By Asyl Osmonalieva/Bishkek, Kyrgyzstan

After watching the international financial system teeter on the brink of collapse in recent years, lawmakers in Kyrgyzstan have agreed to allow local banks to apply the principles of Islamic finances.

Supporters say the move will provide the country with a viable alternative to the Western banking model and help protect Kyrgyzstan during these uncertain economic times.

Opponents, however, claim approving practices from the Islamic world is a worrisome sign as it suggests this Central Asian state is losing sight of the secular principles on which it was founded.

Because charging interest is prohibited by religious law, the Islamic system is radically different from the financial model followed in the West. Instead of a lender assuming financial risk in return for interest on loans, banks and their clients form a partnership and share the profits.

“In this case, the bank is a partner that shares profits and losses with the client, so it will back promising projects because it has an interest in the success of the venture,” said Timur Jusupov, deputy chair of the board of EcoBank, which began providing financial services according to Islamic legal tenets under a pilot programme in 2006.

Nurbek Elebaev, who chairs the board of directors of Kyrgyzstan’s stock market, believes that EcoBank and others that begin applying Islamic principles offer the country a new mechanism for attracting funding, at a time when it is suffering from the global financial crisis.

“Countries where the Islamic banking model dominates have not been hit as hard by the crisis,” he said.

Some think that banks that follow Islamic principles will be a boon to the country’s economy.

“Interest-free credit based on Islamic principles will stimulate the growth of small and medium enterprises,” said Dinara Moldosheva, a member of parliament.

“Many people who want to set up their own business or develop an existing one find it impossible to pay the interest on a loan,” he said.

“I’m not saying the conventional banks are ineffective, but one has to admit they have strict rules. Islamic principles are less harsh and more flexible.”

Alexander Strelkin, the risk manager at EcoBank, noted that 20% of the bank’s current customers are non-Muslim.

Rustam Sarybaev, a spokesman for the Union of Banks of Kyrgyzstan, acknowledged that conventional financial activity in the country is at a standstill.

Banks “have no money (to lend) for the long term. Banks operating on Islamic principles can occupy this niche,” he said.

Even supporters of Islamic finance say, however, that it will never supplant conventional banking. Instead, they see it as an alternative way of doing business in the country.

Still, some worry about introducing religious principles into the secular world of economics.

Although the majority of the population in Kyrgyzstan is Muslim, the country has a long secular tradition, dating back to when it was part of the former Soviet Union.

Communist Party leader Ishak Masaliev led the opposition to the Islamic banking bill in parliament, saying he feared that “we will lose Kyrgyzstan’s secularism” as a result.

And the head of the human rights group Citizens Against Corruption, Tolekan Ismailova, said that allowing Islamic banking is a step in the wrong direction.

“Through this move we are showing that Kyrgyzstan’s development orientation is towards Muslim states,” she said. “One has to understand that Kyrgyzstan is not a Muslim country; there are more than 80 ethnic groups living here. If we give precedence to one religion, we violate the rights of others and provoke a conflict of interests.”

But banking officials think that most people will base their decisions on economics rather than ideology.

“People who need loans will be guided above all by a sober calculation about how good the loan terms are,” Sarybaev said. “They won’t let their decision be clouded by stereotypes.” — The Institute for War & Peace Reporting/MCT

l Asyl Osmonalieva is a reporter in Kyrgyzstan who writes for The Institute for War & Peace Reporting, nonprofit organisation that trains journalists in areas of conflict. Readers may write to the author at the Institute for War & Peace Reporting, 48 Grays Inn Road, London WC1X 8LT, UK; Website: www.iwpr.net..

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