Islamic finance is set to expand rapidly in Commonwealth of Independent States (CIS) countries in the next five years from a very low base, Moody’s Investors service said in a report published recently.

This growth will be driven by government initiatives to nurture the sector with countries such as Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan set to lead this expansion of Islamic banking.

According to Svetlana Pavlova, AVP-Analyst at Moody’s, “These countries have large Muslim populations, and are notable for their governments’ commitment and progress in establishing better legal and regulatory infrastructure for Islamic finance.”

The report added that Kazakhstan’s government is planning to boost the share of Islamic banking assets to 3% of its total banking assets in the country by 2025 from the current 0.2% and Kyrgyzstan’s national bank plans to expand the share from the current 1.4% to 5% by 2021.

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According to the report, Russia has the least growth potential, but some individual banks are trying to meet potential demand for Shariah-compliant products and services under existing laws. Sberbank, the largest commercial bank by assets in Russia is looking to offer such services and it launched an Islamic payment application in 2019. AK BARS, the largest bank in the Republic of Tatarstan, introduced a pilot Islamic mortgage product in 2019.

In most CIS jurisdictions asset purchases and resales are subject to value-added taxes and this might prove to be a regulatory hurdle unless there would be an exemption to be created for Islamic banking dealings. The report added that in some countries, Islamic banks’ deposits are not covered by state deposit insurance systems and Islamic banks cannot use central banks’ conventional liquidity and funding facilities because they all bear interest. These disadvantages mean Islamic banks have higher funding and operating costs compared with mainstream lenders, which might pose hurdles.