A year after Kazakhstan adopted a law on Islamic finance and banking, many Shariah compliant institutions have been set up. Looking ahead, the issuance of Sukuk by Kazakhstan-based companies is expected to drive the market for this type of finance, DONNA RICHARDSON writes.

Islamic finance is rapidly gaining popularity in Kazakhstan because of its strict requirements in terms of loan policy and strong risk management. Kazakhstan’s financial regulator, the AFN, has been working to improve the stability of the country’s financial sector and prevent a second bubble from emerging as the economy starts to grow again following the world financial woes.

“The crisis demonstrated that problems arose because of Kazakhstan’s imperfect system to regulate risk, low level of corporate management and insufficient transparency,” Alina Aldambergen, deputy chair of the AFN, said. “We plan to improve the stability of the financial sector, stimulate investment activity, increase trust in the financial sector among customers and investors and mobilize financial resources post crisis, including foreign investments.”

Turnover on the Kazakh stock exchange KASE fell sharply last year in line with global economic developments. This decline was mostly due to the foreign currency and repurchase agreement, or repo, markets, while the sharp increase in the KASE index was driven by the strong performance of leading stocks including Kazakhmys and KMG EP. “The KASE index looks good in comparison to other emerging markets stock market indexes,” said KASE president Kadyrzhan Damitov. “This year we expect to see greater volatility and don’t think the index will continue to grow in line with 2009, but we hope to see positive results.”

Amidst this upheaval is a shining light for the country, the Regional Financial Center of Almaty (RFCA), a virtual city that acts as a financial hub, Not content with being the first country in the Commonwealth of Independent States (CIS) to adopt a law on Islamic finance, in February 2009, Kazakhstan planned further legislative amendments.

“We are discussing changes that will help us to implement a full range of Islamic finance in Almaty,” RFCA head Arken Artysanov said. “These include instruments for regulation, allowing Islamic windows to open in traditional banks and changes to accounting and tax rules.”

There is much activity in developing Kazakhstan as an Islamic finance hub. Rising commodity prices have lifted the economy in recent months and generally there is a sense of things returning to normal in the country. There are still issues of developing a functioning stock market and other ways to put money to work in the country after the real estate crash which had hampered growth.

There are at least 10 funds investing in Kazakhstan (five with participation from Kazyna, the Kazyna Sustainable Development Fund set up by the government). There are a further 48 that have the potential to invest in Kazakhstan as part of their CIS or emerging markets mandate, although few are active in the country as yet.

The funds include the CITIC-Kazyna Investment Fund, set up by Kazyna and Chinese investment holding company Citic Capital Holdings in June 2008, with an agreement to increase the fund to up to US$1 billion. This has been instrumental in attracting the Islamic world’s attention. Kazyna also aims to create a corporate restructuring fund — something that has been eagerly awaited by businesses.

Kazakhstan has courted international interest from as far afield as the Middle East. Early last year, Qatar Islamic Bank and Bahrain’s Ithmaar Bank announced their intention to enter Kazakhstan. UAE-based Al Hilal bank obtained a license to operate in Almaty and Astoria in April and has opened branches in both cities.

Mohamed Jamil Berro, CEO of Al Hilal Bank, said one of the reasons for setting up its first foreign subsidiary in Kazakhstan is because the country is the only one in CIS that has adopted legislation on Islamic finance. In addition, “there are strong ties at all levels between Abu Dhabi and Kazakhstan, vast investment opportunities in Kazakhstan, and an opportunity for us to contribute to the growth and prosperity of this country,” he said.

Al Hilal’s balance sheet is expected to reach US$200 million-US$250 million by the end of 2010, according to Prasad Abraham, chairman of Al Hilal in Kazakhstan. “The government of Abu Dhabi is committed to making sure that eventually at least US$1 billion is invested in Kazakhstan.”

The bank is mainly looking at the oil and gas, and metals and mining sectors. It is also interested in public-private partnerships and in infrastructure projects such as road construction as well as move into industry, agriculture, tourism and possibly real estate. “Our main focus will be on government financing and top-tier corporate, as well as trade between the UAE and Kazakhstan,” said Abraham. “Initially, we will be financing government projects and offering deposit facilities for corporate clients. Later, we plan to launch personal banking projects in the financing and investment sectors.”

It is just over nine months since an agreement on the bank’s establishment was signed between the governments of Kazakhstan and Abu Dhabi. Typically it takes between 18 months and two years for a banking license to be issued.

Kazakhstan is also planning a sovereign Sukuk, finance minister Bolat Jamishev announced in early March. There is speculation that Kazakhstan could issue a Sukuk in the US$300 million-US$500 million range by the end of the year.

And Al Hilal would be a prime contender to manage the issuance, according to Al Hilal — “we would participate very actively,” Abraham told Islamic Finance Asia.

With many companies in Kazakhstan in need of liquidity, Al Hilal is in a position to meet this demand. Set up in 2008, the bank is 100% owned by the government of Abu Dhabi and has capital of US$1.2 billion. This has already sparked considerable interest from local players. Abraham said: “From day one we had enquiries from government, quasi government and corporate actors.”

The friendship between Kazakh president Nursultan Nazarbayev and the Sultan of Abu Dhabi is also a factor. While the majority of Kazakhstan’s citizens are Muslim, the country is largely secular, and Nazarbayev’s policy has been to build good relations with all religions. However, he has been very much the driving force behind efforts to establish Islamic finance in Kazakhstan.
Kazakhstan’s retail and commercial banking is excluded from Islamic practice, but “you cannot ignore the fact Islamic institutions are relatively stable compared to their conventional counterparts,” said Nariman Zharkinbayev, director of financial institutions at JSC BTA Bank. He believes that Al Hilal obtaining a license to open a subsidiary in Kazakhstan is a strong sign of the confidence in Kazakhstan.

“There is no doubt that Islamic banking is going to become more developed and widespread in the mid-term future. There may be a Sukuk issuance by the Government of Kazakhstan; currently intensive work is being done in this matter,” Zharkinbayev said. “Regarding Al Hilal Bank’s role in the Sukuk issuance, as it is a bank with good experience, we think it will be a good example for Sukuk issuances in Kazakhstan.”

For the time being Kazakhstan is not fully involved in business under Islamic financing principles but is going through a formative period. It is doubtless, however, that there is plenty of scope for the development of an Islamic market in Kazakhstan — even a mortgage market in time, according to Zharkinbayev.

“Some local financial institutions, including us (JSC BTA Bank), have Islamic transactions in their portfolio that they have used to fund their clients, so we can say that the banking sector is most active in terms of being engaged in Islamic banking facilities.

“Still, we live in a secular country with conventional legislation, and the law on Islamic finance was adopted just recently. So I see the mortgage sector being among the first to see the entry of Islamic financial products as it can be readily developed in the near future together,” said Zharkinbayev.