Kazakhstan embraces non-traditional financial instruments
Throughout the recent global financial crisis, the Islamic finance sector has demonstrated its competitiveness and resilience. The world market for Islamic financial services has been expanding. Islamic assets have grown by 15-20% per annum from US$150 billion in the mid-1990s to an estimated US$1.0 trillion in 2010. In 2010, Islamic banking assets represented 83.4% of overall Islamic assets followed by "sukuk" certificates (11.3%) and Islamic funds (4.6%). The Islamic Financial Services Board expects global Islamic finance assets to reach US$1.6 trillion by 2012.
Islamic finance is growing fast, especially in Central Asia and the Commonwealth of Independent States (CIS),News Bulletin of the Embassy of the Republic of Kazakhstan to the United State of America reads.
Among the CIS and Central Asian countries, Kazakhstan leads in developing Islamic finance. In 2006-2007, the country's private financial institutions signed several agreements with international partners in the sector.
In 2009, a law was passed to create the framework for the operation of full-service Islamic banks and other financial institutions. The law provided a strong boost to the Islamic financial industry, which established several financial institutions specializing in Islamic finance.
The same year, Kazakhstan and the UAE signed an intergovernmental agreement to set up the first-ever Islamic bank Al-Hilal in Almaty, Kazakhstan. Today, the Al-Hilal bank operates with 250 million dollars in assets. In next two years, this figure should reach up to US$1 billion. The bank opened two full-service branches in 2010 in Astana and Shymkent.
Abu Dhabi's Al Hilal Bank Chairman Ahmed Ateeq Al Mazrouei mentioned the establishment of the Islamic bank in Kazakhstan as vivid evidence of successful cooperation between the two countries.
Kazakhstan also has Sharia'h (Islamic religious law) compliant organizations such as "Fattah Finance" JSC, "Istisna'a Corporation" LLC, "Kausar Consulting" LLC, "Akyl-Kenes Consulting" LLP, "Islamic Financial Instruments" and "Mutual Halal Insurance Takaful." All of them are members of the Islamic Finance Development Association, which was established to facilitate growth of the Islamic finance market in Kazakhstan through international cooperation.
In 2010, Kazakhstan adopted the 2010-2012 Islamic Finance Development Roadmap, which aims, among other things, to attract FDIs from the wealthy member countries of the OIC, which Kazakhstan will chair in 2011.
At the Kazakhstan Islamic Finance Conference, held on March 14-15, 2011, Deputy Prime Minister Asset Issekeshev outlined the importance of Islamic finance in diversifying the national economy through investment in petrochemicals, renewable energy, tourism and agriculture.
"Islamic finance is crucial for economic development and innovations. It has weathered financial crises and is proven for its quality, reliability and transparency. Having understood the vital role it can play to attract investments from Islamic nations, the Government has extended the state patronage by amending the laws. We are confident that Islamic finance will lead the way to attract funds, especially from the Gulf countries and the other Muslim countries to develop all these sectors," said Mr. Issekeshev.
One way of doing so is to issue a "Sukuk" financial certificate, which is similar to a bond in Western finance. The main distinction is that it allows the participating sides to avoid interest payments, which are not allowed under Islamic finance. Under "sukuk", the issuer sells an investor group the certificate, which then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.
The global "sukuk" issuance in 2011 is expected to remain high at US$35-40 billion.
To tap into Islamic finances, the Kazakh Government plans to issue its debut sovereign "sukuk" for US$500 million by the end of 2011. It is expected that by issuing "sukuk," Kazakhstan authorities would create a benchmark for corporate lenders. Overall, Kazakhstan has plans to attract up to US$10 billion in Islamic finance over the next five to seven years.
"It might make sense for Kazakhstan to start building its liability structure with a different investor base," Richard Segal, Director of Emerging markets fixed-income in London at Knight Libertas Ltd., said while commenting the news about the country's intention to tap into the Islamic capital market.
Today, the Government is in the process of drafting new regulations that would permit the Ministry of Trade and New Technologies to issue sovereign "sukuk" and legislation that would enable private companies to buy and sell Islamic bonds. In addition, the Government has tentatively identified two prospective issuers for its flagship "sukuk" certificates: one is a South East Asian compan and the other is a local company.
In the meantime, private sector investors are becoming more active. Fattah Finance, a local Kazakh brokerage company, is joining forces with a Malaysian trustee company, Amanah Raya Berhad, and the state-owned Development Bank of Kazakhstan to conduct a feasibility study to establish Kazakhstan's second Islamic bank in the second quarter of 2011. Kuwait Turkish Participation Bank has received a license from the Turkish Central Bank to open its branch in Kazakhstan with a limited range of Islamic finance services. The bank has already established its representative office in Almaty.
Kazakhstan, the largest Central Asian economy, is sending strong signals to potential investors in the West, China and Muslim countries about the investment opportunities, as it seeks to implement its economic diversification strategy.