Unlocking Central Asia's Islamic Finance Potential: EDB's Strategic Expansion

The Eurasian Development Bank (EDB) is poised to make a significant impact in Central Asia's burgeoning Islamic finance sector. With plans to open an Islamic banking window by 2025, the regional development bank aims to capitalize on the growing demand for Sharia-compliant financial services in the region.

Pioneering Islamic Finance Across Eurasia

Tapping into Central Asia's Untapped Potential

The Eurasian Development Bank, with its member countries of Kazakhstan, Kyrgyzstan, and Tajikistan, has identified a substantial opportunity in the region's Islamic finance landscape. EDB Chairman Nikolai Podguzov has expressed the bank's intention to establish an Islamic window, recognizing the "great demand" for such services in Central Asia. This strategic move aligns with the bank's broader mission to foster economic development and integration across the Eurasian continent.The EDB's foray into Islamic finance is not without its challenges, as Podguzov acknowledges the process to be "not an easy" one. However, the bank is committed to completing the necessary preparations by the end of 2023, paving the way for the launch of its first Islamic finance instruments in 2024. The bank's ambitious goal is to deploy up to 0 million in Islamic finance by 2025, though Podguzov admits this will be a "bumpy road" to navigate.

Bridging the Gap: EDB's Unique Advantage

As an international development bank, the EDB holds a distinct advantage in the Islamic finance landscape of Central Asia. According to EDB Deputy Chairman Ruslan Dalenov, commercial banks in the region currently face legal restrictions that prevent them from offering Islamic banking services. In contrast, the EDB's status as a multilateral institution allows it to open up access to Islamic banking, thereby filling a critical gap in the market.The bank's first foray into Islamic finance is a million murabaha project, announced on June 27th. This pilot project serves as a stepping stone for the EDB, which plans to launch several additional pilot initiatives before embarking on larger-scale investment projects. To finance these larger Islamic finance endeavors, the bank intends to issue a sukuk, or Islamic bond, though the specific location for the bond issuance is yet to be determined.

Forging Strategic Partnerships for Growth

The EDB's expansion into Islamic finance is not a solo endeavor. The bank has forged a strategic partnership with the Islamic Development Bank (IsDB) to support the development of Islamic finance in Central Asia. The two development banks signed a memorandum of cooperation on June 27th, with the aim of building trust and creating a conducive environment for the growth of Sharia-compliant financial services in the region.Additionally, the EDB has partnered with Dar Al Sharia, a leading Islamic finance advisory firm, to assist in the establishment of its Islamic window. Ammar Ahmed, the CEO of Dar Al Sharia, expressed his organization's pride in collaborating with the EDB, recognizing the bank's potential to serve as a catalyst for the spread of Islamic banking and finance across Central Asia and beyond.

Overcoming Challenges, Embracing Opportunities

While Islamic finance has been present in Central Asia since the 1990s, its development has been a gradual process. National governments in the region only began actively promoting the sector in the late 2000s and 2010s. Currently, Islamic finance accounts for less than 1% of the banking sector's assets in Central Asia, highlighting the significant untapped potential.EDB Deputy Chairman Ruslan Dalenov acknowledged the challenges, such as the small number of banks and non-bank financial institutions, as well as the low awareness among the population, particularly in rural areas. However, he remains optimistic about the sector's growth prospects, likening it to the rapid development of the electric vehicle industry.The EDB's foray into Islamic finance has been welcomed by policymakers in the region. Kazakhstan's Vice-Minister of Finance, Dauren Kenbeil, expressed his enthusiasm for the bank's plans, while Olzhas Kizatov, the deputy chairman of the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market, revealed that the country is actively reviewing its legislation to enable conventional banks to open Islamic windows.The success of the EDB's Islamic finance initiatives will not only benefit the bank but also contribute to the broader economic development and financial inclusion in Central Asia. As the region embraces the potential of Sharia-compliant finance, the EDB's strategic expansion into this sector promises to unlock new avenues for investment, strengthen the financial system, and mobilize resources to drive sustainable growth across the Eurasian landscape.