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In the 14th century, after crossing through the Black Sea, the famed traveler Ibn Battuta journeyed through the Central Asian Steppe (the area near the Caspian Sea) over areas of the fabled Silk Road – the historic bridge between East and West. His route took him to Samarkand, Tabriz, and many other major cities of the region. Back then he crossed through the region shortly after the devastation of the Mongol hordes. Little did he know that the area would again one day suffer at the hands of the Soviet Union and, as before, emerge once again - this time fragmented, clinging to an Islamic heritage.
Today, the area referred to as Central Asia consists of 5 independent nations (Kazakhstan, Kyrgyz Republic, Turkmensitan, Tajikistan, and Uzbekistan) all linked by a common Turkic heritage and Islamic worldview. It has vast energy reserves and natural resources and has boasted strong economic growth in many sectors over the past decade. The government of Kazakhstan has even announced its grand outlook to become not just a regional hub, but a global economic power (See story - Kazakhstan’s Vision Sets it up as an Investment Gateway to Central Asia). In this context, overtures to Russia and China are being made in addition to promoting trade and investment with Arab countries as well as Pakistan and other countries in South Asia.
Strong Growth in Industry
While industry in general is promoted, it is the banking and finance sectors in particular which lead the fray – especially in Kazakhstan. The country has a well-developed banking and pension sector that is searching to place its extra liquidity in growth opportunities in alternative investments.
An October 2005 article in The Banker magazine reported that “Kazakhstan is even becoming a victim of its own success...both the banking and pension sectors have both collected so much money they can’t find enough investment to soak up all their resources, although potential abounds.”
Where is Islamic Finance in Central Asia?
Given the tremendous progress in the banking sector one would expect some movement in Islamic finance – especially since majority of the people in the Central Asian nations are Muslim. The fact of the matter, however, is that the progress of Islamic Finance in Central Asia has so far been negligible.
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CENTRAL ASIA DEMOGRAPHIC |
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Region |
GDP Growth
2005 |
GDP Per Capita
'05
(PPP US$)
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Religious Affinity |
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Kazakhstan |
9% |
$ 5,871 |
Muslim 47%, Russian Orthodox 44%, Protestant 2%, other 7% |
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Turkmenistan |
7% |
$ 3,956 |
Muslim 89%, Eastern Orthodox 9%, unknown 2% |
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Uzbekistan |
5.4% |
$ 2,441 |
Muslim 88% (mostly Sunnis), Eastern Orthodox 9%, other 3% |
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Kyrgyz Republic |
2% |
$ 2,711 |
Muslim 75%, Russian Orthodox 20%, other 5% |
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Tajikistan |
8% |
$ 1,152 |
Sunni Muslim 85%, Shi'a Muslim 5%, other 10% (2003 est.) |
Source: CIA World Fact Book
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Indeed there seems to be more interest in Islamic Finance in North America and Europe where Muslims live in minorities. In an interview with a senior banker based in Dubai, Dinar Standard was told that indeed there is not much indigenous activity in the Islamic Finance sector in Central Asia.
While reports suggest that there has been some interest from the Kazakh, Kyrgyz, and Uzbek governments, the private sector seems to be completely aloof to the prospects.
A senior banker in Dubai who manages banking relationships across the Middle East and Asia was of the opinion that Central Asian based companies are just concerned with finance – not necessarily Islamic finance. What is important is the bottom line – does a banking package makes sense to the project it is funding.
The curious part here is why Islamic finance has not gained at least some traction. The words of Mr. Rushdi Siddiqui of Dow Jones Islamic Market Index may apply here. At a conference in London some time ago he said that at times some “Muslim countries … do not even seem to know that Islamic Banking exists.” Indeed, it seems that the development of Islamic Finance in Central Asia is at a slower pace than in the United States and Europe where Muslims are a minority.
There is however some interest developing.
Mr. Bahitbek Katen, who is an executive with ORDABASY affiliated development company Yujni Centre (the South Center), Kazakhstan, has recently been charged by the Board on the idea of establishing an Islamic Finance investment fund and thereafter a financial institute in Kazakstan.
Mr. Katen has contacted DinarStandard with his interest in creating an Islamic Investment Fund there. Such funds are intended for the real estate sector as growth in this area demands the mobilization of funds on a large scale. However, the lack of expertise available for such initiatives is obvious due to a current shortage in indigenous expertise and frameworks to create these vehicles.
Increased momentum would be needed to reach existing channels that can properly deliver frameworks needed to spur Islamic Finance in the area. This momentum would most certainly need to come from the private sector but must also be supported by regulatory regimes which promote growth. One of the few bankers working in the Islamic finance sector, Mr. Yedige Alpysbay, told DinarStandard that currently, the “regulations are not suitable” for a full fledged Islamic Financial Institution (IFI).
Progress is however noticeable according to Mr. Alpysbay since regulators are said to have visited Malaysia a few times for discussion on the topic of Islamic finance. It will indeed be very interesting to see how influences from Malaysia and the GCC affect the development of the Islamic financial industry in Kazakhstan. Further, the Kazakhstan government is said to be in contact with the Islamic Development Bank on financial matters focusing on Islamic finance, among other matters.
Given Kazakhstan’s prominence in the region, the vision of its leadership, and both GCC and SE Asian involvement in the Islamic Finance area this will be an area to watch; especially as Kazakhstan enables itself to export Islamic finance to the other four central Asian republics.
Where is Turkey?
Islamic finance has been slow to develop in Turkey as well, even while it is the largest economy in the Muslim World. While the current government supports the idea in principle, there continues to be significant resistance from sections of the Turkish population that seem to equate the rise of Islamic Finance with a militant, reductionist form of Islam.
There is a restriction on the use of the word Shari’ah or Islamic for these institutions. Instead they are known as “participation banks" or "specialized finance houses".
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Turkey's Leading "Special Finance Houses" Offering
Islamic Finance Services |
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With the stabilization of the Turkish economy in general, the handful of institutions which do operate there on this basis have seen success recently. Reports suggest a 2-3% overall market share which is expected to grow steadily over the next decade. The main players include indigenous Turkish firms (Türkiye Finans Katilim Bankasi and Asya Katılım Bankası) as well as firms that are controlled by Gulf based financial institutions (including Albaraka Türk Katılım Bankası (controlled by Albaraka Banking Group) and Kuveyt Türk Katılım Bankası (controlled by the Gulf-based Kuwait Finance House). Assets at each of these have shown, or are projected to show, strong growth.
Leveraging a Common Heritage
Given the tremendous liquidity enjoyed by Gulf based banks, GCC based institutions have continued to establish ties with Turkish finance houses.
Dubai Islamic Bank’s announcement of its intent to buy MNG bank of Turkey for $160 million is good news. More interesting is the news of cooperation between Dubai Bank and Daruma Corporate Finance “in the origination, structuring, execution and distribution of Shari’ah compliant corporate finance and merchant banking services”. The agreement defines the geographic sphere of activity as the GCC and Turkey and its neighboring areas including Romania, Bulgaria, Croatia, Kazakhstan, Turkmenistan, Uzbekistan and Azerbaijan.
Cooperation between Turkish and Central Asian firms has historically taken place in sectors other than finance. Companies such as Calik Holdings and Alarko Holdings are two examples which operate in the construction sector.
It is interesting that it took the backing of Gulf based financial institutions to begin the visible process of Turkish finance companies seeking business opportunities in Central Asia. How many indigenous Turkish finance firms do the same remains to be seen but we hope this is the start of a trend.
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Feedback:
Salamualeikum; I think the same as in Turkey, problem of some resistance from sections of the population exists. But the main problem seem to be the lack of common accepted methodology of performing the islamic banking that becomes an obstacle to standartise the process and introduce it in regulations. At the same time there are some initiatives from the banking authorities - while they are studying the forefront experience of Malaysia and it's applicability to Kazakhstan in general the islamic finance will likely to be allowed within the newly created financial center in ALmaty. That would the way to try the islamic financial techniques in Kazakhstan. That is where any islamic financial institution would be more than welcome for sure.
Azamut
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