Kazakhstan is one of the recent entrants into the Islamic finance market. The country, which is 47% Muslim according to the CIA World Factbook, has only saw the opening of the first Islamic bank in the country, Al Hilal Islamic Bank, owned by the UAE government owned Al Hilal Bank. Since then there are a number of other Islamic banks including Amana Raya from Malaysia and Qatar Islamic Bank, which has a number of subsidiaries outside the GCC, most notably being QIB (UK) plc, its UK subsidiary formerly known as the European Finance House.
The latest development in Kazakhstan is the announcement (or more appropriately restatement) of a desire to launch a $500 million sukuk, which was announced at an Islamic finance conference in the country. According to a recent release by the Kazakh embassy in the US, the country plans on bringing $10 billion in Islamic financial transactions to market in the next 5 to 7 years.
At the conference, Prime Minister Asset Issekeshev said that "We are confident that Islamic finance will lead the way to attract funds, especially from the Gulf countries and other Muslim countries to develop all these sectors". In my opinion, this signals a problem in some of the expansion of Islamic finance. According to the World Bank, Kazakhstan is largely dependent on natural resources (oil, gas and minerals), which represent 39% of its GDP and 73% of exports, compared to agriculture and manufacturing, which generate 5% and 11% of GDP.
This is problematic if the government sees the sukuk as a way to tap funds from the GCC. The GCC itself is trying to diversify itself away from dependence on natural resources as well and therefore the economic cycles of the GCC and Kazakhstan are likely to be relatively synchronized. If the government is seeking funds from a region whose economic cycles are aligned with its own, it is likely that the funds it is tapping will not be there when it most needs it. If natural resource prices fall significantly, the region it is tapping for funds in sukuk will be facing their own troubles and will not be available to roll over maturing sukuk.
For the GCC and the investors from that region who subscribe to any Kazakh sukuk, they will face an equal problem. Their investment in the sukuk of Kazakh will be viewed as "troubled" if resource prices fall significantly at the point where the local economies in the GCC will be struggling from the lower revenues from natural resources. Expansion of sukuk with a focus on the GCC will be highly cyclical with issuance (and uptake from investors) highest in the economic peaks and problems emerging if resource prices falter.
For Kazakhstan, it should focus on sukuk with an eye to the local market and towards investors whose economic fate is less tied up by the price of natural resources. As the World Bank report notes, the country has been working to reduce the salinity of the Aral Sea, which has created fishing jobs, and on "drylands management", which has increased the agricultural sector (cattle and hay are mentioned specifically).
My knowledge of the Kazakh economy is limited, so I cannot offer much on that front, but from the perspective of Islamic finance, there should be a different focus (not only in Kazakhstan). Kazakhstan and other non-GCC countries aspiring to tap the Islamic finance market (particularly those with natural resource biases in their economies) should welcome investment in the sukuk from the GCC, but should focus on raising funds domestically and from countries with different economies whose investors may be more willing to continuing investment if resource prices fall.
They should also focus on the use of the funds from the sukuk into areas of government services that help to diversify the economy away from the natural resource sector to reduce their own reliance on resources to both create employment as well as de-link their economies from the same resource prices that provide the funding to their investors (if those investors are primarily located in the GCC).
Islamic finance in general, and sukuk in particular, are fashionable ways to attract money from the GCC because of its large wealth and also large Muslim population, but Islamic finance should not be viewed as just a way to get at the oil money in the region. It should be viewed as an alternative structure of finance (and bonds) and with nearly half of the population in Kazakhstan being Muslim, there should also be some focus on the local market. A domestic, local currency sukuk alongside the global sukuk would benefit the domestic market more than a sukuk focused on the GCC market.