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Government support to boost Islamic banking in some CIS countries, Moody's says

Islamic banking will grow significantly in such Commonwealth of Independent States as Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan in the next five years, with the growth fueled by various government initiatives and large Muslim populations, according to Moody's.

At the moment, Islamic banking remains underdeveloped in the area, mainly due to weak public awareness and various regulatory hurdles, such as e.g. value-added taxes on asset purchases and resales, which are part of many Islamic finance transactions, or the inability by Islamic banks to use central banks' conventional liquidity and funding facilities because they bear interest.

Those regulatory disadvantages result in higher funding and operating costs for Islamic banks compared with conventional lenders, Moody's said in its Aug. 15 report analyzing the level of Islamic banking development in CIS countries.

Kazakhstan and Kyrgyzstan are set to drive Islamic finance growth in the region. Kazakh authorities are looking to boost the share of Islamic banking assets to 3% of total banking assets in the country by 2025 from the current 0.2%, while Kyrgyzstan's central bank plans to expand the share of Islamic banking assets to 5% by 2021 from the current level of 1.4%.

Tajikistan implemented a law in 2014 to lay out a foundation for Islamic banking, and its central bank and government have been working to amend the existing legislation to facilitate the development of the sector. Meanwhile, Uzbekistan is developing Islamic finance legislation with support from Islamic Development Bank.

Russia, where the Muslim population is relatively small, has the weakest potential for the growth of Islamic banking, according to Moody's. The country lacks an Islamic bank, and the government has not taken any significant actions to support Sharia finance, with the inactivity bound to limit Islamic banking growth in the county. Nevertheless, some individual banks, such as PAO Sberbank of Russia and PAO AK BARS Bank, are exploring ways to meet potential demand for Islamic law-compliant products and services under existing domestic laws.

Azerbaijan also shows weak growth prospects for Islamic banking. The Muslim population is large in the country, but Azerbaijani authorities do not offer support for the sector and are focused on building a secular state and economy. In 2018, the country signed an agreement with Islamic Development Bank to receive technical assistance in preparing Islamic finance legislation, but without a strong government commitment to develop the segment, its growth will be restricted, Moody's noted.