THE ROOTS OF ISLAMIC BANKING IN KYRGYZSTAN

C O N F I D E N T I A L SECTION 01 OF 02 BISHKEK 000958

SIPDIS

SIPDIS

DEPT FOR SCA/CEN (GEHRENBECK)

E.O. 12958: DECL: 07/25/2017
TAGS: EFIN KISL PGOV KG
SUBJECT: THE ROOTS OF ISLAMIC BANKING IN KYRGYZSTAN

BISHKEK 00000958 001.2 OF 002


Classified By: Charge d'Affaires Lee Litzenberger for Reasons 1.4 (b) a
nd (d)


1. (C) Summary: Kyrgyzstan's EcoBank has launched a pilot
project to introduce Islamic banking instruments in the
country. The driving force behind the project is EcoBank's
main shareholder, Shamil Murtazaliev, who also serves as
Kyrgyzstan's representative to the Islamic Development Bank.
While the move may be an excellent marketing ploy for
EcoBank, the government hopes that Islamic banking will
attract more foreign capital (with fewer strings) into the
Kyrgyz banking sector. The introduction of Islamic banking
has generated some concerns, however, including whether the
Kyrgyz Central Bank has the capacity to supervise the new
financial instruments properly. End summary.

Breaking New Ground
--------------


2. (C) Kyrgyzstan's EcoBank, with declared assets of
approximately $22 million, is implementing a "pilot project"
sanctioned by Kyrgyz authorities to introduce Islamic banking
instruments to Kyrgyzstan. Islamic Development Bank (IsDB)
Chairman Ahmad Mohamed Ali Al-Madani joined Kyrgyz President
Bakiyev for the official launch ceremony on July 4. (Note:
The IsDB aided in the development of the pilot project. End
note.) Ulan Sarbanov, EcoBank's board chairman (and former
Central Bank chairman),told emboff that only $100,000 of
EcoBank's balance sheet is currently invested in Islamic
banking products. (Note: "Islamic banking" generally shuns
interest charges, prohibits investment in certain businesses
and shares risk. End note.) EcoBank's modest exposure, he
explained, is due to the uncertainty with which Kyrgyz
authorities, particularly taxation officials, will treat new
financial instruments. While he doubted the Central Bank's
abilities to supervise Islamic banking products, Sarbanov
said that the Central Bank had already approved 10-12 Islamic
banking instruments for use in Kyrgyzstan.

Novelty or New Path
--------------


3. (C) Excluding Bishkek and the northern Chui valley,
Sarbanov argued that the introduction of Islamic banking
simply reflected the "Islamization of society" already taking
place elsewhere in Kyrgyzstan. However, while crediting
EcoBank's main shareholder, Shamil Murtazaliev, with
spearheading the Islamic banking initiative, Sarbanov valued
the marketing appeal of Islamic banking in helping
differentiate EcoBank from the 19 other banks operating in
Kyrgyzstan.


4. (C) A Central Bank advisor cautioned emboff that "the
money, not the principles" was the driving force behind
Islamic banking in Kyrgyzstan. While Sarbanov, in a meeting
with emboff months before he joined EcoBank, noted that
Islamic banking could be an avenue for funds from the Persian
Gulf to enter Kyrgyzstan, he recently downplayed this
possibility by pointing out that the IsDB had only invested
$70 million in Kyrgyzstan during the past 15 years. However,
the Central Bank advisor argued that Kyrgyz officials viewed
Islamic financial instruments as options to conditioned
assistance from international financial institutions.
Sarbanov, in the earlier meeting, added that President
Bakiyev only backed the Islamic banking initiative after
hearing that "large sums of money" would flow into Kyrgyzstan.

BISHKEK 00000958 002.2 OF 002



The Man Behind the Scene
--------------


5. (C) With strong family connections to Russia's Dagestan
region, EcoBank's main shareholder, Shamil Murtazaliev, is
described as a young, crafty businessman with a nebulous past
rumored to include vodka production among other business
ventures. Murtazaliev is also Kyrgyzstan's representative to
the Islamic Development Bank and serves as an advisor to
President Bakiyev on Islamic issues. While a strong
supporter of the 2005 revolution that brought Bakiyev to
power, Murtazaliev has also reportedly objected to "pluralism
and democracy" for Kyrgyzstan.

Comment
--------------


6. (C) Although Sarbanov described a rather benign
introduction for Islamic banking in Kyrgyzstan, some
non-governmental organization representatives in southern
Kyrgyzstan view developments in Islamic banking with alarm,
and fear that Islamic banking could enable the spread of
Islamic extremism. While we have no evidence to support such
concerns, the introduction of Islamic banking may broaden
Kyrgyzstan's links with countries in which Islamic financial
instruments are commonly employed. If Islamic banking grows
in popularity, the Central Bank may need some capacity
building in order to ensure proper supervision of financial
instruments.
LITZENBERGER