Clare Nuttall in Almaty -

The Development Bank of Kazakhstan is in the final stages of preparing to issue the country's first sukuk, or Islamic bond. The quasi-sovereign issue by the state development bank is expected to set a benchmark for Kazakh sukuk, opening the way for corporate Islamic bonds to be placed in future.

The DBK, which is 100% state owned, is planning a Malaysian ringgit-denominated Islamic Medium Term Note Programme with a limit of MYR1.5bn ($500m). The first sukuk, which is structured to comply with Sharia law by not paying interest to investors but giving them a share of the revenues from certain assets that are placed in a special-purpose vehicle, will be issued in Malaysia, one of the world's centres for Islamic financing, with part of the issue to be placed on the Kazakhstan Stock Exchange (KASE). A spokesperson for the DBK told bne in June that the bank might look into issuing the sukuk within a month, subject to market conditions.

The bank has already obtained all the necessary authorisations to go ahead with the sukuk placement, according to a statement published on the KASE on June 12. The Malaysian rating agency, RAM Rating Services Berhad, has assigned an 'AA2' rating to the bonds, indicating the DBK's high level of reliability on financial liabilities payment. A roadshow for domestic investors took place in Kazakhstan's financial centre of Almaty on June 13, with the bank's management also planning to target investors in Kuala Lumpur.

Islamic centre

Malaysia is the world's largest Islamic banking and financial market, with total Islamic banking assets of MYR113.5bn ($30.9bn), according to PriceWaterhouseCoopers, and an Islamic money market channelling MYR30bn-40bn a month. By contrast, Islamic finance in Kazakhstan is in its infancy, but the market is already the most developed in the former Soviet Union thanks to a large extent to backing from the top levels of government; President Nursultan Nazarbayev is a strong supporter of Islamic finance.

The issue of a sovereign or quasi-sovereign sukuk has been seen as an important next step to develop the market, as it is expected to pave the way for corporate issues. "I believe the DBK's Islamic bond issue is a very positive step," says Prasad Abraham, chairman of Kazakhstan's first Islamic Bank, Al Hilal Bank Kazakhstan.

However, Abraham points out that a pure corporate issue on the scale of DBK's offering is unlikely, given that as DBK is government owned, the risk level is more acceptable for investors. "Within Kazakhstan, there is a group of very strong top-end companies, many with a degree of government ownership, that are being targeted by all major banks. At the other end of the scale, small and medium-sized companies are still struggling for money, as the banks are being more conservative," Abraham says.

The Kazakh government's interest in establishing an Islamic finance sector grew during the first wave of the 2008 crisis, when finance from traditional sources dried up. Although the majority of Kazakhstan's population is Muslim, many - though by no means all - have embraced western credit culture. However, Astana is looking to diversify its funding sources, and interest in Islamic finance remains high.

Kazakhstan's first Islamic bank, Al Hilal, obtained its license in 2010 and in March 2012 closed Kazakhstan's first fully Sharia-compliant investment, a $10m investment in KazPost. The bank has branches in Almaty, Astana and Shymkent, and this year plans to expand its geographic footprint as well as exploring options to enter the retail banking sector. In July 2010, the DBK signed an agreement with Almaty-based investment house Fattah Finance and Malaysia's AmanahRaya Financial Group to set up the country's second Islamic bank.