Azernews.Az

By Bloomberg

As Nursultan Nazarbayev was re-elected as Kazakhstan’s president last week, he signed off on a law set to transform the country’s Islamic finance industry.

Preparing to start his fifth term in office following a one-sided vote April 26, Nazarbayev endorsed a bill eliminating additional tax on Shariah-compliant deals and allowing trade transactions based on so-called Murabaha contracts. For Abu Dhabi-based Al Hilal Bank, whose unit is the only stand-alone lender offering Shariah-compliant services in Kazakhstan, the decision may double the Islamic share of the country’s banking industry over the next five years.

“We’re broadening the market’s access to Islamic products” after this law, Al Hilal Islamic Bank JSC’s Chief Financial Officer Aidyn Tairov said in a phone interview from Almaty on April 30. “It gives an opportunity to work with a larger number of clients, which include retail, wholesale and national companies,” he said.

The majority Muslim country, central Asia’s biggest oil producer, is “fine-tuning” legislation for Shariah-compliant banking to attract financial institutions from the Middle East and southeast Asia, central bank Chairman Kairat Kelimbetov said in September. Since starting in 2010, Al Hilal has struggled to generate business due to additional taxes levied on Islamic deals, Tairov said in 2012.

‘Gray Areas’

Shariah-compliant finance in Kazakhstan is still in its infancy, accounting for just 1 percent of the banking industry. Development Bank of Kazakhstan JSC sold the country’s first and only sukuk in 2012.

“Islamic banks used to be quite limited in their access to the retail market,” Tairov said. “The new law also clarified Islamic leasing, Ijara transactions, allowing them in the retail market.”

The law broadens the potential client base and “eliminates the gray areas,” Yeltay Mukhamejanov, the Almaty-based director of corporate banking at Al Hilal’s unit in Kazakhstan, said April 30.

Islamic Corporation for the Development of the Private Sector, a unit of Saudi Arabia-based Islamic Development Bank, announced plans in 2013 to convert Kazakhstan’s Zaman Bank into an Islamic lender by taking a 35 percent stake, according to Zaman’s website. Islamic Development Bank has had a regional office in Almaty since 1997.

“We anticipate there will be other players” as the laws will also make it “easier” for new lenders, Tairov said by phone. “We need at least two to three banks to activate the market.”

Devaluation

Kazakhstan in March raised its planned budget deficit for this year to 3 percent of gross domestic product after a crash in oil prices squeezed finances. Economic growth in the nation with the second-lowest investment-grade credit rating at Standard & Poor’s is expected to slow to 2.1 percent this year from 4.3 percent in 2014, according to a Bloomberg survey of economists in March.

Kazakhstan is looking to finance infrastructure projects and attract investments from Gulf states, according to Sheikh Bilal Khan, a Shariah scholar and director of Dome Advisory Ltd., who works with the Association for Development of Islamic Finance in Kazakhstan and National Bank of Kazakhstan.

The nation is mulling a sale of an international bond worth at least $1 billion, after raising $2.5 billion in October, a person familiar with the plan said on April 22.

Fifty-four percent of the 17 million Kazakhs hold bank accounts, according to World Bank data. About 70 percent of the population is Muslim, according to the latest census from 2009.

“Kazakhstan has huge potential to be that gateway for Islamic finance in central Asia,” Khan said by phone from London on April 30. The law “will encourage more Shariah- compliant investments into the country.”