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Islamic finance shows potential in Central Asia as GCC ties deepen

Fitch Ratings-Toronto/Dubai/Jakarta: Kazakhstan and Kyrgyzstan could lead Central Asian Islamic finance industry growth over the medium-to-long term, although the industry is likely to remain niche, Fitch Ratings says. Government initiatives to tap funding from the Gulf Cooperation Council (GCC) countries and Islamic multilateral institutions, diversifying the financial sector and boosting financial inclusion, could support growth. However, non-enabling Islamic finance regulations, unequal tax treatment, an undeveloped Islamic finance ecosystem, and gaps in product availability could stymie potential growth. The secular Soviet legacy contributes to low Islamic finance awareness and sharia-sensitivity, despite many CIS countries being Muslim-majority. Islamic banks are not covered as part of the deposit protection scheme in many Central Asian countries, which could negatively affect confidence. We estimate Central Asia’s Islamic finance industry exceeded USD500 million as of end-2024 (excluding multilateral financing). There are some signs of the ties with the GCC being deepened, which could help Islamic finance penetration. In 2024, Qatari-based Lesha Bank, an Islamic bank, acquired Kazakhstan-based Bereke Bank JSC (B+/Stable). Additionally, ADCB Islamic Bank JSC (BBB+/Stable), one of two Islamic banks in Kazakhstan, is a subsidiary of Abu Dhabi Commercial Bank, one of the UAE’s largest banks. However, ADCB plans to gradually phase out its retail banking activities, which could further impede Islamic product availability. The Islamic multilateral bank and Saudi Arabia-headquartered Islamic Development Bank (IsDB) Group also supports CIS countries across various projects. Total IsDB funding to CIS countries reached USD9.1 billion at end-2023, with the largest shares in Uzbekistan (41%), Kazakhstan (18%), Turkmenistan (13.6%), and Azerbaijan (13.2%). The Central Asia bond market is mostly underdeveloped, with sukuk market more embryonic. In 2023, the first tenge-denominated sukuk was issued by the Islamic Corporation for the Development of the Private Sector. In 2024, the Astana International Exchange (AIX) announced the issuance of the first local sukuk by Gamma-T SPC Limited. AIX also cross-listed sukuk for the first time in 2020, issued by Qatar International Islamic Bank. This was followed by the cross-listing of IsDB’s sukuk.