan’s law on Islamic finance and banking was adopted, a handful of local and international Islamic institutions have already set up in the country. Looking ahead, the issuance of Islamic bonds by Kazakhstan-based companies is expected to drive the market for Sharia finance.

Within Kazakhstan, Fattah Finance, the country’s first brokerage specialising in Islamic finance, started work in March, a month after the law was adopted. The firm has put together a team of around 15 professionals, with experience in the stock market, and Islamic finance and banking. Although the firm still works with traditional instruments, its main purpose is Islamic finance. Kazakhstan also has its first consultancy focussed on Islamic finance, Kausar Consulting.

Meanwhile, from the United Arab Emirates, Al Hilal Bank is already present in Kazakhstan, and is planning to open two branches – in Almaty and Astana – by the end of 2009. It is expected to focus on the industry, agriculture, real estate and tourism sectors. In May, Qatar Islamic Bank and Bahrain’s Ithmaar Bank also announced their intention to enter Kazakhstan, though concrete plans haven’t yet been announced.

Financial hub

The new law is part of Kazakhstan’s efforts to develop its financial infrastructure and establish Almaty as a regional financial centre.

Chingiz Kanapyanov, deputy chairman of the Agency of the Republic of Kazakhstan on Regulation of Activities of the Regional Finance Centre of Almaty (RFCA), which pushed for the law’s adoption, stresses that Islamic finance will exist alongside traditional finance in Kazakhstan. “We are not switching the system completely, but would like to create another opportunity for both Kazakh and global players to invest in this country,” he tells bne.

As the first country of the Commonwealth of Independent States (CIS) to introduce legislation on Islamic finance, Kazakhstan hopes to open up new investment opportunities for domestic actors and build new links with the Islamic world. According to Kanapyanov, interest from investors in the Middle East and Malaysia has been very strong.

Astana’s policy of maintaining friendly relations with other nations encompasses the Islamic world. These efforts have been stepped up recently. Kazakhstan is organising investment conferences in both Bahrain and Abu Dhabi later this year, and on October 31 national carrier Air Astana will launch weekly flights to the Malaysian capital Kuala Lumpur. “We would like to see more investors operating in the Sharia-compliant sectors, and to see more bridges being built between Kazakhstan and the Islamic countries. This will be very beneficial for our country,” Kanapyanov says. “At the same time, banks such as Al Hilal that choose to come here from abroad will gain access to Kazakhstan and Central Asia. Despite the international turmoil, Central Asia is still one of the fastest growing economies, and there are definitely opportunities here.”

Research carried out by Fattah found that institutional investors, pension funds, insurance companies and individuals in Kazakhstan would be interested in buying sukuks. “The pension funds are increasing their activities, and would like to start buying sukuks to diversify their investment portfolios,” says Fattah chairman Aidos Demeshev. “Individual people are also interested. It’s not just Muslims; other people are attracted because Islamic financial products are connected to something real, and all risks and profits are shared.”

Demeshev stresses that sukuks must be issued in Kazakhstan if the new law is to have a real effect on the economy. Under the law, only wholly owned state companies – those within the Samruk-Kazyna and KazAgro groups – and Islamic banks can issue sukuks. As yet, none have been issued in Kazakhstan, although some are understood to be in the pipeline. “We want and we are ready to work with other actors in the market to start this process,” says Demeshev. “Our company will grow at the same speed as the sukuk market in Kazakhstan. We would like to work with other foreign partners and we are open for cooperation for developing our market.”

Until domestic sukuks are issued, Kazakhstan-based institutions and individuals will have to invest in foreign Islamic financial instruments. “We can invest in sukuks on world capital markets. However, we want to invest domestic capital into sukuk bonds on the domestic market,” says Demeshev. “It would be very good if we could attract investors from both world and domestic market to projects in Kazakhstan. Investors from the Middle East and Islamic countries are likely to become more interested in Kazakhstani projects.”

Early stage

Islamic finance is still at a very early stage in Kazakhstan, and market participants acknowledge that it will take time for the market to grow. In the longer term, new legislation is expected to be adopted, allowing a wider range of Islamic financial products to be used, and more institutions to be set up. “Islamic finance is still in its infancy in Kazakhstan, and we need to develop this market,” says Demeshev.

It does, however, benefit from strong support from President Nursultan Nazarbayev, who was a driving force behind the law’s adoption, as well as other top government officials and the RFCA.

Now that the first steps have been taken, Kazakhstan has started working with the Islamic Development Bank to draft a roadmap on Islamic finance and economic development. This will form a central part of the IDB’s strategy in Kazakhstan, and is expected to be announced in early 2010.

 Source : skilledroadintelligent