Many of Tajikistan’s traditional banks are wobbling due to years of chronic mismanagement and their troubles are creating a space for up-and-coming Islamic lenders to flourish, according to EurasiaNet.org.
In 2014, the same year that the government adopted legislation regulating Islamic finance, Alif Capital opened its doors, becoming the first company in the country to offer banking services on strictly Islamic principles.
“We do not provide our services with the aim of Sharia compliance for the sake of marketing or capturing some ‘unmet demand’ or some ‘niche,’” Abdullo Qurbonov, the head of Alif Capital, told EurasiaNet.org in an email. “We provide our services in a Sharia-compliant manner — as much as possible under existing regulations — because of our personal stance, our own personal principles.”
The government has been tentative in its support of the emerging Islamic banking sector, but the general population appears to be more enthusiastic.
Some of the distinctions between traditional and Islamic banking are arguably technical.
On the consumer loan front, banks like Alif Capital assist their customers by dealing directly with retailers and paying for items — be it household appliances or cars — in full and upfront. The customer then pays back the bank in installments. The bank earns its cut by receiving a commission from the retailer.
Deposits are notionally considered an investment, not simply a fund that exists to earn interest for clients.
Mehurbon Burhonov, an expert on Islamic financing, told EurasiaNet.org that the fact that creditors typically do not handle cash directly substantially reduces risks.
Burhonov said Islamic banks tend to be scrupulous about assessing investment projects, since they stand to lose heavily in the event of failure. This is a huge consideration in Tajikistan, where lax lending practices — in effect the widespread practice extending credit to “friends” and “friends of friends” — has been at the core of the meltdown in the banking sector over the last few years.
Qurbonov, the head of Alif Capital, said his institution’s desire to conform to Islamic principles means that it has always financed transactions that had a verifiable link to actual assets.
“Furthermore, in addition to making a list of things we wanted to do, we made a list of things we didn't want to do. For example, we didn't enter the foreign exchange market — buying and selling foreign currencies — because we believe this would shift our focus away from our target clients,” Qurbonov said.
It is that business model, Qurbonov said, that has seen Alif Capital expand its asset portfolio from $100,000, in 2014, to the current level of around $2.5 million. What began as a bank run by three people now employs 90 and provides services to about 10,000 customers.
While the scale might be modest, the rate of growth has piqued interest among domestic market peers.
In October, Sohibkorbonk announced it had entered talks with a branch of the Saudi-based Islamic Development Bank — the Islamic Corporation for the Development of the Private Sector — on exploring ways to convert fully to Islamic banking practices.
Experts worry, however, that even though legislation allowing for this sector to exist, the rules are not clearly defined. And there is a chronic shortage of personnel in Tajikistan with a suitable mastery of both finance and the intricacies of the Islamic legal canon.
For those reasons, among others, plans by Bonki Rushdi Tojikiston — a daughter company of crisis-stricken Tojik Sodirot Bonk (TSB) — to turn to Islamic financing have stalled. That lender announced in November 2015 that it had contracted the services of the Islamic Development Bank to assist in its conversion to an Islamic bank, but little progress has been made since.
Not that even the most ardent advocates for Islamic banking see it as a panacea for all ills in Tajikistan’s financial sector. Qurbonov said the main reason some banks are in such trouble today is a pattern of inadequate corporate governance.
“Islamic banking can provide a comprehensive framework for risk management and prudent banking. However, even before introducing new models, the financial sector can significantly improve by a stricter adherence to existing corporate governance practices,” Qurbonov said.
