How is Islamic banking developing in Kazakhstan | FinReview
21 September 2020

How is Islamic banking developing in Kazakhstan

When the business of traditional banks around the world shows volatility, Islamic banks become an example of stability and reliability, which allows customers not only to save, but also to increase their capital. Islamic banking products attract more and more attention in the Kazakh market. As of July 1, 2020, the growth of deposits and accounts of clients of Islamic banks amounted to 63% in annual change or 9.4 billion tenge.

Islamic banks are gaining weight as an alternative to traditional Western banks, in particular because they are successfully coping with the economic crisis.

When Islamic banks first appeared in the Gulf States in the 1970s, their clients were exclusively practicing Muslims. They needed a banking system that matched their religious values. That is, it includes a ban on issuing money at interest rates that are considered morally unacceptable, such as alcohol.

In Kazakhstan, the history of Islamic banking began with the opening of Al Hilal Bank in 2010. For the first seven years, the Bank focused on corporate clients, but in August 2017, it launched a retail business in Almaty, Nur-Sultan and Shymkent.

How is Islamic banking currently developing in Kazakhstan, whose global assets have exceeded 2 trillion US dollars over the past forty years, analysts have analyzed

Loans without interest — the reality of Islamic banking

Islamic banks, unlike traditional ones, which earn on the difference in interest on loans and deposits, work on the principle of money-goods or services-money. Let’s say a client needs funds to buy real estate. A traditional Bank will give them a loan at a certain percentage, while an Islamic Bank will buy the selected object for the client and sell it in installments with a fixed mark-up, which includes the transaction costs and other costs, including the estimated profit of the Bank.

The advantage of this form of lending is that the margin is known to the client immediately. And depending on the loan term, it is more profitable than in traditional banks. For example, when making a mortgage in the amount of 10 million tenge for a period of 5 years, the margin will be 2.5 million tenge, and in traditional banks, the overpayment starts from 2.7 million tenge, depending on the conditions of the Bank itself.

As for deposits, they work on the principles of investment and partnership. The client provides the Bank with funds in trust management, and the Bank invests them in business projects with subsequent profit sharing with the client. The percentage of profit depends on the term of opening the Deposit.

What Islamic banking products are available in Kazakhstan?

Currently, there are two Islamic banks in Kazakhstan-Al Hilal and Zaman-Bank. They provide a wide range of financial instruments for both corporate clients and individuals. The most common are:

“Murabaha” is a cross between a classic loan and leasing. Here, the transaction is based on an asset previously purchased by the Bank, which is sold to the client at a surcharge. And until the customer repays the entire agreed amount, the Bank remains the owner of the product.

“Ijara” is the Islamic equivalent of classical leasing, where the Bank purchases property and enters into a leasing agreement with the client. During the lease term, the Bank is the owner of the property and bears all risks associated with its ownership.

“Mudaraba” – is the type of banking service is used for opening deposits. The specificity of this product is that the Bank does not specify in advance the remuneration rate that the client will receive. We propose a proportion, namely, the share of profit, from the investment of Deposit funds by the Bank in projects. Suppose a depositor deposits funds for a period of 1 year. In this case, 55% of the profit from investment activities will be received by the depositor, and the remaining 45% will remain in the Bank.

“Vakala” – a Deposit with a fixed percentage of profit. This type of banking services is analogous to deposits in the traditional financial system. The only difference is that the profit is issued only at the end of the Deposit term.

In General, the demand for these banking products has increased dramatically in recent years. This is due to the fact that Islamic banks are almost the only financial institutions in the world that have not been affected by the global economic crisis. At the moment, none of them needed significant financial assistance to survive, which means that to some extent they are safer for storing savings than traditional banks.

Over the year, the assets of Islamic banks in Kazakhstan increased by a quarter

As of August 1, 2020, the total assets of the two Islamic banks in Kazakhstan reached 72.1 billion tenge, while a year earlier this amount was 57.4 billion tenge. In other words, assets grew by 25.6% year-on-year.

At the same time, the largest Islamic Bank in Kazakhstan — Al Hilal — increased its assets by 39% to 48.5 billion tenge. The assets of Zaman-Bank increased by 5% and amounted to 23.7 billion tenge.

The loan portfolio of banks is also growing — with an increase of about 41% over the year. It is noteworthy that the share of loans with overdue payments over 90 days in Al Hilal Bank is 0%, in Zaman-Bank – 3%, while in the Republic the indicator is around 9%, and in some banks it even exceeds 50%.

The growth is also observed in deposits and customer accounts — for the year they increased by 63%, reaching 24.4 billion tenge. However, this led to the fact That al Hilal Bank’s current liabilities on deposits and customer accounts exceed the loan portfolio by 14.4 million tenge. So now the Bank’s expenses are higher than its income.

Currently, Islamic banking is the fastest growing segment of the financial sector in Kazakhstan. Our country intends to further develop the Islamic banking industry as an alternative source of financing for the economy.

Prospects for Islamic banking in the post-pandemic period

In Kazakhstan, the tools of Islamic banking have been improved since 2018 with the help of the Astana International Financial Centre. The AIFC plans to become a hub of Islamic Finance in the regions of the EAEU and Central Asia. To do this, the financial centre has built the necessary infrastructure and regulatory framework that meets international practices and standards. The AIFC became the first platform in the Central Asian region that provides businesses with access to Islamic Finance.

The Islamic Finance industry in Kazakhstan will soon be replenished by one of the largest banks — Al Rayan Bank, which has registered its branch on the site of the financial centre. Its net annual revenue exceeds 94.4 million US dollars.

Astana International Exchange (AIX) also hosted a cross — listing of sukuk — Islamic securities issued by the International Islamic Bank of Qatar (Qatar International Islamic Bank) for the first time in Kazakhstan. Their initial placement was made on the London Stock Exchange (LSE) in the amount of 500 million US dollars with an annual fixed coupon of 4.264% per annum.

All this demonstrates the confidence of the international business community in the Kazakh financial centre, which continues to develop Islamic Finance. Further activities of the AIFC will focus on expanding the number of Islamic banks, asset management companies, investment funds, insurance companies, other Islamic financial organizations, as well as leading international institutions of Islamic Finance. This is especially true in the post-crisis period, when the economy is particularly in need of cheap loans and investment funds.