A universal investment instrument: participants at the EDB Annual Meeting and Business Forum discuss the prospects of Islamic banking
A universal investment instrument: participants at the EDB Annual Meeting and Business Forum discuss the prospects of Islamic banking
Almaty, 27 June 2024. Shariah-compliant financing for investment projects is booming, second only to the automotive market. Islamic banking now spans approximately 90 countries worldwide. However, this financial instrument still lacks sufficient support from authorities and needs legislative backing. This conclusion was reached by participants at the Eurasian Development Bank’s (EDB) Annual Meeting and Business Forum, which opened today.
The session was moderated by Yahya Rehman, Associate Manager at the Islamic Development Bank (IsDB) Institute. The first speaker, Ruslan Dalenov, Vice Chairman of the EDB Management Board, emphasised the importance of Islamic finance in the current context. “Islamic finance is present in more than 90 countries. Today, this is the fastest-growing segment of the market, with only electric cars probably growing faster,” he remarked.
By 2025, the EDB plans to have fully customised its Islamic finance processes and has already piloted an Islamic window. This is expected to bring an additional US $2 billion to Central Asia’s financial services market by 2028. According to Ruslan Dalenov, the global Islamic finance market reached US $4.5 trillion in 2023, having doubled in seven years. By 2027, this figure is projected to reach US $6.7 trillion.
Ruslan Dalenov also highlighted that Islamic finance is founded on several principles that have ensured its success: rationality, partnership, asset backing, profit and loss sharing, prohibition of speculation, avoidance of deterioration of the borrower’s financial position, and prohibition of hidden charges. These principles contribute to a sustainable social environment.
“Minimum derivatives and maximum real projects – or, in other words, everything that facilitates investment in real infrastructure,” he added, characterising Islamic investment and lending methods.
To advance Islamic finance in Kazakhstan, conventional multiservice banks must be enabled to engage in this type of transactions. This was emphasised by Olzhas Kizatov, Deputy Chairman of the Agency for Regulation and Development of Financial Market, during the session. He supported the development of Islamic windows and the possibility of converting an Islamic bank into a conventional one with an Islamic window.
According to Olzhas Kizatov, in Kazakhstan, Islamic banks mainly lend to the corporate sector. In terms of economic sectors, 23% of their loan portfolios are in wholesale and retail trade, 17% in manufacturing, and 15% in construction.
Aidyn Tairov, Deputy Chairman of the Management Board at Al Hilal Bank, noted that his bank had initially operated at a loss due to significant investments in overcoming negative stereotypes among officials and businesses. However, these efforts have paid off, and in recent years, the bank, backed by UAE partners, has been operating profitably.
Shariah-compliant Islamic banking (Shariah prohibits interest on loans) includes the issuance of Islamic securities and other financial instruments. Islamic investment funds and fintech companies, as well as consulting companies advising businesses on Shariah issues, have praised Central Asia’s conventional financial instruments.
Dr Sami Al-Suwailem, Acting Director General at the IsDB Institute, highlighted the potential of Islamic banking, as a universal instrument, to reduce global poverty. “You cannot be healthy when your neighbour is sick. Fighting poverty is our goal,” he stated.
Dauren Kenbeil, Kazakhstan’s Deputy Minister of Finance, endorsed the EDB’s proposal to increase the use of Islamic finance in investment projects, including the issuance of Islamic securities.
Ivan Chebeskov, Russia’s Deputy Minister of Finance, also emphasised the immense potential of Islamic finance, describing it as a benchmark for fair and sustainable finance.
Several regions in Russia are currently piloting Islamic banking projects. Although the pilot is for two years, the ministry has already concluded that it is necessary to extend and strengthen this format.
According to EDB data, Islamic banks have established a strong presence in more than 40 countries and are beginning to compete effectively with conventional lending institutions. This is occurring not only in the Gulf and Southeast Asian countries but also in the European Union and the United Kingdom. In Central Asia, Kazakhstan leads the development of Islamic finance, representing 68% of all Islamic finance in the region.
Additional Information:
The Eurasian Development Bank (EDB) is a multilateral development bank investing in Eurasia. For more than 18 years, the Bank has worked to strengthen and expand economic ties and foster comprehensive development in its member countries. The EDB's charter capital totals US $7 billion. Its portfolio consists principally of projects with an integration effect in transport infrastructure, digital systems, green energy, agriculture, manufacturing and mechanical engineering. The Bank adheres to the UN Sustainable Development Goals and ESG principles in its operations.
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