Islamic Banking Seen as Safe Alternative in Kyrgystan

By Asyl Osmonalieva in Bishkek 

Supporters of Islamic banking say it offers a viable alternative to the conventional financial mechanisms used in Kyrgyzstan in these uncertain economic times. 
Opponents, however, say granting approval to practices borrowed from the Islamic world is a worrying sign as it suggests this Central Asian state is losing sight of the secular principles on which it is founded . 
After a three-year pilot project, the Kyrgyz parliament passed legislation on March 31 this year enabling any bank to apply the principles of Islamic finance if it so wishes. 
Instead of a model where the lender assumes financial risk in return for interest on loans, the idea is that banks and their clients form a partnership and share the profits. Interest rates are prohibited under Islamic law’s proscription of usury, and money cannot be lent to venture that go against religious principles, such as selling alcohol or encouraging gambling. 
“In this case, the bank is a partner that shares profits and losses with the client, so it will back promising projects because it has an interest in the success of the venture,” said Timur Jusupov, deputy chair of the board of EcoBank, which has been offering some of its loans according to Islamic legal tenets since 2006, when President Kurmanbek Bakiev approved the pilot project. 
The bank’s risk manager, Alexander Strelkin, says it will switch over to Islamic principles completely by the end of 2010. 
Nurbek Elebaev, who chairs the board of directors of Kyrgyzstan’s stock market, believes that EcoBank and any others that begin applying Islamic principles offer the country a new mechanism for attracting funding, at a time when it is suffering under the impact of the global financial crisis. 
Kyrgyzstan is experiencing a downturn in foreign investment, and Elebaev sees this as part of a wider phenomenon. 
“Countries where the Islamic banking model dominates have not been hit as hard by the crisis,” he said. 
Although supporters of Islamic finance say it will never supplant conventional banking, merely complement it, and that it is simply an alternative way of doing business, some in Kyrgyzstan are fundamentally opposed to it because of its religious connotations. 
Kyrgyzstan has a Muslim majority population, but its Soviet past and its constitutional principles make it a firmly secular state. 
Communist Party leader Ishak Masaliev led the opposition to the Islamic banking bill when it was debated in parliament. He expressed fears that “we will lose Kyrgyzstan’s secularism” as a result. 
The head of the human rights group Citizens Against Corruption, Tolekan Ismailova, agreed that this was a step in the wrong direction. 
“Through this move we are showing that that Kyrgyzstan’s development orientation is towards Muslim states,” she said. “One has to understand that Kyrgzstan is not a Muslim country; there are more than 80 ethnic groups living here. If we give precedence to one religious confession, we violate the rights of others and provoke a conflict of interests.” 
Others, however, say Islamic finance instruments should be allowed to compete in the marketplace, where ideology is of lesser importance and clients will look for the best deals. 
“People who need loans will be guided above all by a sober calculation about how good the loan terms are,” said Rustam Sarybaev, PR manager for the Union of Banks of Kyrgyzstan. “They won’t let their decision be clouded by stereotypes.” 
Strelkin noted that one-fifth of EcoBank’s clients are non-Muslims. 
Islamic banking instruments may fill gaps where it is currently hard to get a conventional loan in Kyrgyzstan, such as to fund a long-term project or a small farming business. 
“Interest-free credit based on Islamic principles will stimulate the growth of small and medium enterprises,” said Dinara Moldosheva, a member of parliament from the governing party Ak Jol. “Many people who want to set up their own business or develop an existing one find it impossible to pay the interest on a loan. I’m not saying the conventional banks are in effective, but one has to admit they have strict rules. Islamic principles are less harsh and more flexible.” 
Sarybaev said Kyrgyzstan’s banks “have no money [to lend] for the long term. Banks operating on Islamic principles can occupy this niche.” 
According to Elebaev, the likely obstacles will range from “resistance on the part of some banks operating exclusively according to the traditional model” to “bureaucracy and red tape”. 
He noted that Islamic banking had been slow to take off in Kazakstan and Russia, adding, “That may be related to the size of those countries. Kyrgyzstan is a small country and we might be able to do it more quickly and successfully.” 
Asyl Osmonalieva is an IWPR-trained contributor in Bishkek. 
source : iwpr