Though Kazakhstan adopted relevant legislation for domestic (such as the governed Kazakh law) Islamic banking transactions more than seven years ago and has a Muslim population of over 11 million, Islamic finance is still in the early stages of its development and Islamic products are rarely used. According to the National Bank of Kazakhstan (NBK), as of 2015, the share of Islamic banking assets account for only 0.08% of total banking sector assets in Kazakhstan. One may argue that there is more talk about Islamic finance rather than real business all these years and that there is no real market demand for Shariah compliant finance in Kazakhstan. 

Thus, the big question is whether the applicable legal framework is the major hindrance for the development of Islamic finance in Kazakhstan or whether there are other non-legal issues that need to be assessed and tackled.   

In efforts to make itself the Islamic financial center of the Eurasian Economic Union and Central Asia, Kazakhstan has so far adopted three sets of legislative amendments (in 2009, 2011 and 2015) in connection with the development of Islamic finance. The socalled Astana Financial Investment Center (the AIFC), based on the model of the Dubai International Financial Center, is envisaged to come into operation in 2018-19. 

On the 29th March 2012, the government approved the Roadmap for the Development of Islamic Finance until 2020, which provides measures for the development of Islamic finance activities in Kazakhstan in terms of further legislative changes and such. 

Because of the aforementioned initiatives of the government of Kazakhstan that created a specific legal and regulatory framework for Islamic finance in Kazakhstan, there is already one fully operating Islamic bank in the country (Al Hilal Bank) and one conventional bank is now undergoing conversion into a Kazakh Islamic bank (Zaman Bank). In addition, an Islamic leasing (Ijarah) company (Kazakhstan Ijara Company) and an Islamic mutual insurance company (Mutual Insurance Company Takaful) are present in Kazakhstan. 

Importantly, there is no unified Islamic finance law in Kazakhstan. Instead, domestic (such as the governed Kazakh law) Islamic finance transactions are regulated by Kazakhstan’s general banking, securities, insurance and other relevant legislation. 

Foreign Islamic financial institutions are not allowed to offer regulated Islamic banking and capital market services in Kazakhstan (for example, they cannot be treated as a Kazakh Islamic bank or a Kazakh insurance firm), but they can, generally, engage in cross-border Islamic finance transactions, such as cross-border Sukuk). 

Generally, Kazakh law treats Islamic products equally with their corresponding conventional products so that there is a level-playing field for Islamic finance, for instance, so-called Kazakh Islamic banks incorporated in Kazakhstan are treated, more or less, in the same way as Kazakh conventional banks.  

The principal authority charged with the oversight of Islamic and conventional banking, capital markets and insurance products is the NBK, ie there is no specific supervisory authority for Islamic financial institutions. 

A Kazakh Islamic bank is a Kazakh commercial bank (ie it shall be incorporated as a Kazakh joint stock company) created as such and having an Islamic banking license issued by the NBK. 

An Islamic banking license authorizes a Kazakh Islamic bank to conduct, inter alia, the following specific operations: accepting interest-free demand deposits, financing of commercial operations through the purchase/sale of goods or by way of participation in projects, leasing and such.  

Kazakh law specifically provides for such concepts as Islamic insurance (Takaful) and Islamic insurance firms (Takaful operators). Islamic insurance under Kazakh law is a system of mutual protection where one policyholder pays to reimburse the losses of another policyholder. The pool is managed by an Islamic insurance firm. Islamic insurance must be carried out by Kazakh Islamic insurance firms only.  

Kazakh Islamic securities certify the right of their holder for the portion of the material assets and the right to the disposal of such assets and the income derived from such assets, services and other assets of the particular projects for financing of which Islamic securities have been issued. Kazakh Islamic securities include: shares and units of Islamic investment funds; Islamic lease certificates; Islamic participation certificates; and other securities recognized as Islamic securities by Kazakh law. 

Importantly, Kazakh Islamic securities may be paid only in cash. The prospectus of Islamic securities shall be approved by the so-called council on the principles of Islamic finance that may be engaged by the issuer based on the agreement. 

In 2012, the Development Bank of Kazakhstan issued a RM240 million (US$53.87 million) 5.5% Sukuk Murabahah facility under its RM1.5 billion (US$336.66 million) Islamic medium-term note program. 

To the best of our knowledge, however, these Sukuk were issued on a crossborder basis and were governed by foreign rather than Kazakh law and therefore cannot be considered as Kazakh Islamic securities. Interestingly, the board of directors of the Development Bank of Kazakhstan on the 23rd February 2017 decided to annul this RM1.5 billion program with full satisfaction of current liabilities by the 31st December 2017.  

Taking all of the aforementioned points into account, Kazakhstan, evidently, already has a decent legal and regulatory framework for both the domestic Islamic finance industry and for cross-border Islamic finance transactions and, therefore, it seems that it is not local law that precludes the development of Islamic finance in Kazakhstan and there is no real need to wait for its further improvement. 

One may argue that Islamic finance is too complex to understand and to be used by the general population and SMEs in Kazakhstan and, therefore, the Kazakh government, instead of developing a legal framework for the domestic Islamic finance industry, should just concentrate its efforts on attracting through the AIFC crossborder Islamic financing from abroad (such as the Arab states of the Persian Gulf and Malaysia) for the purposes of implementation of big infrastructure and public-private partnership projects that can already be easily done under the current legal framework.