ASTANA - In Kazakhstan, a farmer and an imam approach the Islamic Development Bank for a loan. The farmer, an Orthodox Christian, needs tractors to plough his fields. The imam wants to repair the roof of his mosque. Which one gets the loan?
Yerlan Baidaulet, a banker who is one of Kazakhstan’s
foremost proponents of Islamic finance, received both requests.
He sent the imam away with a donation from his own pocket on the
grounds that Islamic banking permits charity or grants, not
loans, to religious institutions.
The farmer, an ethnic Russian, got the loan he needed. Long
since repaid, it was the springboard to the growth of a major
farming enterprise in the grain belt surrounding Kazakhstan’s
futuristic capital, Astana.
“Islamic finance isn’t only for Muslims,” said Baidaulet,
executive director for the Commonwealth of Independent States
and Eastern Europe at the IDB, a Saudi Arabia-based multilateral
lender. “Even dollar bills are printed with the words: ‘In God
We Trust’.”
Two decades after the collapse of the Soviet Union freed
Kazakhstan from Marxist ideology, the country of 17 million
people is making a bid to become a regional centre of Islamic
finance, which is based on religious principles including bans
on interest and pure monetary speculation.
Strongman President Nursultan Nazarbayev, in power since
Soviet times, has declared he wants Almaty to become a hub for
Islamic banking in the former Soviet Union, which includes other
majority Muslim states and Russian republics such as Tatarstan.
While that reflects growing demand among a generation of
practising Muslims who grew up after the Soviet Union’s
collapse, it could also bring direct economic benefits to
Kazakhstan by linking the country to big pools of Islamic
investment money in the Gulf and southeast Asia.
On the face of it, the country is ideal for Islamic finance.
About 70 percent of its population is nominally Muslim and, in
the wake of the global financial crisis, people are more
receptive to alternative forms of banking.
But Islamic finance also challenges taboos on overtly
religious practices in a society which is run along secular
lines. In order to keep the peace in a multi-ethnic state, the
government declares itself to be uncompromisingly secular.
Three thousand copies of ‘The Handbook on Islamic Banking’
by Mervyn Lewis and M. Kabir Hassan, translated into Russian for
the local market, have not sold well.
“Some bookstores – the kind of stores that sell economic
textbooks – have told us: ‘It’s a religious book. We won’t sell
it’,” said Baidaulet, who also advises the Kazakh Ministry of
Industry and New Technologies.
PIONEER
Abu Dhabi-based Al Hilal Bank became the pioneer for Islamic
banking in Kazakhstan by opening its doors there in March 2010.
It employs nearly 50 people in the country and its investments
to date are worth $90 million, said Prasad Abraham, the bank’s
local chief executive, adding that it had set a target of $200
million by the end of 2012.
So far, Al Hilal’s business has been in the corporate sector
and with state-owned companies such as postal firm KazPost, with
which the bank signed a wakala or agency agreement worth 1.5
billion tenge ($10 million) in March.
Legislation was passed in 2009 that would in principle allow
the government to issue a sovereign sukuk or Islamic bond, which
would be a big step in creating a sharia-compliant debt market.
Zaratkazy Nurpiissov, chairman of the management board of
Fattah Finance, the country’s first brokerage to offer
sharia-compliant services, said there was demand for Islamic
consumer finance to buy cars and household goods.
Fattah Finance’s Hajj fund, in which pilgrims set aside cash
to visit Mecca, has accumulated $150,000 in its first year.
Nurpiissov said such numbers were the tip of the iceberg.
“I would say there are more than 1 million people who wish
to use Islamic finance services,” he said. “That number is
growing every year.”
Proponents of Islamic finance cite Kazakhstan’s painful
recent experience with conventional finance to make their case;
a crisis in 2007-2008 was triggered by banks’ exposure to
bloated real estate markets and reliance on foreign funding.
Islamic finance claims to be less risky because transactions are
supposed to be based on income from real assets.
“Why did so many real estate companies go bust?” said
Nurpiissov. “Because they borrowed money to buy land next to
their existing construction projects without having any cash
flow. Then the price of that land fell. Islamic finance would
only lend money to build that one block of apartments.”
OBSTACLES
The industry has run up against some major obstacles,
however. Crucially, the debut sovereign sukuk issue has not yet
materialised.
With over $50 billion stowed in its National Fund, which
collects windfall oil revenues, Kazakhstan has no pressing need
to borrow abroad. Not only the sukuk was pulled; a $500 million
sovereign eurobond planned for 2010 was also shelved.
“It’s not a question of sukuk per se. It’s simply that we
have no need to borrow money on the external market to finance a
budget deficit,” Finance Minister Bolat Zhamishev told Reuters.
“If it becomes timely to fix a benchmark for our corporate
sector, we will think about sukuk issuance. But it wouldn’t be
effective were it just a one-off.”
That view is shared by Ana Lucia Coronel, head of the
International Monetary Fund misson that visited Kazakhstan in
April and May this year.
“This is not the right time for Kazakhstan to go ahead,” she
said in an interview in Astana in May. “The sukuk market cannot
develop unless the traditional government bond market is
sufficiently developed, so it will take a little time.”
With a sovereign sukuk off the table for now, the
state-owned Development Bank of Kazakhstan is to take the lead
in Islamic bond issuance. In March, the bank said it planned a
sukuk programme worth up to $500 million, but it did not say
when issues might take place.
At present, Al Hilal remains the only Islamic commercial
bank in Kazakhstan. Rules for entry into the sector are strict;
the minimum capital requirement to establish any new bank,
w he ther Islamic or conventional, is 10 billion tenge. Kazakh law
does not permit conventional banks to run “Islamic windows”,
sections that would operate on religious principles.
“A second or a third bank would bring opportunities for
transactions between Islamic banks that I’m not in a position to
engage in at the moment,” said Abraham at Al Hilal.
According to Baidaulet, taxation is “the biggest trouble for
Islamic finance in Kazakhstan”. Deals based on the murabaha
model, the most widely used Islamic financing structure, require
bonds to be backed by assets that change hands more than once.
In Kazakhstan, each sale of such commodities is subject to 11
percent value-added tax.
A 41-point government road map for Islamic finance, released
in March, extends to the year 2020. It envisages the issue of
Islamic securities for some industrial projects. Taxation rules
would be amended and several Islamic banks created by 2014.
Implementing the road map, however, may yet require a shift
in mindset within the government. While debating the sovereign
sukuk issue, some members of parliament expressed horror at the
prospect, however unlikely, of state-owned assets falling into
foreign hands in the event of a default.
A tough new law on religion passed last year, which includes
a ban on prayer rooms in state institutions, hasn’t helped. The
law has been interpreted as a means to curb religious radicalism
after a series of Islamist-inspired attacks unprecedented in
Kazakhstan. While there is no suggestion that Islamic finance is
linked with militant activity, few in government wish to appear
overtly religious.
“People, especially civil servants, are now trying to
distance themselves from the word Islamic,” said Baidaulet,
co-chairman of the working group for the road map.
Abraham at Al Hilal said, “Islamic banking is not asking for
special favours. We’re just asking: make us equal to the
conventional banks.”
