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