With 90.6% of the population in Central Asia – the region made up of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan – being Muslim, Islamic finance in the region offers significant opportunities for Middle Eastern investors seeking to expand the industry’s reach through Islamic banking systems, according to a recent report.

And, despite the region’s regulatory restrictions and an underdeveloped financial ecosystem, encouraging sukuk issuance is seen by Islamic banks as a way to further support financial inclusion. However, Islamic capital market instruments like sukuk are developing more slowly than Islamic financial institutions, finds The Future of Islamic Finance in Central Asia report, published by the Eurasian Development Bank, the Islamic Development Bank Institute and the London Stock Exchange Group. The report examines the current state of the region’s financial ecosystem.

Central Asia currently hosts 18 Islamic banks and 14 non-banking financial institutions, along with Islamic banking windows, the report notes. Other institutions include takaful operators, microfinance providers, investment companies, ijarah ( leasing ) companies and Islamic fintechs, such as digital banks and wealth management platforms.

The region’s Islamic finance industry was estimated to exceed US$500 million by the end of 2024 ( excluding multilateral financing ), according to Fitch Ratings, with this growth being driven by funding interest from Gulf Cooperation Council ( GCC ) countries and Islamic multilateral institutions.

Notable regional deals in 2024 included the Qatari-based Lesha Bank, an Islamic bank, acquiring Kazakhstan-based Bereke Bank for 65 billion Kazakh tenge, equivalent to approximately US$135 million.

However, ADCB Islamic Bank – one of just two Islamic banks in Kazakhstan and a subsidiary of Abu Dhabi Commercial Bank, one of the UAE’s largest banks, plans to gradually wind down its retail banking activities, which could further limit the availability of Islamic financial products.

Bank penetration

Islamic banking in the region has the highest penetration in Kazakhstan and Kyrgyzstan, but still represents only around 1% of its total banking system assets as of end-2024. However, both countries are expected to lead the growth of the industry over the medium to long term, Fitch Ratings notes, although it is likely to remain niche.

And although the financial sector across many of the Commonwealth of Independent States ( CIS ) –  the wider region’s club of former Soviet Union states, which includes those of Central Asia – remains underdeveloped, the Kazakh government has set a target for Islamic finance to reach a market share of 3% to 5% by the end of 2025.

In Kyrgyzstan, there is one fully-fledged Islamic bank and four Islamic windows. Nevertheless, Islamic financing grew by 49.3% in 2024, according to Fitch Ratings, outpacing the total banking sector’s credit growth of 32.2%.

Tajikistan has one Islamic bank, with another bank in the process of conversion. Islamic banks and windows are currently absent in Turkmenistan, Uzbekistan and regional neighbour Azerbaijan.

Bond market

The Central Asian bond market remains largely underdeveloped, and the sukuk market is still in its early stages of development. In 2023, the first Kazakhstan tenge-denominated sukuk was issued by the Islamic Corporation for the Development of the Private Sector, raising 2 billion tenge ( US$3.9 million ).

In 2024, the Astana International Exchange ( AIX ) announced the issuance of the first local sukuk by Gamma-T SPC, a subsidiary of Gamma-T, which provides maintenance services to coal mining entities. The issuance size is approximately US$9.6 million.

However, non-enabling Islamic finance regulations, unequal tax treatment, an underdeveloped Islamic finance ecosystem and gaps in product availability could stymie potential growth.

The secular Soviet legacy has contributed to low awareness of Islamic finance and limited sensitivity to Shariah compliance, despite many CIS countries having Muslim-majority populations.

As well, Islamic banks are not covered under deposit protection schemes in many Central Asian countries, Fitch Ratings points out, which could negatively impact depositor confidence.

Growth potential

Looking ahead over the next decade, the region holds strong potential for significant growth in Islamic finance, primarily driven by the Islamic banking sector and the sukuk asset class.

Key promising areas of future investment, The Future of Islamic Finance report points out, include energy, transport and logistics, industry, food security and social infrastructure.

Islamic banking assets in Central Asia, according to the report, are forecast to grow to US$2.5 billion by 2028 and US$6.3 billion by 2033.

And Kazakhstan, given its favourable demographics, strong economic growth and the substantial size of its banking industry compared with the other four nations, is expected to be the regional leader in Islamic finance.

Overall, the regional sukuk market is also expected to expand significantly, with baseline forecasts projecting growth to US$2.05 billion by 2028 and US$5.6 billion by 2033.