Kazakhstan financial services market Essay
Kazakhstan financial services market is being expanded introducing Islamic financial principles. In February 2009 a Law of the Republic of Kazakhstan on issues of organization and activity of Islamic banks and organization of Islamic financing (the Law) was adopted. The Law avails opening of Islamic banks, Islamic investment funds, and issuance of Islamic securities in Kazakhstan.
These days an Islamic financial services market is actively developing in secular economies, such as the USA, the United Kingdom, France, etc. Leading international banks and investment companies provide Islamic financial services, and open subsidiary companies that comply with Islamic financial principles. Popularity of Islamic financing is growing due to the world’s interest in attraction of Middle East countries’ investment capital. Also Islamic financial organizations showed resistance to the world liquidity crunch owing to characteristics of Islamic financing.
Basic principles of Islamic finance are prohibition of interest, risk sharing, asset backing of money flows, and prohibition of financing of certain activities (gambling, trading with arms, tobacco, alcoholic production, etc.). According to the Law an Islamic bank is a second-tier bank operating under a special license. Each Islamic bank should create a Shariah Board, an advisory body that supervises compliance of Islamic bank’s operations with Shariah principles.
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Under a commercial loan agreement an Islamic bank purchases to its ownership a good and sells it to a client with a price markup allowing payments to be delayed or made in installments. The commercial loan agreement shall include good’s name, quantity, and price, at which the purchaser acquires the good from the Islamic Bank, specifying a markup on the good and commercial loan conditions. Thereby, Shariah principles are followed: absence of uncertainty and prohibition of using money as a good. The price markup makes Islamic bank’s income.
An Islamic bank may finance manufacturing and trading activities under a partnership agreement to derive revenues. According to the agreement an Islamic bank and a client enter into an agreement with money or with an asset. Revenues and losses of the project are distributed between the bank and the client proportionally to their parts in common assets or as agreed in advance. Thus, risk sharing Shariah principle is followed. Income of the Islamic bank is its part in the revenue made from the project realization.
According to the Law an Islamic investment fund is a joint stock investment fund or closed unit investment fund that invests in accordance with Shariah principles. Investment declaration of the Islamic investment fund is reconciled with a Shariah Board. For this purpose a management company may outsource Shariah Board services, thus, it is not obliged to create its own Shariah Board. It is worth to mention that Shariah Board experts should meet high requirements to their work experience, knowledge of Shariah and principles of Islamic financing. Globally there is a short list of acknowledged experts that are represented in several Shariah Boards at the same time. Thereby, apart from assessment of project’s profitability investors consider the Shariah experts that gave a Shariah approval of the project.
The Law specifies following types of Islamic securities: shares and common stock of Islamic investment funds, Islamic lease certificates, and Islamic participation certificates. Islamic lease certificates are issued to finance purchase of real estate, ground areas, etc. An Islamic special purpose vehicle (SPV) is created by the originator. The SPV buys an asset from the originator or the third party for funds obtained through the certificate issuance. The asset is leased, and the lease payments are distributed between the certificate holders as dividends.
Islamic participation certificates are issued by the SPV for financing of new investment project, the existing investment project, or an entrepreneurial activity. Originator participates in the project by brining in asset or trust management of the SPV. The revenue obtained from the project realization is distributed between the originator and the certificate holders. The global practice shows that Islamic securities are issued by legal entities and governments for construction of infrastructural objects, multifunctional centers, manufacturing, etc. Often a combination of Islamic lease and Islamic participation certificates is used. As for now in Kazakhstan according to the Law the originator of an SPV is an Islamic bank, “KazAgro” National Holding” JSC, “Samruk-Kazyna” National Welfare Fund” JSC and its 100 % subsidiary organizations.
Development of a legal base for Islamic finance in Kazakhstan is accompanied with coming of new market players. A first Islamic brokerage company and an Islamic consulting firm started their operations. As well Government of Kazakhstan and United Arab Emirates signed an agreement on opening of the first Islamic bank in Kazakhstan by the end of this year. Above all introduction of Islamic financial principles expands a range of financial services in Kazakhstan. Besides, this is an instrument for attraction of investment capital and leading Islamic financial industry players to Kazakhstan.
As of January 1, 2008 total assets of commercial banks were KZT 11.6 trillion (USD 97.12 bln), retirement savings plans – KZT 1.2 trillion (USD 10.17 bln), insurance companies – KZT 0.2 trillion (USD 1.86 bln) and mutual funds – KZT 0.19 trillion (USD 1.66 bln). The increase in the population prosperity and implementation of the Improvement of the Investment and Financial Literacy of the Population Program by the Agency promoted to attraction of savings of the population to the stock market. Thus, in 2007 the share of retail investors in transactions of sale and purchase of shares was 31.7% and that of corporate bonds was 13.5%.
Moreover, foreign investors achieved a dominant position at the Kazakhstan Stock Exchange. In 2007 the share of non-resident foreign investors was 11.9% in the total trade of corporate securities. The Agency strives to make the stock market more transparent and clear for the population by promoting the improvement of the investment activities of citizens of the Republic of Kazakhstan at the stock market.