Kazakhstan’s Islamic ambitions stalled

    (Excerpted from an article by Alastair Marsh, Financial Times ‘Tilt’)
    Islamic finance in Kazakhstan should be a no-brainer. About 80 percent of its 16 million population are Muslims, which in theory should provide plenty of opportunities for the development of Islamic banking services and financial products. But so far progress has been slow with numerous setbacks en route.
    
    The latest came earlier this month when Kazakhstan’s central bank suspended the license of Abu Dhabi state-owned Al Hilal Bank, the first and only bank to have launched Islamic operations in Kazakhstan. Al Hilal, which itself launched in mid-2008 and played a key role in Abu Dhabi’s 2009 bailout of Dubai, was punished, along with two other banks, for not complying with the requirements on the minimum equity capital to be held by second tier banks (KZT 10 billion, or US $68.3 million). The bank on Tuesday clarified that its main owner, the Abu Dhabi government, has upped its capital to the required level from KZT 9.5 billion. The reason for the deficit was an operating loss amassed during the first year of its activities in Kazakhstan, the bank said.
    
    The immediate effects of the license suspension are expected to be limited because Kazakhstan’s Islamic banking sector is small and still only in its infancy, Bakytzhan Khochshanov, an analyst at Halyk Finance in Almaty, told FT Tilt. And Al Hilal said the suspension only applies to the opening of new retail accounts and does not affect Al Hilal’s transactions with its corporate clients. Nonetheless, this is bad PR for Kazakhstan’s plans to develop sharia-compliant banking within its borders. In 2009, Kazakhstan’s banking legislation, as well as its civil and tax codes, were amended to encourage Islamic banks to invest in the country, while the government has also said it plans to bring US $10 billion of Islamic financial transactions to market in the next 5 to 7 years.
    
    So far Al Hilal has been the only bank to respond to the call, opening its Kazakh offices in March 2010. A number of other banks have looked at the market, including Qatar Islamic Bank and Malaysian trustee company Amanah Raya Berhad, which is joining forces with Kazakh brokerage Fattah Finance and the state-owned Development Bank of Kazakhstan to conduct a feasibility study on establishing a bank. But so far no new banks have actually opened.
    
    What could really get the motor running would be the issue of the much talked about sovereign sukuk. Kazakhstan first mentioned the idea of a sukuk issue in 2010 after it cancelled an international bond sale, and if the country were to come to the market it would blaze a trail for local corporates, Halyk’s Khochshanov said. “We expect the sovereign issue will be a benchmark and make a way for state corporates to issue sukuk bonds as well. With the issue of a sukuk, the government would more be looking to launch a market for Islamic instruments rather than meet its need for financing.”
    However, a source close to the deal said preparations have been so slow and arduous that the idea now looks like a nonstarter, especially since a conventional sovereign bond, in his opinion, would find greater investor demand and better pricing levels. But with Malaysia, the leading sukuk issuer, offering to finance the bond, perhaps there is hope yet.