S&P Global Ratings names the main issues of Islamic banking in Central Asia

This includes, in particular, the underdevelopment of financial intermediation, low financial literacy, and poverty. The development of Islamic banking in Central Asian countries is occurring from a low base, Forbes.kz reports, citing a study by the international rating agency S&P Global Ratings. According to the provided data, the total volume of Islamic financing in the region as of September 30, 2023, amounted to only $500 million.

Agency specialists note that Islamic finance is at an early stage of development in six former Soviet countries with predominantly Muslim populations: Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. However, the study emphasizes that merely having a Muslim population is insufficient for the development of the growing Islamic finance sector. It notes that even in countries where authorities have created a significant regulatory framework, the level of penetration of such banking products among the population remains quite low.

Analysts at S&P Global Ratings explain that the low level of penetration can be attributed to several factors, including the relative complexity of the financial product, the low level of population wealth, and the likely secular legacy of the republics. They believe that the rapid growth of Islamic banking in Tajikistan and Kyrgyzstan suggests that Islamic banks may compete with traditional ones. The authors of the study note that financial intermediation in the region as a whole is insufficiently developed. They emphasize that many countries in the region have small banking systems compared to the size of their economies.

This is related to the following:

– low level of wealth (Tajikistan or Kyrgyzstan);

– predominance of extractive industries in the economic structure (Azerbaijan and Kazakhstan);

– relatively low level of bank account penetration, except for Kazakhstan.

“As a result, the development of Islamic banking is hindered not only by factors specific to this sector but also by the insufficient level of penetration of banking services among the populations of these countries,” the study states. It also notes the low level of financial literacy among the region’s population, especially in rural areas. S&P states: despite the fact that the majority of the population in Central Asia is Muslim, the principles of Sharia do not influence the judicial systems of the six former Soviet countries, unlike Muslim countries in the Middle East, where Sharia affects certain legal norms. For a long time, the complexity of adapting the legal environment has served as an obstacle to the development of the sector.

Islamic Banking in Tajikistan

Work on the implementation of Islamic banking by financial organizations in Tajikistan began in the early 2010s. In May 2014, a law on “Islamic Banking Activities” was adopted in the republic. Subsequently, with the help of international consultants, a number of regulatory legal acts were developed and adopted to regulate and supervise the activities of Islamic financial organizations in accordance with Islamic financing principles and standards of Islamic activities. In 2015, “Tajiksodirotbank” planned to transform the “Development Bank of Tajikistan,” which is part of its structure, into a full-fledged Islamic bank. However, just a year later, “Tajiksodirotbank” faced financial problems that ultimately led to its liquidation.

In September 2019, OJSC “Tavhidbank” received a license to carry out operations based on Islamic banking principles. In early 2020, the credit and financial organizations “Humo” and “Imon” received licenses to conduct Islamic banking activities through the “Islamic Banking Window.” In October 2021, “Alif Bank” submitted a request to the National Bank of Tajikistan with a package of documents to begin the transformation process into an Islamic bank, which has not yet been completed. Earlier, the management of the NBT reported that a number of credit and financial organizations in the country had provided the necessary documents for transformation into an Islamic bank, which are currently under review. According to the regulator, at the beginning of the second half of last year, the assets of Islamic organizations in the country amounted to 264 million somoni: 133 million somoni in capital and 131 million somoni in liabilities.