Central Asian countries harbour several opportunities for a burgeoning Islamic finance landscape, that could increase investment as well as diversify sources of financing.
These opportunities include evolving favourable legislation and a tech savvy, predominately Muslim population base across the region.
"Islamic finance will also enable financing on a Sharia compliant basis," says Najib Al Aswad, director at advisory firm Islamic Finance Advisory & Assurance Services (IFAAS).
“Islamic finance will also benefit CIS (Commonwealth of Independent States) economies in terms of facilitating international trade. A lot of CIS countries trade with Muslim-majority nations, in addition to Russia and China.”
Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan make up the Central Asia (CA) region, home to roughly 80 million people, 85% of whom identify themselves as Muslims.
The four Central Asian states, barring Turkmenistan, also make up the broader CIS association.
Islamic finance can also help attract more foreign direct investment [into Central Asian nations] from Islamic countries like Malaysia, Turkey and the GCC states, particularly in the financial sector, adds Aswad.
FDI can be in the form of paid-up capital and/or lines of finance for Islamic financial institutions.
Several supranational organisations have played an active role in boosting the region’s Islamic finance sector. The Islamic Corporation for the Development of the Private Sector (ICD), for example, has provided technical assistance and support to local stakeholders.
The Islamic Development Bank (IsDB) has also been a key player in the progression of the region’s Islamic finance sector ecosystem.
Adding to this, the Eurasian Development Bank, a development institution, pledged to become a platform for Islamic finance in Central Asia.
Last October, it revealed plans to sell $500 million worth of sukuk in international markets.
However, despite key factors coalescing to promote the region's Islamic finance industry, it continues to face long-standing challenges, according to a recent S&P Global Ratings report.
These include low levels of financial intermediation, low financial literacy and long-standing secular legacy shared in all CIS countries. Specific in-country challenges exist, too.
“Even in countries where banking regulation is developed, accounting rules for corporate customers are not necessarily well-established which complicates access to customers,” says Roman Rybalkin, associate director at S&P Global Ratings.
Kazakhstan
Kazakhstan introduced its Islamic finance framework in 2009, which seeks to cover banking products, Takaful and capital market instruments.
Al Hilal, a UAE-based Islamic bank and a subsidiary of Abu Dhabi Commercial Bank, is one of the two Islamic banks that currently operate in the country. The other is Zaman Bank, whose key shareholders is the ICD.
In February, Qatar-based Lesha Bank entered into a preliminary agreement with state-owned management holding Baiterek, on the potential acquisition of one of its subsidiaries Bereke Bank.
To jumpstart the domestic sukuk market, ICD issued its first-ever Tenge-denominated sukuk in June 2023. The 2 billion Kazakhstani tenge five-year amortized sukuk, is rated A+ by Fitch.
However, there is limited demand for Islamic products, due to less awareness and confidence in Shariah-compliance of products, despite housing a sizeable Muslim population, according to Fitch Ratings.
“The government has, in the past, supported the industry through regulatory changes to diversify its financial sector, and aimed for Kazakhstan to become the Islamic finance hub of Central Asia. However, the industry hasn’t kept up pace, with more push and regulatory changes still needed,” the rating agency noted.
However, government initiatives aim to continually push Islamic finance into the mainstream. For example, the establishment of the Astana International Financial Centre (AIFC) in 2018 has accelerated the sector. AIFC seeks to be a regional financial zone offering a different legal framework to mainland Kazakhstan.
“The AIFC has had mixed success, as it takes time to develop an international financial centre, particularly in a unique region and context like the CIS - it is difficult to mirror the Dubai Financial International Centre as the dynamics are different,” explains Aswad.
A broader challenge faces Kazakhstan’s Islamic finance industry, though, he adds. "Although Islamic windows are permitted within the AIFC, they not allowed in mainland Kazakhstan."
Despite the challenges, the country, by virtue of its Islamic finance master plan (2020-2025) and through the AIFC, intends to increase the sector’s market share in total banking assets to 3%-5% by 2025.
Tajikistan
Tajikistan passed its Islamic banking framework in 2014, followed by an Islamic banking supervision department established by the country's central bank three years later.
Under the country’s National Financial Inclusion Strategy for 2022-2026, Islamic finance has been highlighted as a priority area, ranging from product development, financial education and research.
Tawhid Bank, a fully-fledged Islamic bank, is one of the two Islamic finance players operating in the country. In February 2022, the lender signed an agreement with UAE-based Al Huda CIBE to launch a Takaful operator.
The other Islamic player is Alif Bank, a Tajikistan-based fintech company, that serves 1.3 million customers locally and an additional one million in Uzbekistan. It presently operates under a conventional banking licence and is in the process of converting into a Sharia-compliant firm.
Outside of the country, Alif maintains a presence in Uzbekistan and recently launched in the UAE.
Kyrgyzstan
Islamic finance remains modest in Kyrgyzstan, accounting for around 1.5% of the country’s banking sector.
Despite an established framework available since 2006, its domestic industry is beset by challenges, including lack of Islamic finance specialists, low public awareness and a tightly regulated market.
At present there is one full-fledged Islamic bank and four Islamic windows. There are five Islamic microfinance institutions offering Sharia-compliant services, too.
Although the banking sector remains nascent, Kyrgyzstan’s Islamic capital sector offers more promise.
In April 2023, Intercascade Group, a Hong-Kong based trading firm with a special focus on Central Asia, issued the first ever Som-denominated sukuk. Intercascade privately sold a $8.39 million-equivalent mudaraba sukuk to investors.
Uzbekistan
Despite housing the region’s largest population of around 36 million, Uzbekistan has no dedicated Islamic finance framework, no fully-fledged Islamic banks nor windows.
Financial inclusion remains a challenge, too. Around 56% of the adult population did not have a bank account in 2021, according to a World Bank report. Only 39% of women held a bank account then.
Account ownership, by economy, 2021
| Economy |
Adults with an account (%) |
| Tajikistan |
39 |
| Uzbekistan |
44 |
| Kazakhstan |
81 |
| Source: World Bank Group |
“Uzbekistan’s high-level regulation allows Islamic finance for non-bank financial institutions in principle,” says S&P’s Rybalkin. “But there are no low-level documents on permissible/standard operations, creating a gray zone of sorts.”
To address this, Uzbekistan’s central bank has been working to reform the banking legislation, notes IFAAS’ Aswad.
“However, this [reform] requires the involvement of other government bodies and institutions including the Ministry of Justice,” adds Aswad.
“The country is working on enabling the introduction of Islamic windows at existing conventional banks and microfinance institutions, as well as full-fledged Islamic banks.”
The timing is rather promising as the adoption of Islamic finance comes as Uzbekistan is seeking to attract FDI as part of its reform agenda which began in 2017.
Odilbek Isakov, CEO and co-founder at Infrasia Capital, a London-based finance advisory, says that since 2017, Uzbekistan has developed its advanced funding programs in international capital markets.
This includes a record of local currency Eurobonds, sustainable development goals (SDG)-linked and Green bonds, in addition to conventional benchmark issuances.
“Sukuk and other Islamic instruments seem like the natural next step that can open a new source of funding,” says Isakov.
“Sukuk allows international Islamic investors and funds to invest in the Uzbek economic success. The government is working on introducing a new capital market legislation and we are hopeful that sukuk will be issued.”
Isakov, who served as Uzbekistan's deputy finance minister from 2019 to 2023, adds that despite the lack of Islamic finance regulations, market education has begun.
“[The] private sector has already started educating customers, practitioners and other stakeholders about Islamic products,” he says.
“Some companies such as Iman Invest are already using fintech which is a new tool that can provide services for retail and some corporate customers.”
Turkmenistan
Turkmenistan is fairly underdeveloped in Islamic finance. There is no legislation and no Islamic banks offering Sharia-compliant financial services.
In 2022, International Islamic Trade Finance Corporation - an IsDB subsidiary - and the State Bank for Foreign Economic Affairs of Turkmenistan held a Islamic finance trade workshop for local financial institutions and public enterprises in the country.
However, government backing is imperative to bolster Islamic finance initiatives and projects in the country.
Note: Story updated on April 24, 2024.