Future of Islamic Finance in Central Asia: Insights from EDB, IsDBI & LSEG

Islamic finance is emerging as a game-changer for Central Asia’s economic landscape. This growing financial model, driven by ethical and Shariah-compliant principles, is now being championed by global financial institutions such as the Eurasian Development Bank (EDB), the Islamic Development Bank Institute (IsDBI), and the London Stock Exchange Group (LSEG). During Abu Dhabi Finance Week (ADFW) 2024, these key players came together for a groundbreaking discussion titled “Bridging the Capital Road: CIS & GCC” to explore how Islamic finance can foster sustainable development, economic integration, and regional growth in Central Asia.

With Central Asia being one of the fastest-growing economic regions in the world, the push for Islamic finance could not be more timely. As a region poised to experience significant growth in Islamic banking assets and sukūk (Islamic bonds), the insights shared during this panel offer a glimpse into the promising future of Islamic finance in Central Asia.

Central Asia’s Booming Economy

Central Asia’s economy is growing at a pace that outstrips the global average. In 2024, the Eurasian Development Bank’s (EDB) states of operation saw a 4% GDP growth rate, significantly higher than the global growth rate of 3.2%. The region’s rapid economic development makes it a fertile ground for Islamic finance to take root. As nations in the region seek sustainable and inclusive financial solutions, Islamic finance’s ethical investment model is becoming a preferred option.

Industry forecasts suggest that the Islamic finance market in Central Asia will grow exponentially, from USD 2.5 billion in 2028 to USD 6.3 billion in 2033. Key drivers of this growth include increased demand for Shariah-compliant banking products, the growth of sukūk as an alternative investment tool, and government-backed initiatives promoting financial inclusion.

As part of this growth, several Central Asian nations, including Kazakhstan, Uzbekistan, and Kyrgyzstan, are updating their regulatory frameworks to support Islamic finance. These changes aim to make the legal environment more conducive to Shariah-compliant financial products, allowing for the issuance of sukūk, the opening of Islamic banking windows, and the facilitation of cross-border investments.

To promote the region’s competitiveness, governments are focusing on infrastructure development, green energy projects, and digitization—all of which align with Islamic finance’s ethical guidelines. This alignment has spurred the interest of international investors, especially those from the Gulf Cooperation Council (GCC) region, further driving the growth of Islamic finance in Central Asia.

Key Insights from Industry Leaders

During the ADFW 2024 panel, senior executives and financial leaders shared insights into how Islamic finance can be a catalyst for sustainable growth. The panelists included:

• Nikolai Podguzov, Chairman of the Management Board of the Eurasian Development Bank (EDB)

• Maya Marissa Malek, Managing Director and CEO of Amanie Advisors Global Office

• Renat Bekturov, Governor of the Astana International Financial Centre (AIFC)

• Dr. Hylmun Izhar, Senior Economist at the Islamic Development Bank Institute (IsDBI)

Moderated by Mustafa Adil, Head of Islamic Finance at LSEG, the session explored key themes shaping Islamic finance’s trajectory in Central Asia, including collaboration opportunities between Central Asia and the Gulf Cooperation Council (GCC) and the role of Islamic finance in cross-border trade, infrastructure development, and sustainable investments.

One of the session’s standout moments was the discussion on the potential for growth in the sukūk market. Experts highlighted the growing appetite for Islamic bonds among both institutional and retail investors. The issuance of sukūk could provide Central Asian governments with a vital tool for financing large-scale infrastructure projects, such as roads, bridges, and renewable energy facilities.

The panelists also emphasized the role of human capital development. There is a growing need for financial professionals with expertise in Islamic finance. Educational initiatives, certification programs, and university partnerships are essential to creating a workforce that can support the growing sector. By fostering local talent, Central Asia can ensure the long-term success and sustainability of Islamic finance in the region.

Strategic Initiatives to Expand Islamic Finance in Central Asia

1. The Establishment of Islamic Windows: A major highlight of the session was the announcement of plans to establish Islamic windows in Central Asian financial institutions. An Islamic window allows conventional banks to offer Shariah-compliant products alongside their traditional offerings. According to Nikolai Podguzov, the EDB’s Islamic window will play a pivotal role in enabling the bank to fund projects that comply with Islamic finance principles, especially in sectors like renewable energy, infrastructure, and green projects.

The introduction of Islamic windows is seen as a practical way to introduce Shariah-compliant financial services without requiring the creation of fully-fledged Islamic banks. This approach allows conventional banks to tap into new markets while simultaneously promoting financial inclusion.

2. Expanding Sukūk Markets: Sukūk, or Islamic bonds, have gained traction in Central Asia as an alternative to conventional debt instruments. The demand for sukūk is expected to grow significantly, driven by the region’s need for infrastructure financing. Central Asian governments and development banks are exploring the issuance of sukūk to attract investors from the GCC, Malaysia, and other global Islamic finance hubs.

With Kazakhstan issuing its first sovereign sukūk in recent years, other Central Asian countries are now looking to follow suit. These efforts are expected to accelerate regional integration and strengthen financial linkages with GCC countries.

3. Boosting Islamic Banking Assets: With forecasts suggesting that Islamic banking assets could increase 5-10 times in the coming years, banks in Central Asia are ramping up their capacity to offer Islamic banking services. By leveraging the experience of IsDBI, the region’s financial institutions aim to introduce new products, such as profit-sharing investment accounts, Murabaha (cost-plus financing), and Ijarah (leasing) contracts.

Recent developments also include the expansion of Islamic microfinance initiatives aimed at promoting financial inclusion in rural and underbanked communities. These initiatives align with global Sustainable Development Goals (SDGs) by supporting poverty reduction and inclusive economic growth.

Collaboration with the Gulf Cooperation Council (GCC)

The economic relationship between Central Asia and the GCC is growing stronger. Through Islamic finance, the two regions can enhance trade ties, facilitate cross-border investments, and co-develop projects that benefit from ethical financing principles. The establishment of partnerships between the EDB and the GCC’s leading financial institutions could lead to a more integrated economic framework that supports both regions’ growth ambitions.

During the panel, experts emphasized the importance of shared goals. “This panel is a vital platform for discussing strategies that align with our mission of regional integration and sustainable development,” stated Nikolai Podguzov, Chairman of EDB. The collaboration could facilitate joint projects in renewable energy, digital finance, and sustainable infrastructure, where Islamic finance’s value proposition is well-aligned with Central Asia’s long-term development goals.

The concept of sustainability is deeply embedded in the principles of Islamic finance, which forbids investment in activities deemed harmful to society. Islamic finance’s alignment with Environmental, Social, and Governance (ESG) principles makes it a natural fit for the development objectives of Central Asia. The EDB, in particular, has made ESG principles a core component of its operational strategy.

“The EDB forecasts the region’s economic growth rate in 2025 to be around 3%, maintaining high rates of economic growth,” noted Nikolai Podguzov, reaffirming the EDB’s commitment to sustainability and regional development. The bank’s support for renewable energy projects and green investments reflects its alignment with the United Nations’ Sustainable Development Goals (SDGs).

The future of Islamic finance in Central Asia is brighter than ever. By fostering cross-border collaborations and aligning with global ESG principles, Central Asia is set to become a key player in the global Islamic finance market, unlocking new opportunities for prosperity, sustainability, and growth.