Economics / 2. Finance and Banking

Zhumagul Torekhan (master’s student),

Oserbayuly Seysenbay (scientific supervisor)

Al-Farabi Kazakh National University, Almaty, Kazakhstan

Islamic banking – the way to globalization to attract investments and diversify country's economy

Kazakhstan is one of the recent countries, who opened doors for Islamic finance (1997). In 2009 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). 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. However, due to unknown circumstances these banks are not yet to be in the market.

Sources of Financing There are the following sources of financing:

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

Figure 1. Conventional bank (model)

Source: National Bank of RK

Conventional banks make profit from the margin between loans and cost of deposits. But model of Islamic banks are different.

Figure 2. Islamic bank (model)

There are many principles of financing

Deposits

Investment deposits

Source: National Bank of RK

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]

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]

In favor of these projections we can claim the following:

1. Simple comparison of proportion of the total Sharia-compliant asset under management, which is about 1% of global financial asset size, and proportion of Muslim population in the world, which is about 20%, gives us a strong argument that there is a huge room for the industry to grow. It is estimated that nowadays only 12% of Muslim population use Islamic Finance.[2]

2. The Middle–East cash flow from oil is a strong support for expansion of Islamic finance in the region and beyond. The region has more than half of the world’s proven oil reserves (53%1).

3. Economic growth in Asia will also be supportive due to significant Muslim population in the region, especially in countries like India, Malaysia and Indonesia.

4. Ethical and social responsible investments are on increasing demand in the West in the light of economic crisis and social unrests, banking corporate scandals and environmental issues.

5. Governments and financial centers are aiming for growth and diversification of investments in their countries and therefore have to open doors for Islamic 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.

A subsidiary of Al Hilal Bank was established in Kazakhstan in 2010.The bank has opened so far three outlets including head-office in Almaty, the commercial capital, and two branches in the capital city of Astana and Shymkent, most populated center on the South of the country.

Figure 4: ‘Al Hilal Bank Kazakhstan’ Performance Indicators, 2010-2013

Particular, USD billion	FY 2010	FY 2011	FY 2012	FY 2013
Total assets	6.5	10,8	11,9	13,4
Total liabilities	42 207 700	66 108 300	90 950 600	5,7
Clients deposits	25 661 600	55 356 600	61 058 200	5.5
Capital	6,5	10,7	10,7	10,7
Total comprehensive income	4 702 800	26 665 600	34 433 100	66 401 700

Source: FMSA, 2012b.

The assets of the bank grew by 36% in 2011, but went down by 8% for six month of this year. The main reason of decrease was in the settlement of US$ 12 million borrowings from other financial institutions. However, the clients’ funds are not growing this year in contrast with 16% growth in 2011.

The main strategy of the bank is focused on corporate clients especially national companies where the bank tries to leverage on the Kazakhstan government support thanking the intergovernmental agreement between Kazakhstan and UAE. In the retail segment the bank is targeting only wealthy people with minimum deposit amount of US$5,000.

According to the bank’s annual report (Al Hilal bank, 2012) the main products offered to the corporate clients are commodity Murabaha (58%) and Ijara (42%). The retail banking presents a current account based on Qard-Hassan and a deposit based on Mudaraba contracts. As we can see the biggest proportion of the bank’s financing portfolio falls under Murabaha, which is the most criticized and disputable product.

Being a part of ‘Al-Hilal Group’, the bank receives support from the head-office in Abu-Dhabi in terms of Sharia supervision, risk management and funding base.[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.[5]

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. Madi Akhmambet, How attractive is 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. National Bank of RK, RFCA, Almaty 2014

5. FMSA (2012b) Banking Sector Statistics [Online] Available from: http://www.afn.kz/?switch=eng&docid=441 [Accessed 18 August 2012].