Islamic financial system

The birth of Islam on the territory of modern Kyrgyzstan historians point to the XIII century in the initial stage - in the south of the country in the Fergana Valley, and a little later - in the northern part of it. In the Soviet period, in line with government policy, the manifestations of Islam were few and occurred mainly in the family household level.

After well-known political and socio-economic reforms 90 years of the last century, the activation of Muslims has increased markedly. Go to one of the positive aspects of this phenomenon can be attributed the fact that Kyrgyzstan has managed to escape the sad events associated with the "Islamic factor" that occurred in Tajikistan and Uzbekistan.

According to the State Commission on Religious Affairs of the Kyrgyz Republic, the number of Muslims in the country is around 80%. And the state of Islam in the Kyrgyz Republic can be described in one word - a revival.

This word has incorporated all the features of the processes taking place in the world in this direction. This includes attempts to introduce Islamic banking and finance in the economic system of the country. In our view, what is happening, of course, is a consequence of the integration processes in the world, and is a new model and the parameters of international financial relations.

I must admit that in the post-Soviet states on such a significant level, this process takes place for the first time. For independent Kyrgyzstan is a new phenomenon, but for the majority of the population - a completely unknown.

Briefly about the current state of the banking system of the country. Today in Kyrgyzstan is quite booming market of credit services, which is characterized by high interest rates, short terms of credit use, stringent conditions of collateral, etc. Naturally, under such tight credit lending major industries will be those for which there is an opportunity for Short-term, high-yield use the loan to Kyrgyzstan it - trade.

The Kyrgyz Republic is a member of the Islamic Development Bank in 1993. During the reporting period of cooperation had been a number of investment projects in the economy of the country with varying levels of success.

A new impetus to the development of bilateral relations was given the signing of a Memorandum of Understanding between the Kyrgyz Republic, the Islamic Development Bank and JSC "Ecobank" from May 16, 2006. The memorandum includes the parties' agreement on cooperation in the introduction of Islamic banking and finance in the banking system.

Following this document, the President of the Kyrgyz Republic signed a decree on July 12, 2006, UP 373 number "for a pilot project introducing Islamic financing principles in the Kyrgyz Republic." The preamble of the decree states: "The introduction of the Kyrgyz Republic, the Islamic principles of banking and finance, along with the traditional current banking and lending, is seen as the creation of conditions for the development of economic relations, as well as competing systems of financing and lending. In turn, this will lead to the introduction of a full achievement of the civil rights to economic freedom and the free use of their abilities and assets in any economic activity that is not prohibited by the Constitution and laws, taking into account religion or atheism. "

The introduction of Islamic banking is based on a pilot project being implemented in the Kyrgyz Republic on the basis of one of the leading banks in the country of "Ecobank", with its headquarters in Bishkek. Given that this process has a high level of risk, it was decided to initially implement it as a pilot (the same as an "experienced") project, and only on the basis of one of the branches of "Ecobank". That is, most likely, it will be presented in the form of "Islamic window" in the traditional commercial bank, at least in the initial period of existence.

Of "Ecobank" was selected by the Executive Agency of the pilot project on introduction of Islamic banking in the Kyrgyz Republic in accordance with the above memorandum and also due to the fact that it is the part of the credit institution was based initiative to expand its product range by introducing the practice of banking new services and attracting investments into the economy of the country. The initiative has been expressed in the correspondence of "Ecobank" with the Administration of the President of the Kyrgyz Republic, the IDB headquarters and the office of the Manager of the Kyrgyz Republic to the Islamic Development Bank, and found a positive response to JSC "Ecobank". In short, the pilot project operates under the direct supervision of the State. Executive Agency (JSC "Ecobank"), as you might guess, is a joint-stock company in which the State has a stake in its share capital.

Currently, a steering committee of the project, which is composed of senior officials from the three parties: the Government of the Kyrgyz Republic, the IDB and of "Ecobank".

After long and painful rounds of talks and discussions on the implementation and legal justification for the use of the principles of Islamic finance, in December 2006 the National Bank of the Kyrgyz Republic (the supervisory and regulatory authority) has granted, giving the right to carry out transactions in accordance with Regulation of the National Bank of the Kyrgyz Republic. "On the implementation of Islamic financing principles in the Kyrgyz Republic within the framework of a pilot project. "

Of course, the fear of a regulatory body in the country are without foundation. In an effort to maximize the protection of the holders of deposits and future customers of the bank, given the relatively high risks of Islamic banking as such, these steps are also being taken to reduce or "mitigate" the first possible surprises in the process.

Under the terms of the Agreement, Pilot Project is to be implemented within one calendar year. But this does not mean that in a year this thing is over, no. We are talking about the introduction, that is, during this time must be addressed all the necessary regulations, organizational, administrative, technical (including the issues of hardware and software), personnel and other matters arising from these issues.

In our view, talk about the development of the regional network is too early, as at this stage it is only a draft. However, looking ahead, it can be assumed that in the future is possible, and such a scenario. Moreover, given that the Executive Agency has already has a wide network of its own branches and so-called "savings banks", it is quite likely "way out" of the branch network in the near abroad. Anyhow, in theory, may be as prospects. As for the rest of the desire of financial institutions in the country to use the principles of Islamic finance in the private practice of providing banking services, the adoption of this decision - is a completely independent and voluntary act. The current democratic principles of relations in our country do not admit to the spread of new banking products in a forced way. The practice of Islamic banking around the world demonstrates that Islamic principles of financing and traditional financing perfect "get along", representing the two competing self-contained system. It should be noted that during the period of the Steering Committee has adopted more than twenty normative documents regulating as a pilot project, and the very principles of Islamic finance in the Kyrgyz Republic.

In accordance with the regulations, except that the "Islamic window" of Bank offers financing in accordance with Islamic principles, it provides a wide range of banking services.

The following types of bank services:

* remittances;

* foreign exchange transactions;

* the opening of deposit accounts;

* transactions in securities;

* Letters of Credit;

* debit cards;

* and other services, of course, to the extent permitted by Sharia.

Supervisory authorities, taking into account the "pilot" of the project and a high level of risk, was granted permission to raise funds on deposit by Islamic principles only to the legal persons. Probably, the National Bank, for fear of possible problems with individuals who under the terms of the deposit policy of Islamic banks may suffer losses, with the participation of their funds in contracts PLS, was forced to make this restriction. This issue is common to all Islamic banks: the customers of the branch of the Islamic Bank is likely to be difficult to understand the need to cross the line of separation, including the possible loss of funded projects.

However, in our view, such a position is shortsighted of the National Bank, as holders of deposits, including private individuals, may enter into a contract with a bank deposit of Haman. In this case, their means of uniquely and in full will be saved, not by bringing them and neither profits nor losses, not counting the fact that for a data operation means the Bank may take a commission. It is hoped that the place is so categorical austerity measures, after a while will understand the importance of such a step. In addition, this service is certainly needed in the modern realities of the banking system in Kyrgyzstan, as it is part of the Muslim population can not afford to keep their own savings in traditional banks, taking into account existing constraints of Sharia. Given the increasing number of practicing Muslims who are potential clients of the Islamic branch of the Bank, it can be assumed that the resolution of this issue in a positive way can have a significant impact on the attraction of money into the banking system, even if at first only as of their safety. The fact that the Kyrgyz people need the services of Islamic banking, there is indisputable. There are some prerequisites that these services will be in demand in full.

In the first place - is growth in the number of followers of Islam in the Kyrgyz Republic. However, it is necessary to emphasize the qualitative growth inside the Muslim community in terms of age profile. That is, if the 90-ies of the last century, it was the people aged 50 years and older, to date, this much younger contingent.

Notable is the fact that Islam is stronger and faster spread among the urban population, particularly among young people in the most active age - from 15-18 to 45-55 years. This is not hard to see, passing by the city or the country's mosques on Fridays.

In short it is the part of the population that bears the responsibilities of social security contributions to the revenue side of the budget of the country. These people are mostly breadwinners. As you know, most of the banking services are aimed precisely at this client segment of the financial market. Among the positive can be attributed the fact that with the introduction of new principles must be offset by the funding problem of misuse of borrowed funds as cash, except for contracts of Islamic banking and istisnaa salaam, will not be made available to borrowers. In accordance with the principles of Islamic finance transactions in the Bank will only buy tangible assets.

Third, perhaps the realization of the principle of bank participation in the profits and losses of projects funded enterprises motivate and other banking institution to a more thorough preliminary analysis and then monitoring the effectiveness of the use of borrowed funds and their investment in the real sector of the economy, that is currently quite a hot topic for the entire banking system.

The results of operations of the branch of the Islamic Bank are obvious: the investor gets his share of the profits, the government - tax payments to the budget, and the population of the country - the necessary goods and services. In addition, the bank hopes to enhance its resource base by attracting new deposits of legal persons and, in the long term - and the savings of citizens who for religious reasons do not currently use the services of traditional banking institutions because of the percentages.

Speaking of the prospects for the development of Islamic finance, it may be noted that the support of the process of the state will benefit in a reasoned and rational use of these principles in the financial sector of the country, and in the future - to create a serious and competitive market of Islamic finance in the region. In addition, as a positive thing we can say the fact that recently the geography of Islamic finance is a new point, which is located in the heart of Central Asia and its address - the Kyrgyz Republic, Bishkek.

8. The political component of the framework for the IAP

The main conditions for the "inclusion" of Kyrgyzstan in the Islamic finance industry are the interest and intent to meet the requirements of Islamic law on financial transactions. Subject to the country's participation in the scheme at the Government level, the requirement of joining the member countries of the IDB is a priority, but not a prerequisite. The condition is becoming a part of the IDB is unambiguous consent and acceptance of the Articles of Agreement of the Memorandum IDB.

Analytical conclusions, given the failures and achievements, it is logical to do with the introduction of a pilot project. At this stage, the most important condition of its operation - is to create a legal framework and strict adherence to these requirements.

You can not deny the influence of the public on the current political and socio-economic changes in the country - its role is significant. From the point of view of the requirements of the public in the implementation of IAP, then the process should have open and transparent procedures. For Muslims, the most interested part of society, it is an opportunity to realize their legitimate right to economic activity which meets the requirements of Islamic law, and, in general, is not in contradiction with the basic law of the country, since the presence of the legal field - required and strict condition its normal functioning. The practice of Islamic banking around the world demonstrates that Islamic principles of financing and traditional financing perfect "get along", representing the two competing self-contained system. Economic activity of alternative banking systems of the country (conventional and Islamic) create a healthy competitive environment, there is benefit not only Muslims, but on the whole society. Thus, the successful operation of the Islamic banking sector may well lead to a downward trend in interest rates by other banks. This, of course, will benefit the entire community. In addition, it is one of the most effective ways to undeclared approach to combating religious intolerance.

Inefficient management of the implementation of the IAP in the Kyrgyz Republic have the same chances to affect the economy of the country, as well as errors and mistakes introducing any innovation in the economy. Country's cooperation with the IDB in the form of contracts and procedures of Islamic principles of financing has experience of more than a dozen years. As for Islamic banking, which is a special case of the IAP, it is so "late" introduction from the beginning of the operation in the country itself IAP can be explained as follows:

· Destruction of the ideological foundations of the post-Soviet period, and as a result, increasing the problems of moral and ethical character;

· Do not mono regulate and secular nature of society;

· The lack of public awareness about the procedures and mechanisms of Islamic banking.

Support pilot project by the state plays an important role in the regulation of this process in the framework of the current legislation. In this context, the objectives of the President of the Kyrgyz Republic, as the guarantor of the Constitution, is respect for the equal rights of all citizens, regardless of the views and beliefs in their economic and financial activities. As for the country's legislative body, the Jogorku Kenesh should actively participate in the development and adoption of the legal framework of Islamic finance, and through the involvement of expert advice from the parliaments of the countries who have practical experience in the use of these financial arrangements. For example, the Parliament of Malaysia and the UK, as secular states.

Prospects for the development of IAP

Application of the methods of Islamic finance in the Kyrgyz Republic, requires compliance with certain conditions:

1. Existence of a legal framework governing the use of the competence of the innovative methods of financing. The legal framework of Islamic finance can operate in parallel to the main banking legislation of the country, spreading their force only for Islamic financial institutions (Islamic banks, Islamic investment funds, Islamic insurance companies (takaful), and so on.), For example, in Malaysia.

2. Availability needs of the population in the products and services of IAP.

3. Availability of themselves Islamic financial institutions (banks, investment funds, insurance companies, etc.) that provide these types of financial services.

4. The availability of skills and methods of Islamic finance the staff of financial institutions.

5. Awareness of the population (ie, the customer base) on the methods and mechanisms of action of IPF.

6. Equipment information and techno-logical resources, modified to work with the new financing instruments.

7. Availability of experts in Islamic law that can draw conclusions on economic issues from the standpoint of Sharia.

The use of IAP will attract domestic financial resources that are not currently being invested in the banking system of Kyrgyzstan many citizens due to the limitations associated with religion, which does not allow you to participate in transactions that use the loan interest. Obviously, the untapped potential of the banking system in financing the country's Muslims enough to bring them into the official business turnover of the economy. The fact necessary infusion of investment in the economy of the Kyrgyz Republic is undeniable. In some cases, especially when it comes to investments of countries cooperating with Kyrgyzstan within the framework of existing international agreements for the state would be advisable to operate with funding mechanisms offered by investors to attract investment opportunities in the resource-rich IDB member countries. The current democratic principles in the country do not allow to spread new banking products in a forced way. Given the fact that the majority of society is secular development, implementation of IAP should be as much as non-radical form, the method of gradual evolution, while at the same time takes into account the vital interests and needs of every citizen of the country. More than thirty years of experience of modern Islamic banking, including in non-Muslim countries proves that the conduct of advocacy activities that emphasize the lack of revolutionary spirit and radicalism in the very principles of IAP may be one of the conditions for the consolidation of society and tolerance within society.

1Michel Hoebink, “Thinking About Renewal in Islam: Towards a History of Islamic Ideas on

Modernization and Secularization,” Journal of Arabic and Islamic Studies 46, no. 1 (1999): 24-37.

2 Paul Mills and John Presley, Islamic Finance: Theory and Practice (New York, NY: St. Martin

Press, 1999), 2-3.

4 Mahmud Faksh, The Future of Islam in the Middle East: Fundamentalism in Egypt, Algeria, and

Saudi Arabia (Westport, CT: Greenwood Publishing Group, 1997), 8-20.

9Accounting and Auditing Organization for Islamic Financial Institution, “AAOIFI Overview

2006-2007,” http:///www.aaoifi.com/overview.html (accessed November 4, 2010).

11Institute of Islamic Banking and Finance, “IFSB Defending New Standards in Islamic Finance,"

http://www.ifsb.org (accessed November 4, 2010).

12Islamic Development Bank, “Islamic Bonds,” http://www.isdb.org/irj/portal (accessed

November 4, 2010).

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