What is Islamic finance and how is it developing in Central Asia and the world? What are the prospects for this area in Kazakhstan?

Astana International Financial Center is the first platform in the region that provides businesses with systemic access to a rapidly growing and promising investment segment — Islamic finance. The largest sector of Islamic finance is Islamic banking, in addition, insurance (takaful) and the Islamic capital market are actively developing.

Kazakhstan plans to develop the Islamic finance industry in order to create alternative sources of financing, both for state and municipal projects, as well as for private ones. For this, the country and the AIFC have created all the necessary infrastructure and regulatory legal framework in line with best international practices and standards.

The AIFC Islamic financial services industry includes participants from Islamic banks, asset management companies, investment funds, takaful and retacafule companies, other Islamic financial organizations, as well as leading international Islamic finance institutions.

“Astana International Financial Center is establishing a dialogue with various market players, we see this as a positive sign,” said Mehdi Benslimane, global expansion strategist at Wahed Invest.

An important aspect is the infrastructure. According to Ivan Kamenski, co-founder of Tayyab Digital Islamic Bank, infrastructure means special digital platforms and the use of reliable financial solutions.

“It is necessary to be able to open an account in digital format and conduct business through it. We are also talking about the use of mobile applications — these are payments and money transfers without the need for a presence in the bank's office. Such solutions already exist in Kazakhstan and other countries of Central Asia,”said Ivan Kamenski.

In addition, it is necessary to digitize the financial instruments that the business could receive online. To do this, specialized ecosystems or marketplaces to offer customers a wide range of services must be created.

President and CEO of the International Center for Education in Islamic Finance, Professor Dato’ Dr. Mohd Azmi Omar noted that microenterprises and small and medium-sized businesses have been hit hard by the coronavirus pandemic, primarily due to quarantine measures.

“Micro-enterprises, small and medium-sized businesses have been hit very hard by the pandemic. First of all, due to quarantine, and even after the softening of the measures, the rules of self-isolation are still preserved, which makes it difficult for companies to return to the market,” said Dr. Mohd Azmi Omar.

The pandemic, according to him, also significantly affected the welfare of citizens. As an example, the speaker cited Malaysia statistics on citizens' savings.

According to these data, representatives of the self-employed group can live in quarantine on their savings for only a month. Beyond these limits, they need state assistance, said Dr. Mohd Azmi Omar.

“As for private sector workers, they can live no more than two months on their savings, after which they will start having financial difficulties. They will fall below the poverty line, and there will be a regression in the economy,” the expert said.

On the other hand, the quarantine regime gave impetus to the development of digital payments. According to a recent Mastercard study, many payment card users have begun to buy online more. At the same time, the share of payments in Malaysia increased more than in other countries of the region due to the growth of purchases on Internet sites and the use of contactless credit cards. In general, according to Dr. Mohd Azmi Omar, the volume of cash payments in the country decreased by 64%.

How will pandemic affect Islamic finance sector?

Global Expansion Strategist of Wahed Invest Mehdi Benslimane believes that the current economic crisis, which is observed against the backdrop of the coronavirus pandemic, has become an alarming bell for the global economy. Therefore, market participants should look closely at the methods of making money. At the same time, companies operating in the Islamic finance sector may come out of the crisis with good results.

“This crisis is a call for us to change our methods of investment work. They should become more sustainable, with emphasis on environmental aspects,” said the speaker.

After the crisis, says Mehdi Benslimane, Islamic finance companies will have a "good position in terms of investment and financing." And in the end, the current crisis may launch the next stage in the development of Islamic financial institutions.

As for Kazakhstan, for the development of Islamic finance, it is necessary to improve legislation and promote financial literacy in order to succeed in the development of Islamic finance in its market. This can be helped by the Astana International Financial Center, which supports the emergence of new financial instruments in the country and the region as a whole.

“The AIFC was founded in the capital of Kazakhstan, and since its inception, Kazakhstan has the opportunity to develop special technologies and special financing methods, in particular, Islamic. Now we have digital financing tools for our clients,” said Ivan Kamenski.

Mehdi Benslimane added that Kazakhstan has “great scope” in terms of promoting investments.

“But besides spreading infrastructure, it’s important to spread financial literacy. We need to educate investors on how to invest and how to use affordable tools to the advantage,” said Mehdi Benslimane.

Development of fintech in Kazakhstan and the world

Coronavirus has made significant adjustments to the plans of companies around the world. The measures that the governments of the countries introduced led to a partial or complete shutdown of the companies. Against this background, new opportunities have appeared in companies in the financial technology sector.

Thus, according to the report of Tech Nation and Dealroom, fintech showed stability during the coronary crisis, and in 2020, technology companies in London accounted for 39% of all venture investments. Another study by the consulting company deVere Group reports that Europeans are 72% more likely to use fintech applications against the backdrop of a pandemic.

The situation is similar in Kazakhstan and in Central Asia. So, in Kazakhstan, due to the temporary closure of bank branches and other credit organizations, financial institutions began to develop their digital services. For example, against the background of quarantine, the service of remote opening of card accounts first appeared. By the end of April, more than 1 million people opened card accounts online, and about 700 thousand received cards with home delivery.

The trend for the development of fintech and the emergence of new services that can be obtained without visiting banks will continue to develop, experts say.

About half of the population of Central Asian countries is still not covered by financial services, but the development of Internet networks can correct this situation. For example, in 2019, the average penetration rate of the World Wide Web in Central Asia was estimated at 49%, and this already allows banks to develop their digital services. This is especially true for Kazakhstan with a penetration of 79% and Kyrgyzstan with Uzbekistan, where the figure is in the region of 50%.

Mobile banking will help financial institutions to offer their services to residents of remote and rural areas, where there are no branches and departments. Thanks to good rates of mobile Internet access — more than 60% on average in Central Asia — this is a very realistic scenario.

It is important to further develop legislation and create conditions for the emergence of new fintech solutions in the field of Islamic finance, said the President and CEO of the International Center for Education in the Field of Islamic Finance, Professor Dato’ Dr. Mohd Azmi Omar.

“We need to create conditions so that all enterprises operating in Islamic finance can go digital. AIFC can help this,” said the speaker.

In his opinion, fintech companies can offer the market p2p solutions, that is, financing between participants in the same system, crowdfunding. This money can be used to finance SMEs. And thanks to flexible legislation that would help companies in the sector develop, Kazakhstan could become a center for the spread of Islamic financial services throughout Central Asia.

Venture Capital Ecosystem in CIS

Representatives of leading venture capital funds, associations and investors from Kazakhstan, Central Asia and Russia discussed the impact of the COVID-19 pandemic on the venture capital market and the prospects for its further growth.

In Kazakhstan, the startup market is still at an early stage of development. Acceleration programs are operating, such as AIFC Fintech hub, Astana hub and TechGarden. AIFC may provide additional incentives for market growth.

“The AIFC jurisdiction is only in its infancy, but the principles that are laid down in it are advanced for the CIS. Perhaps this is the best design in the CIS,” said Alexey Girin, co-founder and general partner of Starta Ventures.

For startups, the markets of the CIS countries are small. For example, in Russia there are more than 120 million online users, and therefore the largest local companies, for example, Mail.ru, Yandex, Ozon and Wildberries work in the retail segment.

“To become a corporate player, you need to enter the global market. For example, every startup in Israel is global, because there is no local market and you need to go to the USA, Great Britain, China to grow your business,” said Viktor Orlovsky, general partner of FortRoss Ventures.

A similar situation is taking place in Ukraine. Investor Murat Abdrakhmanov noted that local companies are focused on the foreign market. As a result, there are three unicorn companies: People.ai, Gitlab, and Grammarly.

In Uzbekistan, the areas of fintech, marketplaces, as well as medical tech are actively developing. The volume of venture capital in the country is less than $10 million, investors are local "angels" and foreign funds. In this regard, Dilshod Zufarov, Director General of Uzbekistan Venture Capital Association, proposed the creation of the Central Asian Investment Club to unite all investors and funds of the region.

During the current crisis, technology companies have strengthened their advantages, their assessments by investors have increased. Astana International Financial Center offers companies a complete and multifunctional legal platform for attracting, implementing and protecting investments.

EdTech Kazakhstan Forum of Educational Technologies

The second Kazakhstani forum of educational technologies EdTech was held in digital format at the Online Astana Finance Days 2020. The central theme of this year was the digitalization of education around the world amid lessons from social distancing.

The pandemic and social distancing have become an incentive for the educational technology industry — there is an accelerated digital transformation of the education system around the world. Schools, universities and professional certifications are rapidly becoming online, and the new digital reality in this area no longer seems like a distant future.

Experts discussed pressing issues of finding and attracting highly qualified IT-specialists to education; the lessons the industry has learned from social distancing and the digital transformation of education; the role of human capital in the digital economy and the place of education in the Fourth Industrial Revolution.

The Deputy CEO of AIFC Administration Yernur Rysmagambetov believes that 2020 will be remembered for a long time, and contemporaries will retell cases of digital transformation, giving an example when entire industries and countries came together to solve one single problem — finding the right solutions to maintain social distance for EdTech account.

“That's why we brought together the best experts who are able to propose solutions and create an international collaboration in the most environmentally friendly sphere of the economy — in education,” he said.

Deputy Chair of the Board of JSC National Infocommunication Holding Zerde Pavel Koktyshev noted that the education sector is undergoing tremendous changes. Flexible and effective approaches to learning are becoming more accessible, innovative techniques forming the new educational industry are emerging.

“It is nice to see examples of successful implementation of Kazakhstani projects and initiatives that confirm the effective use of innovative technologies. And now is the time to discuss these changes and industry innovations with experts from different ecosystems in order to come to a common understanding of what changes in education are needed at this stage,” he said.

What happens to society and economy in changing world?

According to the latest forecast of the International Monetary Fund, in 2020 the world economy will fall immediately by 4.9%, although with a subsequent increase of 5.4%. However, much still depends on the successes of mankind in the fight against the pandemic, and if it does not decline until the end of 2020, then the recession may continue in 2021. In such circumstances, it will become more difficult for business to attract investments to support the developments: investors become will more cautious, many of them will withdraw capital from emerging markets. Financial platforms — international financial centers that help develop the market by offering access to financing in different formats, can help. In 2018, Kazakhstan launched its own Astana International Financial Center to support the diversification of the economy.

The representative of Ozara Services Paul Pullinger emphasized that the pandemic had forced the business to change plans and put efforts in a different direction. In particular, to financial support for agriculture.

“We were able to provide such support. We have GDP growth, despite the pandemic. Although the forecasts were somewhat pessimistic. In addition, we provide diversification and significant investment. Kazakhstan is now seeking to localize some of its industries, including transport and industry. Instead of importing various cars and trucks. We also pay particular attention to the transport sector and agricultural machinery. We think we have a good future and a strong economy. For investors in Kazakhstan, a favorable climate, there are good opportunities for development,” he said.

Syed Mujtaba Husain, founding partner of Emirates Legal, the founder of Emirates Legal Limited, regulated by the AIFC, noted that the pandemic triggered a reboot and stopped development in some countries. The developed world has returned to the level of the developing world.

“This means that if there is a chance for the AIFC to grow, then this chance has come now. If we talk about Kazakhstan, then there are 4 main sectors of the economy. These are trade (17.3% of GDP), mining (16% of GDP), oil and gas (13.3% of GDP). AIFC is an investment gateway for Kazakhstan in Central Asia,” he said.

The Astana International Financial Center was created on the initiative of the First President of the Republic of Kazakhstan Nursultan Nazarbayev. The constitutional law on the establishment of the AIFC was signed Dec. 7, 2015. AIFC's goal is to form a leading center for financial services at the international level. The AIFC aims to assist in attracting investment in the country's economy, create an attractive environment for investing in financial services, develop the securities market of the Republic of Kazakhstan and ensure its integration with international capital markets. www.aifc.kz

Fintech Hub AIFC is the interface between global startups, entrepreneurs, corporations, investors, leading industry experts and specialists. The development of fintech at the AIFC includes programs to support startups, corporate innovations, the venture capital market, specially developed rules and a regulator that allow testing products and solutions in the field of fintech. http://www.fintech.aifc.kz/