Kazakhstan and Kyrgyzstan could lead Central Asian Islamic finance industry growth over the medium-to-long term, although the industry is likely to remain niche, Fitch Ratings says. Government initiatives to tap funding from the Gulf Cooperation Council (GCC) countries and Islamic multilateral institutions, diversifying the financial sector and boosting financial inclusion, could support growth.

However, non-enabling Islamic finance regulations, unequal tax treatment, an undeveloped Islamic finance ecosystem, and gaps in product availability could stymie potential growth. The secular Soviet legacy contributes to low Islamic finance awareness and sharia-sensitivity, despite many CIS countries being Muslim-majority. Islamic banks are not covered as part of the deposit protection scheme in many Central Asian countries, which could negatively affect confidence.

We estimate Central Asia’s Islamic finance industry exceeded USD500 million as of end-2024 (excluding multilateral financing). There are some signs of the ties with the GCC being deepened, which could help Islamic finance penetration. In 2024, Qatari-based Lesha Bank, an Islamic bank, acquired Kazakhstan-based Bereke Bank JSC (B+/Stable). Additionally, ADCB Islamic Bank JSC (BBB+/Stable), one of two Islamic banks in Kazakhstan, is a subsidiary of Abu Dhabi Commercial Bank, one of the UAE’s largest banks. However, ADCB plans to gradually phase out its retail banking activities, which could further impede Islamic product availability.

The Islamic multilateral bank and Saudi Arabia-headquartered Islamic Development Bank (IsDB) Group also supports CIS countries across various projects. Total IsDB funding to CIS countries reached USD9.1 billion at end-2023, with the largest shares in Uzbekistan (41%), Kazakhstan (18%), Turkmenistan (13.6%), and Azerbaijan (13.2%).

The Central Asia bond market is mostly underdeveloped, with sukuk market more embryonic. In 2023, the first tenge-denominated sukuk was issued by the Islamic Corporation for the Development of the Private Sector. In 2024, the Astana International Exchange (AIX) announced the issuance of the first local sukuk by Gamma-T SPC Limited. AIX also cross-listed sukuk for the first time in 2020, issued by Qatar International Islamic Bank. This was followed by the cross-listing of IsDB’s sukuk.

Islamic banking has the highest regional penetration in Kyrgyzstan and Kazakhstan, but its presence is still niche, at around 1% of total banking system assets at end-2024, based on Fitch estimates. The financial sector in general is underdeveloped across many CIS countries.

In Kyrgyzstan, there is one fully-fledged Islamic bank and four Islamic windows. However, Islamic financing increased by 49.3% in 2024, outpacing total banking sector credit growth (32.2%). Tajikistan has just one Islamic bank, and another bank is under conversion to Islamic bank. Islamic banks and Islamic windows are absent in Azerbaijan, Uzbekistan, and Turkmenistan.

The Kazakh government set a target for the Islamic finance industry’s market share to reach 3%–5% by end-2025. JSC Otbasy Bank House Construction Savings Bank, the fourth-largest bank in Kazakhstan as of end-2023, recently announced plans to introduce Islamic mortgage products in 2025. The regulator in Kazakhstan plans to amend regulations to allow conventional banks to establish Islamic windows, which could help increase Islamic product availability. Kazakhstan-headquartered Eurasian Development Bank announced its recent membership with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and reported that it would be creating an Islamic window, with a likely issuance of sukuk in 2025.

In Uzbekistan, only non-bank financial institutions can offer sharia-compliant leasing and insurance products, but the Central Bank of Uzbekistan has approved regulations aimed at microfinance organisations diversifying into Islamic finance. Another announcement was recently made to introduce Islamic finance products to Uzbek banks, with the central bank planning to submit legislation to parliament. If the legislation is adopted, conventional banks could establish Islamic windows.