June 19 Kazakhstan will start drafting a new Islamic banking law that could help the industry develop in the former Soviet state, after a five-year-old set of rules failed to stimulate activity.
Fresh legislation would allow Islamic finance to develop better under the secular regulatory regime of the predominantly Muslim country, said Yerlan Baidaulet, the Kazakhstan member of the board of executive directors at the Saudi Arabia-based Islamic Development Bank.
"A new unified law being developed would aim to avoid any complicated Arabic terms. Instead it will focus on a certain set of financial instruments, on a clear tax regime, the actual structures and mechanisms the industry has to offer."
Drafting could take between four and six months and the proposed legislation may be presented to the government by the middle of next year, said Baidaulet, who also advises the Kazakh Ministry of Industry and New Technologies. The drafting is being funded by a grant from the IDB.
Kazakhstan was the first former Soviet country to introduce Islamic finance rules in 2009, but the industry remains embryonic with total assets of less than $200 million at the end of 2013, a report by rating agency Standard & Poor's said.
The new law is to include provisions to facilitate conversion of conventional banks to sharia-compliant ones, a key element in a country with only one full-fledged Islamic bank, Abu Dhabi-based Al Hilal Bank, which opened its doors in 2010.
In May last year, the private investment arm of the IDB said it planned to invest up to 35 percent of the subscribed and paid-up capital of Zaman Bank to convert it into the country's second Islamic bank, but there is no time frame for those plans.
The rigidity of the existing law means conventional banks would have to shut down and then reapply for licences to convert their operations, a process that could take up to three years, said Baidaulet.
"The existing law is just a declarative act. Why should we compromise on a dead law that of course is not effective?"
Currently, Islamic banks are categorised on a par with other commercial banks, known as Tier 2 banks, but the current law does not extend to them all the tax privileges that conventional banks have, he added.
"We are not asking for offshore tax or any tax exemptions, we just want to equalise legally all rights and privileges among all other Tier 2 banks to compete on the same and fair basis." (Editing by Andrew Torchia)