Islamic Finance in Central Asia
Business and Economics13 Comments
The growth of Islamic finance over the past decades has led some analysts to ponder its significance for Central Asia. Islamic finance is consistent with principles of Islamic law and therefore prohibits usury, which also entails the collection and payment of interest (riba).
So, some banks in the Muslim world came up with a set of instruments that would still allow for commercial banking to take place. The most common is hibah, which means as much as ‘gift’: Banks pay depositors a voluntary amount of money as an interest on savings account balances.
Central Asia’s most thriving banking sector is undoubtedly the Kazakh one. Dinar Standard thus wonders whether there is also potential for Islamic banking to gain a foothold.
Given the tremendous progress in the banking sector one would expect some movement in Islamic finance – especially since majority of the people in the Central Asian nations are Muslim. The fact of the matter, however, is that the progress of Islamic Finance in Central Asia has so far been negligible.
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While reports suggest that there has been some interest from the Kazakh, Kyrgyz, and Uzbek governments, the private sector seems to be completely aloof to the prospects.
Obviously, one of the reasons for this is the lack of awareness, says Mr. Rushdi Siddiqui of Dow Jones Islamic Market Index:
[S]ome “Muslim countries … do not even seem to know that Islamic Banking exists.�
However, it is really not clear whether there is actually a market for Islamic financial services at all. The Dinar Standard, quoting statistics on religious affinity, seems to equate the fact that 88% of Uzbekistan’s population are Muslims with the existence of a market potential for Islamic banking.
The development of Islamic banking in Central Asia could also be hindered by the negative image attached to it, as e.g. witnessed in Turkey:
Islamic finance has been slow to develop in Turkey as well, even while it is the largest economy in the Muslim World. While the current government supports the idea in principle, there continues to be significant resistance from sections of the Turkish population that seem to equate the rise of Islamic Finance with a militant, reductionist form of Islam.
It is interesting to see that the only FSU country to have a tradition of Islamic Banking is Russia. The first Islamic bank in the FSU was the Islam-Bank, established in Moscow in 1992. It went bankrupt during the Russian Rouble Crisis in 1998. Today, the only Islamic bank still operating is the Badr-Forte Bank. According to The Institute of Islamic Banking and Insurance:
The banking infrastructure, including an excellent client base and a unique Russian international correspondent network built by Forte Bank, during the last 9 years of operation on the Russian market, supported the Badr Bank venture and contributed greatly to the experiment.
Some observers, such as Renat Bekkin, think that the bank’s experience in conforming with Russian law could be very interesting and valuable for all future market aspirants, potentially also in Central Asian countries. The question is, however, whether the banks can find enough customers willing to deposit their money with such institutions.
The major online portal on matters of Islamic finance in Russia, www.takaful.ru, is – unfortunately – not available at the moment.
Other Islamic banks in the FSU include several smaller institutions in the Northern Caucasus that together with charitable organisations help students to study in Islamic universities abroad. The impact these banks have is hard to measure as no real statistics exist.
Meanwhile, in Central Asia, the banking sector has yet to penetrate poorer and more pious regions in order for Islamic finance to gain a foothold since affluent city dwellers in e.g. Almaty or Astana are not likely customers of Islamic banks.
The most important obstacle for Islamic finance in Central Asia, however, is the insignificance of Sharia law in the region and its automatic association with fundamentalist Islam.
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[...] neweurasia reports on Islamic finance in Central Asia. [...]
There are some more fundamental problems for Islamic banking in Central Asia than a lack of Sharia law (I hope at least). For starters, it doesn’t take a doctorate in economics to see that a lot of the new solutions proposed by Islamic banking essentially amount to traditional banking methods repackaged and less efficient.
The actual economic tenets of Islamic banking have found widespread criticism. For example, Timur Kuran in the Journal of Economic Perspectives argues that that not only are the principles of Islamic banking entirely without economic basis, they are designed to isolate the Islamic community from the global marketplace in order to control their behavior.
That might be going a little far, but he does seem to be correct when he argues that Islamic banking is a cultural (and/or political in the cases of Iran and Pakistan) phenomenon, not an economic one. The argument isn’t esoteric – in an open economy, if the so called Islamic methods of banking were more economically viable they would spring up on their own, without cultural or political forces behind them.
The last thing developing countries in Central Asia need is religion muddeling up economics. I seriously doubt an economically savvy country like Kazakhstan will be dabbling in Islamic finance any time soon.
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When I was in Uzbekistan in 2002-2003, I saw a presentation by a representative of the Islamic Development Bank (http://www.isdb.org/) at an official panel alongside government representatives. So I would guess they were aware of the phenomenon in Central Asia long before this puff piece appeared in the press. If it hasn’t caught on, there are probably reasons, as James suggests.
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BTW, why is their no byline on this “opinion and editorial” about bringing Sha’aria principles to banking in Central Asia? Does it reflect the collective editorial opinion of neweurasia.net? Inquiring readers want to know…
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Laurence, re the oped banner, that’s for testing reasons only and will get removed any minute from now. I agree that Islamic Finance – beyond its principal economic problems – is no real alternative to conventional banking in Central Asia. I just wanted to highlight that there is a discussion going on in the ‘Muslim’ press.
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You don’t have to take down your banner-I just wondered if it was the editorial position of your website, or an individual “op-ed” view from an individual. Actually, there was an Iranian bank operating with government approval in Uzbekistan when I lived there–but I don’t know if they operate as an ordinary bank or according to Sha’aria. It was near the OSCE office, I seem to remember.
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Didn’t mean to give the wrong impression; I think it is a very interesting topic, and definitely worthy of posting. I was merely outlining a few reasons why I hope this fad doesn’t catch on for the wrong reasons in Central Asia.
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In Taj, the Islamic Development Bank issued loans the upgrading of the road between Murgab and the Tajik-Chinese border, as well as that between Dushanbe and Qalaikum via Kulyab I think.
For the rest, I think it is early to say if Islamic banking has a niche in the area. For now, the financial services sector in CA and the Muslim Caucasus is dominated by Russian and Turkish groups or by dubious regime/mob linked structures all of which do not practice Islamic banking methods.
Apart from that, I recently visited an interesting Islamic pilot micro-credit programme run by a UK-based Muslim NGO in Pakistan. Initially, the programme was designed for widows with children under 18 (one of the focus groups of Islamic humanitarianism) but has been opened up to a larger public.
At present it operates in two townships in the Rawalpindi-Islamabad area with a high portion of rural migrants many of whom live below the poverty line. These people can not get loans in the commercial banking sector (no assets, no steady income, etc.) and usually have to borrow with relatives or, in the worst case, sleazy loan sharks.
While ‘riba’ (interest/usury) is proscribed in Islam, making profits on sales is not. Using the latter as a form of lending benefit is formalized in a practice called ‘murabaha’ (a.f.a.I.k it has gained legitimacy with a 1997 fatwa/edict). In the case of the said micro-credit programme, which uses murabaha, a profit margin of 12% is taken on the borrowed amount which ranges from 18,000 to 45,000 Pak. Rupees (1 Euro = ca. 75 Rs.).
The programme gives no cash to avoid that the person who takes the credits squanders the cash on other things (eg. marriage expenses/dowries, lending money to relatives, …). Instead, the money is converted into assets that the person needs to start/expand a small business (eg. a sewing machine, welding equipment, car spare parts, …).
The NGO’s micro-credit officer goes with the applicant to buy the things, pays the seller then a contract is made whereby the person who takes the loan agrees to reimburses the asset’s purchase price plus 12% in x installments. Of course, the lender has to come up with a guarantor and that must be a person who has official residency in the township for at least 3 years. Repeatedly reimbursing late excludes the person from other credit tranches.
I find this an interesting example because this sort of programmes could have its use in poorer parts/among poorer strata of the population of CA and the Muslim Caucasus. Also, micro-credit in general has been quite successful in a number of countries/cases.
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All the information on Islamic finance in Russia is available at the moment at http://www.takafol.ru
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Hello,
I am interested in researching the the subject of Islamic Finance in Central Asia as the possible topic for a graduate school term paper. In an effort to learn more about the issue, I would like to hear from anyone knowledgeable about the industry in the region whether in the public, private, or development sectors.
If interested in discussing Islamic Finance in Central Asia, please do contact me at mead@uchicago.edu.
Thank you for your time and attention to this matter. I appreciate any and all input.
Regards,
Francesca Mead
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[...] In Central Asia, however, there has so far been limited interest in providing Islamic financial services, especially from the private sector, as Ben reported on this site a couple of months ago. [...]
[...] Schluss noch ein sehr gute Analyse von Ben von Neweurasia aus dem Jahr [...]
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