Twenty years after the fall of the Soviet Union released Kazakhstan from its Communist foothold, Islamic bankers are proposing the country and its capital, Astana, as a regional hub for Islamic finance. They have run into difficulties, however, from the stubbornly secular country, eager to keep the peace between its multi-ethnic and religiously diverse population.
President Nursultan Nazarbayev, who has been in power since 1991, declared that he wants to invest in Islamic banking infrastructure in Almaty, Kazakhstan’s largest city, commercial center, and formal capital. He believes that the city could be an Islamic finance center for the entirety of the former Soviet Union, which includes several Muslim-majority states.
Expanding the industry could be beneficial to Kazakhstan for a number of reasons. The religious aspect is intriguing to a generation of Muslims who grew up after the collapse of the Soviet Union, allowing them to freely practice the religion. Secondly, it could provide an abundance of economic benefits by sparking partnerships between Kazakhstan and wealthy Gulf states, or linking it to the pools of investment money coming into Islamic finance from throughout the Middle East and Southeast Asia.
While people are increasingly open to looking at alternative forms of financing following the global meltdown, citizens of Kazakhstan are still weary of deeply religious overt practices. The government is strictly secular, passing a law in 2011 that forbids prayer rooms in state institutions.
Even stores will refuse to place religious literature on their shelves. When Yerlan Baldaulet, one of Kazakhstan’s best-known proponents of Islamic finance, tried to sell a book on Islamic financing to bookstores, he said, “Some bookstores – the kind of stores that sell economic textbooks – have told us: ‘It’s a religious book. We won’t sell it!’”
Change is coming, however, as Islamic banking opportunities increase in the country. Abu Dhabi’s Al Hilal Bank opened branches there in 2010, and currently has investments worth $90 million, according to its CEO Prasad Abraham.
The government also released a plan with steps to become an Islamic finance hub by 2020 in May of this year.
The government has already begun paving the way with legislation. In 2009, it passed a law allowing the government (in principle) to issue sovereign debt in the form of sukuk. Unfortunately, due to its $50 billion National Fund, the country does not need to borrow from abroad and thus the sovereign sukuk did not materialize. Not only that, but a $500 million sovereign Eurobond was also cancelled in 2010.
While those are excellent indicators for the economy, they have not helped the development of the Islamic banking sector.
Tax legislation is also a roadblock. The murabaha model of Islamic finance requires that bonds are backed by assets that change ownership more than once. In Kazakhstan, sales such as that are taxed with an 11 percent value-added tax, making investors less likely to partake in sales.
It remains to be seen what will come of Kazakhstan’s budding Islamic banking industry, but those involved in the field remain positive. There have been talks about establishing a second Islamic bank focused on retail rather than corporate customers. The Development Bank of Kazakhstan, Fattah Finance, and Malaysia’s AmanahRaya are working on the project, which officials hope will emerge in 2013.