Ammon News - By Abdulhamid Hamid Al-Kba- Islamic finance is gaining noticeable momentum across Central Asia and Azerbaijan. Having followed developments in the region closely, I have observed how an area that once suffered from a shortage of Sharia-compliant financial services is now beginning to witness tangible progress. Increased participation by Gulf investors and multilateral Islamic institutions is helping accelerate this transformation, while governments are introducing regulatory reforms to support expansion. These efforts reflect broader ambitions to diversify sources of financing, improve financial inclusion, and strengthen economic ties with the Gulf region.

With large Muslim populations, relatively low banking penetration rates, and growing investor interest in Sharia-compliant products, Central Asia and Azerbaijan are increasingly viewed as promising long-term markets for Islamic banking, sukuk, and takaful. Financing provided by the Islamic Development Bank Group to Central Asian countries has exceeded $10 billion as of April 2026, with Uzbekistan, Kazakhstan, Turkmenistan, and Kyrgyzstan receiving the largest shares.

The annual meetings of the Islamic Development Bank Group held in Baku this year demonstrated that discussions about development in the Islamic world have moved beyond broad slogans and toward practical projects where energy, transportation, and logistics increasingly intersect. Azerbaijan appeared keen to strengthen its role as a bridge between East and West, leveraging its strategic location and infrastructure projects while positioning itself within wider regional integration efforts.

According to Bachar Natour, Global Head of Islamic Finance and Managing Director at Fitch Ratings,
“The development of Islamic finance in Central Asia is still in its early stages, but momentum is building, supported by increased participation from GCC investors and institutions, as well as multilateral entities such as the Islamic Development Bank Group.”


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Kazakhstan and Kyrgyzstan: Setting the Pace

Kazakhstan remains the regional leader in Islamic finance. By the end of 2025, the country had three specialized Islamic banks with combined assets of approximately $600 million. Authorities have introduced legislation allowing conventional banks to establish Islamic windows, while the Astana International Financial Centre has played a central role in building the legal and regulatory framework.

Since May 2026, the minimum capital requirement for Islamic banking institutions has been reduced to $8 million to encourage new market entrants. Industry estimates suggest the market could exceed $15.2 billion in the long term. Kazakhstan has also witnessed the listing of its first retail sukuk and its first Sharia-compliant exchange-traded fund.

Yet Kazakhstan’s experience also illustrates an important lesson: legislation alone is not enough. Although the country has spent more than a decade building a comprehensive legal framework for Islamic finance, practical implementation has remained slower than expected. A clear gap still exists between regulatory readiness and market adoption.

In my view, the introduction of Islamic windows is a particularly smart step because it allows Islamic products to utilize existing banking networks while reducing operational costs. However, Fitch data continues to show that the sector’s market share remains relatively small despite years of regulatory development.

Kyrgyzstan, meanwhile, represents the region’s most mature Islamic finance market. The country established its first Islamic bank in 2011, and six institutions now provide Islamic financial services. In 2025, the sector expanded by 125%, reaching approximately $264 million in assets. Mortgage financing accounted for 40.1% of the market, while takaful was formally integrated into insurance legislation through the licensing of the country’s first specialized operator.

Kyrgyzstan’s plans to establish a new Islamic bank in cooperation with Bahrain demonstrate that Islamic finance has moved beyond the experimental stage and entered a period of institutional development supported by Gulf expertise. Its intention to join the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) could further strengthen investor confidence and reduce risk. Together, Kazakhstan and Kyrgyzstan are expected to remain the main drivers of regional expansion in the coming years.


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Azerbaijan, Uzbekistan and Emerging Markets

Azerbaijan has adopted a cautious but strategic approach. Rather than rushing toward fully fledged Islamic banks, the Central Bank has begun with pilot programs through conventional banks offering products such as murabaha and mudaraba. Policymakers appear determined to understand market demand before moving toward a broader regulatory framework.

What stands out is Baku’s effort to create a tax-neutral environment and adapt existing legislation rather than establish a parallel legal system. Azerbaijan is also examining the experiences of countries such as Malaysia, Türkiye, and Pakistan while exploring the potential role of sukuk in financing infrastructure projects.

The country’s strategic location along the Middle Corridor and its growing economic links with Gulf states have led many observers to view Azerbaijan as a potential regional sukuk hub. In my opinion, this gradual approach is sensible, but success will depend on attracting major Gulf financial institutions and transforming pilot initiatives into products that appeal to ordinary consumers.

Uzbekistan is emerging as a significant potential growth market in the region. In March 2026, the country approved a new Islamic banking law that entered into force in June. Despite a population exceeding 37 million, Uzbekistan previously lacked a formal Islamic finance sector, even though demand for Sharia-compliant products has long been evident.

The new legislation permits the establishment of Islamic banks and Islamic microfinance institutions, with the first national services expected to launch in 2027. Plans for at least three commercial Islamic banks by 2030 suggest that the sector could expand rapidly if implementation matches expectations.

Elsewhere, Islamic finance remains closely tied to broader development agendas. During the 51st Annual Meetings of the Islamic Development Bank Group in Baku, officials confirmed that cooperation with Turkmenistan had reached $1.38 billion across 30 financing operations, many linked to transport, logistics, and connectivity projects. Tajikistan has also deepened its engagement with the Bank, with cumulative approvals exceeding $726 million and additional financing frameworks under preparation. In both cases, Islamic finance is increasingly being connected to long-term economic modernization rather than viewed solely as an alternative banking model.
The Gulf Factor and the Road Ahead
One reality is difficult to ignore: Gulf support has been among the most important drivers of Islamic finance development across Central Asia and Azerbaijan. Whether through private investors, sovereign institutions, or the Islamic Development Bank Group, Gulf participation has brought capital, expertise, and credibility to emerging markets.

However, external support alone cannot guarantee long-term success. The real challenge is transforming foreign capital and expertise into sustainable domestic growth. That means building public awareness, developing products that meet the needs of ordinary citizens, and creating business models capable of competing with conventional banking services.
Despite growing momentum, major challenges remain. Public awareness of Islamic financial products is still limited in many countries. Many consumers prefer Sharia-compliant services for religious reasons but remain unfamiliar with available products or uncertain about their practical advantages.

The shortage of liquidity-management instruments, particularly sukuk, presents another obstacle. Without deeper and more active sukuk markets, Islamic banks will continue to face challenges in managing liquidity and expanding operations. At the same time, shortages of specialized expertise, limited product diversity, and underdeveloped market infrastructure continue to constrain growth.

According to Fitch Ratings, Islamic banks are expected to account for less than 1.5% of total banking assets in Kazakhstan, Kyrgyzstan, and Tajikistan by the end of 2026. The sector remains relatively small despite recent progress.

Yet the long-term opportunity is difficult to overlook. According to World Bank data, significant portions of the population remain outside the formal banking system: approximately 45% in Tajikistan, 44% in Azerbaijan, 40% in Uzbekistan, 28% in Kyrgyzstan, and 13% in Kazakhstan. These figures point to a substantial untapped market for Islamic financial services.
Conclusion
In the end, momentum is clearly building and political support continues to grow across Central Asia and Azerbaijan. Gulf investors and the Islamic Development Bank Group have provided an important foundation, but the future of the industry will depend on whether countries can transform external support into sustainable local growth.

The central question remains whether this momentum can evolve into a mature and self-sustaining financial ecosystem that serves ordinary citizens, or whether the sector will continue to rely heavily on foreign expertise and capital. The answer will determine whether Central Asia and Azerbaijan are entering a genuine new era of Islamic finance or simply experiencing a temporary wave of enthusiasm.


*Abdulhamid Hamid Al-Kba/ Opinion Writer Specializing in Central Asian and Azerbaijani Affairs