Islamic perspectives of banking in Kazakhstan

ZhumagulTorekhan, OserbayulySeysenbay (scientific supervisor)

Al-Farabi Kazakh National University

Since 1960s Islamic finance has been growing fast and already achieved many significant milestones. Kazakhstan is one of the recent countries, who opened doors for Islamic finance. In 2008 the Banking Law was amended making a path to the alternative banking system. Ever since the only Islamic bank started operations in Kazakhstan is a subsidiary of Abu Dhabi state-owned Al-Hilal bank. This bank was opened based on an intergovernmental agreement between the Republic of Kazakhstan (RK) and the United Arab Emirates (UAE) [7]. Therefore, some analysis are in the opinion that this is more political decision rather than a commercial business project. In 2010 there was some other public announcements about new interested entrants such as Amana Paya from Malaysia and Qatar Islamic bank [7]. However, due to unknown circumstances these banks are not yet to be in the market.

A religious aspect also exists. Kazakhstan is historically a Muslim nation. Despite suppression of the religion during the Soviet era, a growing number of people recover their national and religios values now.The main rules of Sharia forming the boundaries and distinguishing Islamic banks from conventional are the following.

  • Prohibition of riba that means usury and includes all forms of interest
  • Prohibition of gharar, maiisir and qimar that means uncertainty, gambling and game of chance.
  • Prohibition of risk transferring and risk selling. Instead, risk must be shared amongst business partners.
  • Restrictions on sale of debt and financial assets and their pledge as collateral
  • Prohibition of finance for haram business. This means business that are repugnant to Sharia law including, but not limited, alcohol, tobacco and pork production, entertainment related to gambling and vulgarity, as well as interest-bearing financial services.[4]

Figure 1: Islam religion in Kazakhstan and Other Countries

Source: Pew Research center, 2012

The Pew Forum research found that the religion is really important for only 18% of total population. This indicator should become a starting point for estimation of Islamic banking available market share.

On the other hand, we know from practice that Islamic finance is in demand by non-Muslims as well. Specially, in Malaysia the share of non-Muslim clients in Islamic banks is about 40% [2]

The fundamental objections of Islamic economy against interest. Objectives of Islamic Banking

a) To help Muslims execute financial dealings in social value of Shariah.

b) To serve Muslim community in mobilization and utilization of financial resources.

c) To serve Islamic communities in strengthening the economic ability.

Sources of Receiving Investment There are the following two sources of receiving investment:a) Loan; b) Mudarabah or participation.

Like conventional banks, the Islamic banks also have two types of Accounts, namely: a) Current Accounts, bearing no profit; b) Profit & Loss accounts, bearing profit on different schemes on the basis of Mudarabah.

Sources of Financing There are the following sources of financing:

a)Musharaka; b) Mudaraba;c) Murabaha;d) Ijarah; e) Wakala;

Since there is no profit to the Islamic banks, it does not issue loans (Qard-Hasanah). As per the existing practice, the Islamic banks adopt Musharakah and Mudarabah on deposit side, but do not normally provide loan to their clients, due to certain unavoidable circumstances, and instead, financing is done through Murabaha, Ijarah, Salam or have Musharakah etc. however, sometimes the banks adopt Musharakah in exports, being less risky. Direct Investment The Islamic banks invest their capital in the following business. [3]

Table: SWOT analysis for Islamic banking industry

Strengths / Weaknesses
  • High and continuous growth over the last four decades: assets up 21.5% in 2011
  • International recognition and opening doors even in countries with majority of Non-Muslim population
  • Spread of geographical scope
  • Institutional infrastructure in place
  • Strong demand for riba free and ethical finance
  • Outperformance over conventional banks and asset management
  • Higher resilence to shocks and crisis
  • Ethical and moral values, increasingly demanded around the globe, already ingrained to Sharia principles
  • Problems recognition and the industry road map in place
/
  • Human capital deficit
  • Sharia scholars deficit
  • Reverse-engineering of conventional products
  • Focus more on debt-based products than equity-based intruments
  • Liquidity management due to lack of short term investments, sovereign papers and illiquid secondary market of Sukuk
  • Additional cost involved due to Sharia supervision
  • Lack of absolute standardization across the board
  • Inactive role of Government in some countries

Threats / Opportunities
  • Reputation risk due to conventional products imitation
  • Reputation risk due to yet invisible social benefits
  • Path-dependency on conventional model
  • Cannibalism if authenticity lost
/
  • Support from economic growth and oil reserves in Muslim population of 1,6 billion
  • Increase in efficiency by regulation and governance, product development standardization, economy of scale and market infrastructure development
  • Revivial with very unique and authentic value proposition based on strong ethics and social justice goals
  • Delivery a viable alternative to conventional system as more resilient to crisis and ethical mode of finance

Currently in Kazakhstan oversees 38 commercial banks, including one islamic bank opened in 2010.At first glance Islamic Finance potential in Kazakhstan seems overwhekming to traditional banking, owing to the majority of Muslim population. However, it is worth saying that due to some historical reasons, including Soviet era restrictions, the religious commitment of the population is quite low comparing to other countries.[6]

As we realized in our previous analysis the bank needs to develop a branch network large enough to cover at least main cities and 14 region centers. Based on the main branch in each region center smaller branches will be opened around.

Electronic banking will be in priority of the bank as a modern and technology based way of custumer service. The bank will provide the following services:

  1. Internet banking (with options of account statement, money transfer within the bank as well as to other banks and abroad);
  2. Email-banking with account statement and customer care;
  3. SMS-banking providing customers with information about transactions on their account;
  4. Plastic cards with debit and credit card as well as virtual cards based on current account.

The overview of Islamic finance industry in the world and the steps taken by the authorities in Kazakhstan, including the leigislation framework, the Road-map, the debut sukuk issuance and opening of the first Islamic financial institutions, promise a good opportunity for Islamic banking in the country.[5]

Figure 2: Branch numbers Comparison (September 2012)

Source: FMSA, 2012

We see that banks with large branch network focus on SME and retail. Specifically Halykbank, BTA, Kaspi, BCC, Tsesnabank. As we discussed in the Poter’s Forces analysis the Top 5 banks in terms of assets hold 55% of the total branch number in the country.[1]

Islamic banking is a very young concept. It has already been implemented in few Muslim countries; there are Islamic banks in many Muslim countries and a few in non-Muslim countries as well. Despite the successful acceptance there are problems, these problems are mainly in the area of financing. With only minor changes in their practices, Islamic banks can get rid of all the problems relating to financing and offer a clean and efficient interest-free banking. The present Islamic Banking system may be modified according to Shariah Laws using only two forms of financing, (a) loans with a service charge and (b) Mudaraba participatory financing – both of which are acceptable to all the Muslim Scholars. Islam focuses on people and their desires, rather than production. All the Shariah rules increment each other. This means Islamic banking system is more than proficient of being practical and impact has a flourishing history of dealing with economic issues. Such a system will offer an effective banking system where Islamic banking is obligatory and a powerful alternative to conventional banking where both co-exist. Additionally, such a system will have no problem in obtaining authorization to operate in non-Muslim countries.

It is not about finding billion-dollar petroleum projects or becoming the next Islamic finance multi-millionaire. Rather, it is to do with alleviating poverty and wealth gops around the world.

References

  1. MadiAkhmambet, How attractiveis setting up an Islamic bank in Kazakhstan, 2012
  2. Ayub, M. Understanding Islamic finance. John Wiley & Sons, Chichester, England, 2007
  3. Chapra, Dr. M. Umar The Economic System of Islam Bureau of composition, Completion & Translation, University of Karachi, 1995
  4. Khan, Mohsin S. and AbbasMirakhor Theoretical Studies in Islamic Banking and Finance, Houston: Institute for Research and Islamic Studies, 245p., 1987
  5. Ahsan, Dr. Manazir The experience of the Islamic Foundation UK in promoting Islamic Economics, 2011
  6. ShafiqAzam, FahimMuhammadAsim, Iqra AbdullahImpact of Global Financial crises on the Islamic Banking System, Arabina Journal of and Management Review (Oman Chapter) Vol-I, No. 9, April, 2012.
  7. Kazinform 2010, Amanah Raya Financial Group of Malaysia, Development Bank of Kazakhstan and FATTAH FINANCE sign agreement to launch a second Islamic bank in Kazakhstan. Press-release, June 19 2010, as cited by the Government [Online] Available from: [Accessed 31 August 2012].

Abstract:The purpose of this research is to overview the prospects of Islamic Banking System in Kazakhstan. Another aim of this study is to show scenario of such system to the researchers at local, regional and international level. Economics of Islam, since 14 centuries, is developing on the guidelines of the Holy Book “Al-Quran” and Shariah-being law and guideline. And Shariah prohibits the fixed or floating payment or acceptance of specific interest or fees (known as riba, or usury) for loans of money. The concepts, theory and practice of Islamic Financial System are consistent in both the Muslim and Non-Muslim countries. The implications for implementation of the suggestions and conclusion may lead to change and improve the existing interest – free banking system in Kazakhstan while providing services to general public in true perspective of Islam.

Аңдатпа: Бұл мақаланың мақсаты Қазақстандағы Ислам банкі жүйесін даму жағдайын қарастыру осы жүйені зерттеушілерге жергілікті, аудандық және халықаралық деңгейде көрсету. ХІV ғасыр бойы ислам экономикасы Шариғат заңдарына сүйеніп келуде. Шариғат тіркелген төлемдерді немесе арнайы пайыздық ставкалармен (риба, өсімқорлық) қарыз алуды харам еткен. Ислам қаржы жүйесінің теориясы мен практикасы, қазіргі кездемұсылман және мұсылман емес елдерде толықтай қолданылуда. Ұсыныстар мен қорытындыларды практикаға енгізу қазіргі бар пайыздық ставкаларды өзгерту мен жақсартуға әкелуі мүмкін. Ол Қазақстанда еркін банк жүйесінің жалпы қоғамға шынайы Ислам қызметтерімен қамтамасыз етуіне әкеледі.