Justin Vela in Istanbul -

The Islamic Corporation for the Development of the Private Sector (ICD), a branch of the Islamic Development Bank, is working to push Islamic finance in the countries of the Commonwealth of Independent States (CIS). But because of lingering effects from the global economic crisis and a lack of existing institutions, it admits there's still a lot of work to do.

Jeddah-based ICD was established in 1999 with the mandate to grow the private sectors of the IDB's 56 member states. Previously, CIS countries were relatively unknown to Arab investors, so ICD has been working to change that, following the proverbial "build it and they will come" credo. "[Arab investors] didn't know much about the countries. Probably to a certain extent Kazakhstan was the only country they knew, because Kazakhstan was opened up in some regions. The other countries were too closed," Khaled Al Aboodi, CEO and general manager of ICD, tells bne in an interview.

ICD began its regional work in Azerbaijan. Because it was difficult at first to convince investors to put their money into the country, ICD decided to first establish companies there, working in conjunction with the Azeri government. "We actually do more financing than investment. But we are doing investment in the [CIS] region because we want to encourage investors in other member countries to come and invest," Al Aboodi says. "In the beginning it was difficult, but now we more or less understand the mentality and the way they do business."

In other CIS countries, ICD is focused on smaller projects and building infrastructure, as there are not yet many projects that meet the institution's requirements for financing in terms of size and level of private ownership. For example, ICD won't finance any company that is more than 49% owned by a government. Another issue ICD has had to deal with is the perception that since ICD is part of an Islamic bank, its work would be free. It quickly had to educate businesspeople that, just like any other bank, there would be a cost for the financing.

Among its projects in CIS countries, in the Russian state of Tatarstan, ICD is managing the Tatarstan International Investment Company, the first Islamic investment company in Russia and a joint venture between the Tatarstan government and the Islamic Development Bank. ICD is also creating investment companies in Turkmenistan and Uzbekistan. In the latter it has also provided $2m in financing to Uzbek Leasing International for small and medium-sized enterprises (SMEs). In Tajikistan and Kyrgyzstan, ICD is also providing financing to SMEs worth about $2m.

Though the legislative process can be tedious, Al Aboodi says CIS governments are generally supportive of the ICD's work. "There is a different level of willingness to open up. We just started in the region and we started to see that many projects are growing to be eligible [for financing]."

Even so, after spending substantial time travelling in the region, Al Aboodi says borders are too frequently closed due to regional unrest, hampering stability and investment. In order to increase stability, he urges more intra-regional trading. "If I am doing business in Uzbekistan, why cannot other Central Asian states be a market? The problem is the relationships between them, there is a lot to be desired there."

Demystifying Islamic finance

Al Aboodi acknowledges that, currently, the demand for Islamic finance in the CIS isn't significant. He puts this down to wariness, partly because Islamic financial methods aren't well understood, and partly because there were some investments in sukuk, Islamic bonds, related to real estate in Dubai that were badly hit during the crisis, though he has stressed in the past that Islamic financial instruments were affected far less than conventional financing tools.

At the same time, there is a rising level of interest due to the examples set by countries such as Malaysia, where Islamic finance has been very successful. This has encouraged ICD to organize "study and familiarization tours" of markets such as Malaysia, where officials can learn more about Islamic finance and decide how best to utilize it.

However, according to the English daily Arab News, the consensus reached at the inaugural roundtable on "Islamic Finance in Russia and the CIS: Market and Regulation" - held in February in Istanbul and sponsored by the ICD - was that Islamic finance in the region is at best a work in progress and the task ahead remains huge, not least because of the authorities in the region.

In an article on the roundtable, Arab News reports that: "The intellectual argument for and the demystification of Islamic finance has gained much ground in Russia and the CIS countries over the last two years, but the political decision makers and bureaucracy, especially the banking regulatory authorities, still need to be convinced about the role an alternative Islamic system of financial management can play, especially in the aftermath of the global financial crisis."