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Down at the Sukuk

With the upcoming issuance of Kazakhstan’s first sukuk under discussion, regulations on Islamic banking are developing quickly to ensure an improved diversification of its financial sector.

Kazakhstan is blazing a trail in the Islamic banking sector within the CIS region. As the first in the region to pass sharia-compliant banking legislation, and the first to welcome an Islamic bank to set up shop, the Central Asian country is creating the necessary framework to become a regional financial hub. The adoption is not solely related to Kazakhstan’s majority Muslim population (around 60%), with Islamic finance gaining ground in even secular markets such as the US and UK. According to the Chairman of the World Islamic Economic Forum (WIEF) Foundation, Tun Musa Hitam, some countries are seeing 10-15% annual growth in Islamic banking. By setting the scene for sharia-compliant banking, Kazakhstan is opening itself to investment from resource-rich Saudi Arabia and other financial giants in the Gulf, as well as emerging market tigers like Malaysia and Indonesia.

Kazakhstan’s legislation recognizes shares and units in Islamic investment funds, Islamic leasing-based certificates (sukuk al-ijara), and Islamic participation certificates (sukuk al-musharaka) as instruments of Islamic securities. The government is currently looking at introducing sukuks (bonds) into the Kazakhstani market. President Nazarbayev established a working group in 2009 to draw-up a roadmap for a sharia-compliant financial system. In February 2009, the government introduced principles of Islamic finance into Kazakhstani legislation to facilitate various Islamic financial transactions such as murabaha and ijarah. Kazakhstan also has sharia-compliant organizations such as Fattah Finance JSC, Istisna’a Corporation LLC, Kausar Consulting LLC, Akyl-Kenes Consulting LLP, and Mutual Halal Insurance Takaful. All are members of the Islamic Finance Development Association, which was established to facilitate the growth of the Islamic finance market in Kazakhstan through international cooperation. In 2010, Kazakhstan adopted the 2010-2012 Islamic Finance Development Roadmap, which aims to attract FDI from wealthy member countries of the OIC, which Kazakhstan currently chairs.

Abu Dhabi’s Al Hilal was first bank to respond when Kazakhstan passed new laws in 2009 to allow an Islamic finance industry. The bank opened its offices in March 2010 with capital of $36 million. The bank currently only caters to corporate clients, but is set to open a retail banking arm toward the end of 2011. The bank also plans to open its third branch in Shymkent in southern Kazakhstan this year as sharia-compliant banking gains popularity in the former Soviet state.

While Al Hilal remains Kazakhstan’s sole Islamic bank, its monopoly on the market is not set to last long, with at least two other competitors hot on its trail. Most likely to be first to join them is Malaysian trustee firm AmanahRaya, which expects to obtain licenses to set up Kazakhstan’s second Islamic bank by the end of 2011. This could bring $500 million-$600 million in foreign investments to Kazakhstan’s sukuk sector once it’s up and running. The joint-venture company aims to divide assets with AmanahRaya owning 55% of the equity, DBK 40%, and Fattah Finance the remaining 5%. Third on the scene is potentially Küveyt-Türk Bank, whose main shareholder is Kuwait Finance House, one of the biggest and leading Islamic finance institutions in the world.