islamic finance in kazakhstan e&y

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Challenges andopportunities

or Islamic fnancein Kazakhstan



Challenges and opportunities or Islamic fnance in Kazakhstan1

The realityo Islamic fnance



Islamc fnance s one o the

astest growng areas o

the global fnancal servces

ndustry.

2Challenges and opportunities or Islamic fnance in Kazakhstan

It should also be noted that Islamc fnancal

products are avalable to the general

publc and not only to Muslms. Overall,

Islamc fnancal products are regarded

as a drect alternatve to conventonalfnancal products oered to the populaton

and busness by conventonal fnancal

nsttutons.

The Government’s commtment to

make Kazakhstan an Islamc fnance

center, coupled wth the country’s

current leadershp n the CIS n makng

legslatve changes to allow the operaton

o Islamc fnance nsttutons, should

gve Kazakhstan a unque compettve

advantage n attractng Islamc fnance

nvestments and help the country achevets goal o becomng a leadng fnancal

center or the regon.

Islamic fnance

has demonstrated

a growth rate o over

20% over the past

decade, ueled by

a number o actors:

It s wdely known that the legslaton o

the Mddle East and Gul countres s based

on Shar’ah. Legslatve acts creatng

avorable tax and legal condtons or the

development o Islamc fnance have alsobeen approved n such European countres

as Great Brtan, France and Germany.

Whle n Asan countres Islamc fnance

s well developed, wth ts man center n

Malaysa, other regons (e.g. Sngapore,

Hong Kong) are also competng or ther

share o the Islamc fnance market.

Kazakhstan has extensve trade relatons

wth countres n Europe, Asa and the

Mddle East, and urther development

o the regulatory ramework or Islamc

fnance would acltate trade relatons wthcountres that adhere prmarly to Shar’ah

prncples. It would also generate greater

nterest on the part o these countres n

nvestng n Kazakhstan.

Islamc fnance s a generally used term or

fnancal and commercal transactons that

are n complance wth Shar’ah (Islamc law).

Islamc fnance s one o the astest

growng areas o the global fnancalservces ndustry. Snce ts relatvely

recent appearance nearly orty years ago,

Islamc fnance has ncreasngly become a

manstream bankng actvty wth fnancal

centers n Bahran, Duba, Kuala Lumpur

and London. Whle stll consdered to be

n ts nancy as compared wth the global

fnancal ndustry, Islamc fnance accounts

or assets conservatvely valued at over

US$750 bllon across 450 fnancal

nsttutons based n 75 countres, all

operatng accordng to Islamc prncples.

In contrast to conventonal banks, durng the

nternatonal fnancal crss o 2008—2009,

no Islamc bank aled or requred

government recaptalzaton. The spread

o Islamc fnance nto Western markets

demonstrates that t s now beng vewed

by regulators and fnancal nsttutons as a

vable alternatve to conventonal bankng

products.

The prncple derentators between Islamc

fnance and conventonal fnance nclude the

ollowng:•Rsk and proft must be shared equally

between partes to a transacton

•Speculaton and uncertanty n

transactons are strctly prohbted

•Makng money rom money (.e. nterest)

s smlarly prohbted

•Certan actvtes not benefcal to socety

are banned

•Transactons must be asset-based or

asset-backed.

Islamic fnance

growth

Increasing

demand or

Shari’ah-comp-

liant fnance

Diversifcation

eorts

Growth o the

Muslim

population

Government

support

Regulatory

reorms

Oil revenues o

GCC states

Acceptance by

conventionalinstitutions

Role o enabling

institutions




In 2009 the Republc o Kazakhstan

became the frst country n the

Commonwealth o Independent States

to ntroduce undamental legslatve

amendments or purposes o Islamcfnance. Such amendments were made to

a number o Kazakhstan’s legslatve acts

(the Cvl Code, the Tax Code, the Law on

Banks and Bankng Actvtes, the Law on

Fnancal Markets and others).

To develop these amendments, a group

o specalsts was ormed that actvely

cooperated and contnues to cooperate

wth government bodes on ssues related

to the development o Islamc fnance n

Kazakhstan.

The man prncples used n developng theamendments to Kazakhstan’s legslaton

were the ollowng:

•Equalzaton o the taxaton o Islamc

fnancal products wth the taxaton o

conventonal fnancal products

•Expanson o exstng concepts to nclude

specfc defntons o Islamc fnancal

nstruments

•Extenson o tax benefts appled to

tradtonal fnancal products to Islamc

fnancal products•For tax purposes, Islamc fnancal

products are classfed as such only or

the purposes o transactons carred out

by Islamc banks.

As a result o the work done n developng

amendments, Chapter 4-1 on requrements

and procedures or establshng and actvty

o Islamc banks as well as defnng certan

Islamc bank products was added to LawNo. 2444 o the Republc o Kazakhstan on

Banks and Bankng Actvtes o 31 August

1995.

The ollowng man amendments to the Tax

Code were also ntroduced:

•The lst o types o ncome receved

by resdents and non-resdents was

expanded to nclude ncome receved

rom an nvestment depost placed n an

Islamc bank. Such an amendment allows

the taxaton o such ncome to be defned

and makes the tax consequences onvestng n Kazakhstan, ncludng oregn

nvestments, more transparent.

•The provson o Islamc fnancal

products was generally exempted rom

value added tax, whch s a sgnfcant

achevement n equalzng the taxaton o

Islamc and tradtonal fnancal products.

The mplementaton o Islamc fnance at

a legslatve level n Kazakhstan plays an

mportant role n the development o the

country’s economy and nrastructure. Inpartcular, t extends the range o fnancal

servces, whch makes Kazakhstan’s

fnancal market more compettve, and s a

means o attractng nvestment captal and

major players rom the worldwde Islamc

fnancal ndustry to Kazakhstan.

Developmento Islamic fnance

in Kazakhstan



The mplementaton o Islamc fnance at

a legslatve level n Kazakhstan plays an

mportant role n the development o the

country’s economy and nrastructure.

Challenges and opportunities or Islamic fnance in Kazakhstan 4



Kazakhstan to move orward

wthout delay n order to ully

utlze ts poneer status n the

area o Islamc fnance

5 Challenges and opportunities or Islamic fnance in Kazakhstan

Further developmento Islamic fnance

in Kazakhstan




Despte the work that has been done,

Kazakhstan’s legslaton regulatng

Islamc fnance s not perect and requres

urther development. It s essental to

ensure a strong legslatve base or theestablshment o other Islamc fnancal

nsttutons n Kazakhstan (e.g. nsurance

companes, nvestment unds) and the

coverage o all Islamc fnancal products as

well as to enable conventonal banks and

other fnancal organzatons to provde

Islamc fnancal products n the course o

ther regular actvtes.

In partcular, the ollowng man aspects

must be consdered:

•Legal and tax ssues wth respect to

transactons nvolvng assets that must

be owned by an Islamc bank (e.g.

transer and regstraton o ownershp

rghts)

• Improvement o accountng prncples

wth respect to Islamc fnancal products

n Kazakhstan

•The possblty and procedures or the

lcensng o actvtes related to the

provson o other Islamc fnancal

products (e.g. nsurance, nvestment

unds)

•Eorts to mprove government and

publc understandng o the prncples

and specfcs o Islamc fnancal products

as well as a ocus on the practcal

mplementaton o legslaton.

Despte the amendments to Kazakhstan’s

tax legslaton, the tax treatment o

certan Islamc fnancal products remans

unclear and unavorable as compared

wth ther conventonal counterparts.Based on today’s experence wth Islamc

fnancal products n Kazakhstan, certan

changes or the mprovement o tax law

are currently beng consdered. These

nclude, among others, changes to the

VAT treatment or an asset’s cost when

a commercal agent fnances tradng

actvtes by provdng a commercal loan

(Commodty Murabaha) and exempton

rom VAT on the markup o an Islamc bank

that renders agency servces n the process

o bankng transactons (Wakala). Other

amendments that should accelerate the

mplementaton and development o Islamc

fnance n Kazakhstan are also beng

consdered.

All n all, gven the rapd development

o other countres and ever-growng

competton or oregn nvestments

globally, t s vtal that Kazakhstan move

orward wthout delay n order to ully

utlze ts poneer status n the area o

Islamc fnance and become a regonal hub

or Islamc fnance nvestments.



Challenges and opportunities or Islamic Finance in Kazakhstan7

Respondng to the dynamc development o

the Islamc fnancal market, Ernst & Young

establshed a group o experts (the Islamc

Fnancal Servces Group) whch specalzes

n renderng Islamc fnancal advsoryservces to partcpants o Islamc and

conventonal fnancal organzatons.

Ernst & Young’s Islamc Fnancal

Servces Group, establshed n 1998 n

Bahran, currently ncludes more than

50 proessonals workng n countres n

the Mddle East and Asa, Great Brtan,

Luxembourg and the CIS.

The Islamc Fnancal Servces Group has won a number o awards or market

leadershp, proessonalsm and contrbutons to the development o servces

n the Islamc fnance sector, ncludng:

Best Advisory

Firm 2009

Islamc Busness &

Fnance Awards

Best Islamic

Finance Advisory

Firm or 2006

Islamc FnanceNews Awards

Best Islamic

Consulting Firm

2006

Shekh MohammedBn Rashd

Al Maktoum Award

Best Islamic

Finance Advisory

Firm 2005

Banker Mddle EastAward

Euromoney

Islamic Finance

Award 2005

Best Islamic

Finance Advisory

Firm or 2008

Islamc Fnance

News Awards

Most Outstanding

Business Advisory

& Consulting Firm

or 2006 and 2007

Kuala Lumpur

Islamc Fnance

Forum Award

Ernst & Young is a leaderin Islamic fnancial advisory

services




Islamic fnancial services providedby Ernst & Young in the CIS

As mentoned above, Kazakhstan was the

frst regon n the CIS to take acton n

mplementng Islamc fnance legslaton.

Our specalsts actvely collaborated wth

government nsttutons n Kazakhstann developng, analyzng and lobbyng

legslatve changes or purposes o Islamc

fnance as well as on ssues related to the

creaton o Al Hlal Bank, the frst Islamc

bank n Kazakhstan. Currently we are

establshng relatons wth government

nsttutons n Russa and Azerbaian.

In connecton wth the growng demand or

advsory servces n the Islamc fnancal

sector, Ernst & Young s hrng experenced

specalsts n ths sector to expand ts

servces and consoldate ts status as

a leader n provdng Islamc fnancal

servces n the CIS and worldwde.

We have successul experence n renderng

Islamc fnancal servces. Our specalsts

render servces to varous fnancal

organzatons n the CIS regon, ncludng:

•Cooperaton wth BTA Bank nmplementng Islamc fnancal servces n

Kazakhstan

•Assstance n openng Al Hlal Bank, the

frst Islamc bank, and advce to the bank

on varous ssues

•Advce on the treatment o Islamc

bankng products under current

Kazakhstan tax law

•Analyss o the tax consequences or

Amrahbank o mplementng Islamc

bankng products n Azerbaian

•Analyss o the Russan tax mplcatons

o Sukuk, assstance n developng a

tax-efcent structure or one o the

largest Russan leasng companes

•Structurng a trade fnancng operaton,ncludng analyss o the Russan tax

mplcatons o Murabaha or a Turksh

tradng company

•Advsng a large nvestment group

on the tax aspects o establshng an

Islamc Investment Fund and on rasng

unds

•Actng as proessonals and speakers

on Islamc fnance ssues at varous

nternatonal Islamc fnance

conerences n Astana, Almaty,

Moscow and Kazan.




Drector, Kuwat

Salmaan Jaery

Dirk Müller-TronnierPartner, Germany

Ken EglintonDrector, UK

Jean-Paul FarahSenor Manager, France

Pierre WeimerskirchPartner, Luxembourg

What’s next or your business?

Our clents talk to us when they need to make mportant

decsons that mpact ther busnesses. Across Europe, MddleEast, Inda, Arca and other mportant markets, our people are

advsng on extraordnary opportuntes to help you actualze

your ull potental.

Your contactsJahangir Juraev

Partner

[email protected]

+7 (727) 258 5960

Ashar Nazim

Drector

[email protected]

+ (973) 1751 2808

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Who we are




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B a h r a

i n - I F S G C en te r o f E x

c e l l e

n c e

Dong Xiang BoExecutve Drector, Chna

AbdulAziz Al SowailimPartner, Mddle East Charman,

Saud Araba Najeeb RanaExecutve Manager, UAE

Robert AbboudPartner, Qatar

Ashar NazimDrector, Bahran

James SmithExecutve Drector,Hong Kong

Sameer AbdiLead Partner,

Islamc Fnancal Servces Group

Jahangir JuraevPartner, Kazakhstanand Central Asa

[email protected]@ae.ey.com

Rau RashidDrector, [email protected]

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