LONDON: Of the CIS countries, Kazakhstan is emerging as the most proactive and advanced Islamic finance market. According to foreign Islamic bankers recently visiting Astana, the Kazakh capital, there is very strong interest in Kazakhstan in developing Islamic finance.

A delegation from Malaysia's International Islamic Financial Centre (MIFC) visiting Kazakhstan at the end of January was very encouraged by the developments in the Islamic finance in the CIS country. The visit was part of the MIFC's objective of consolidating Malaysia as the international hub for Islamic finance and its efforts to foster bilateral ties and cross-border cooperation in Islamic finance.

The government of President Nursultan Nazarbayev established a working group in 2009 to draw up a roadmap for an Islamic financial system. In February 2009 the government introduced principles of Islamic finance in the Kazakh legislation to facilitate various Islamic financial transactions such as Murabaha and Ijarah.

Amendments made to the Banking Law 1995 allowed the authorization and establishment of dedicated Islamic banks, but not Islamic windows. Subsequently, the first Islamic bank in Kazakhstan is to be established in the first quarter of 2010 by Al-Hilal Bank of Abu Dhabi. The Kazakh government is a proactive supporter of Islamic finance in a ready-made market in which 60 percent of the population is Muslim.

The Ministry of Finance in Kazakhstan, according to Malaysian bankers,  is also hoping to launch the country's debut sovereign Sukuk, expected to be in the region of $300 million and most likely a Sukuk Al-Ijarah, for benchmark purposes. The challenges for the sukuk market in Kazakhstan are the specific regulatory provisions on Islamic securities, for instance, originators are limited to Islamic banks and national holding or managing holding companies. Market players would like to see state and privately-owned companies also issue sukuk directly.

Kazakhstan has a longer history in Islamic finance activities than the other CIS countries. The Jeddah-based Islamic Development Bank (IDB) established its first ever regional office in Almaty, the erstwhile capital of Kazakhstan. The Dallah Albaraka Group also established an Islamic bank in Almaty, which was later taken over by Lariba, but which did not really take off.

In 2008, Bahrain-based Islamic investment bank, Gulf Finance House (GFH) signed a memorandum of understanding with the Kazakhstan government to launch the Caspian Energy Hub which is located at Aktau on the shores of the Caspian Sea. The project will be built in a number of clusters which will have a total value of $10 billion.

Kazakhstan is one of the more stable countries in Central Asia with huge oil and gas reserves. It has attracted the largest FDI inflows in the region especially from the US and the EU.

President Nazarbayev is keen to develop diversified economic relations with both traditional partners such as Russia but also with the West and the Middle East Muslim nations. Kazakhstan is after all a member of the OIC (Organization of the Islamic Conference) and the IDB. The Kazakh economy is also a fast-growing one with double-digit GDP economic growth in 2006 and 2007. GDP growth for 2008 was 8.5 percent.

Another Islamic financial institution targeting Kazakhstan and other CIS countries is the Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group, headed by general manager and CEO, Khaled Al-Aboodi. The ICD focus is primarily on establishing bespoke Ijara (leasing companies). The ICD has hitherto supported leasing companies with lines of financing, but it is more interested in creating the concept of the total Ijara company.

SMEs (Small and medium enterprises), rued Al-Aboodi, are usually cut off from conventional finance, and the Ijara companies will try to redress this situation to some extent. The Ijara companies will not finance activities but buy the equipment, cars or trucks directly. ICD has already established two leasing Islamic companies in the CIS and another in Kazakhstan is on the cards.

Al-Aboodi, however, agrees that the CIS countries will need a long education process about Islamic finance, but the potential is huge.

Another Islamic finance professional that is bullish about opportunities and developments in Kazakhstan is Adalet Djabiev, CEO of Al-Shams Capital, the only Islamic asset management company authorized by the Capital Markets Authority in Russia. "President Nursultan Nazarbayev is very supportive of Islamic finance. The legal changes that his government has introduced to facilitate Islamic financial products will change the landscape of the industry not only in Kazakhstan but also in the CIS countries," he added.

Djabiev confirmed that a professional body for Islamic financial institutions in the CIS countries and Eastern Europe is in the process of being established with the support of banks in Russia, Kazakhstan, Azerbaijan, Uzbekistan, Kyrghiz Republic and a few other countries.

The MIFC visit in January also coincided with the Islamic Finance Forum which was addressed by key MIFC initiative stakeholders. The visit is important because Kazakhstan has aspirations of becoming the Islamic finance hub for the CIS.

Agil Natt, president and Chief Executive Officer of International Centre for Education in Islamic Finance (INCEIF), a higher education institution with the status of a university, whose chancellor is Bank Negara Malaysia governor, Zeti Akhtar Aziz, addressed the forum on "Malaysia's Experience: Sharing the Development of Islamic Finance." He outlined the various phases of development in Malaysia's Islamic financial industry, the MIFC initiative and human capital development with a focus on INCEIF.

Aida Othman of the law firm, Zaid Ibrahim & Co., spoke on the "Shariah and Legal Framework in Islamic Finance" which she stressed is a prerequisite to support the development of an Islamic financial system. She also emphasized the importance of legal documentation in Islamic finance. Another lawyer, Andri Badri Sabri of Kadir Andri & Co., similarly highlighted the "Legal Challenges in Making Islamic Finance Work" and outlined the dynamics of target markets; the appreciation of Islamic financial instruments; and understanding of Islamic contracts and legal risks.

There are cooperation opportunities in human capital development, especially in Islamic finance education. Kazakhstan has set up the Regional Financial Centre of Almaty (RFCA) which includes the first academy in the CIS to offer education and training in Islamic finance. Malaysian institutions such as INCEIF and ISRA (International Shariah Research Academy for Islamic Finance) are also exploring collaboration in training, education and research with RFCA counterparts. The RFCA academy is also cooperating with Rating Agency Malaysia Berhad (RAM) to develop a local rating agency in Kazakhstan. - M.P.