Islamic Finance Sector Set for Growth in Central Asia, According to Latest Study
Vibrant Future for Islamic Finance in Central Asia: A Comprehensive Outlook
Central Asia's Islamic finance sector is primed for some serious expansion, according to a groundbreaking report titled "The Future of Islamic Finance in Central Asia," published on May 20 by the Islamic Development Bank Institute (IsDBI) and the Eurasian Development Bank (EDB).
The scene is set for an influx of Islamic finance within the region, which currently holds just $699 million in assets, representing a minute 0.01% of global Islamic finance assets, but boasting an 85% Muslim population and a rapidly diversifying financial sector. This sets the stage for Central Asia as a future powerhouse in the global Islamic finance industry.
Dr. Muhammad Al Jasser, the president of the Islamic Development Bank, asserts, "Central Asian countries, including Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan, are at a strategic juncture, developing their financial systems and accelerating economic growth."
The report pinpoints the presence of diverse Islamic financial institutions as a key strength, ranging from fully-fledged Islamic banks to takaful operators, microfinance institutions, and Islamic fintech firms. These outfits contribute to the region's Islamic finance growth, offering a variety of Sharia-compliant financial products.
Yet, the development of Islamic capital markets, particularly in sukuk, is trailing behind. To fuel growth, the report advises addressing three primary obstacles:
- Public Awareness: Enhancing the general public's understanding of Islamic finance is essential to encourage wider adoption.
- Qualified Personnel: The region requires a larger pool of skilled professionals to manage and expand Islamic financial institutions.
- Legal Frameworks: Streamlined regulations will foster an ideal environment for the growth of Islamic finance.
To defeat these hurdles, the authors propose harmonized regulations, strategic public education campaigns, and substantial investments in professional training.
Nikolai Podguzov, the EDB's Chairman, is optimistic. "The expansion of Islamic finance in Central Asia will boost access to the global Islamic finance market for local businesses and foster regional economic growth," he stated. Islamic finance could become a driving force for inclusive growth and a catalyst for regional integration.
Central Asia's Promising Macroeconomic Conditions
Macroeconomic indicators signal a robust growth potential for Central Asia. With a total population of 82 million, an impressive 40% increase since 2000, and a steady annual growth rate of 2%, the region showcases impressive expansion. The combined GDP recently surpassed $519 billion, increasing at an impressive average rate of 6.2% over the last two decades, outperforming both global and developing regions. Trade turnover has multiplied ninefold since 2000, and foreign direct investment has surged 17-fold.
By 2028, Islamic banking assets could eclipse $2.5 billion, jumping to $6.3 billion by 2033. The sukuk market, which currently stands at $2.05 billion, is projected to swell to $5.6 billion by 2033.
Leading the charge, Kazakhstan is expected to usher in the growth wave, followed closely by Uzbekistan and Turkmenistan. As governments enact favorable regulations and strengthen institutional infrastructure, the sector is anticipated to take gigantic strides.
Key investment sectors for Islamic finance include energy, transportation and logistics, manufacturing, food security, and social infrastructure, all critical to sustainable development in the region.
The Road Ahead: Collaboration and Integration
To seize this chance, greater collaboration with multilateral financial institutions and Islamic banks from mature markets is vital. These partnerships will facilitate knowledge transfer and tailor-made product innovation targeted at local needs.
This collaboration can support "Islamic windows" in conventional banks, develop microfinance initiatives based on Sharia-compliant principles, and finance vital sectors like agriculture and renewable energy. Gulf and Southeast Asian banks and institutions can play a crucial role in capacity building, providing legal expertise and encouraging fintech innovation to help Central Asian countries swiftly advance and integrate deeper into global Islamic finance markets.
With favorable policies and burgeoning demand, Central Asia hovers on the brink of becoming a new frontier for Islamic finance, providing for the needs of its predominantly Muslim population, while driving economic inclusion and resilience in a complex and ever-changing world.
Key Strategies and Initiatives:
- Regulatory Frameworks: Governments are prioritizing the growth of Islamic finance by developing supportive legal foundations that allow for the smooth operation of Islamic financial institutions and products.
- Islamic Windows: The Eurasian Development Bank (EDB) has created an "Islamic Window" to support projects and investments in line with Sharia principles, connected to the global Islamic market.
- Financial Institution Diversity: Central Asia hosts a range of Islamic financial institutions, including Islamic banks, Islamic windows within conventional banks, takaful operators, microfinance institutions, leasing companies, and Islamic fintech firms.
- Islamic Banking Assets Growth: Projections suggest that Islamic banking assets could reach $2.5 billion by 2028 and $6.3 billion by 2033, reflecting substantial growth.
- Financial Technology Role: FinTech is crucial for delivering Shariah-compliant financial products, especially to underbanked communities, through digital banks and wealth management platforms that strengthen financial inclusion.
- High-Potential Markets: Central Asia boasts emerging markets like Kazakhstan, Uzbekistan, and Kyrgyzstan, with burgeoning legal frameworks that support Islamic finance.
- Global Connections: The growth of Islamic finance in Central Asia is expected to connect local businesses with the global Islamic market, promoting regional economic expansion.
- Addressing Challenges: Developing Islamic capital markets, particularly sukuk, is crucial for the long-term sustainability of Islamic finance in the region.
Investing in the business sector is essential for the growth of Islamic finance in Central Asia, as the region's financial sector displays rapid diversification and holds significant potential for expansion. To attract more investments and foster the development of Islamic finance, the report advises addressing three primary challenges: enhancing public awareness, increasing the number of skilled personnel, and shaping favorable legal frameworks.
The growth of the Islamic finance industry in Central Asia could lead to further investment opportunities, especially in high-potential sectors such as energy, transportation and logistics, manufacturing, food security, and social infrastructure, all critical to sustainable development in the region. As the sector matures, it could provide Sharia-compliant financial products to a broader audience and boost economic inclusion.
