Islamic finance is gaining momentum across Central Asia as growing engagement from Gulf investors and Islamic multilateral institutions helps accelerate the development of Shariah-compliant banking and capital markets.

Governments across the region are rolling out regulatory reforms to support the expansion of Islamic finance, while entities from Gulf Cooperation Council countries, including the Saudi Arabia-headquartered Islamic Development Bank Group, are playing an increasingly important role in developing the sector, The Caspian Post reports via Arab News.

The growing focus on Islamic finance in Central Asia reflects broader efforts by regional governments to diversify funding sources, improve financial inclusion and strengthen economic ties with Gulf economies.

With large Muslim populations, relatively low banking penetration and rising investor interest in Shariah-compliant products, the region is increasingly being viewed as a long-term growth market for Islamic banking, sukuk and takaful services.

Funding from the IsDB Group to Central Asian countries exceeded $10 billion as of April, with Uzbekistan, Kazakhstan, and Turkmenistan as well as Kyrgyzstan receiving the largest shares.

“The development of Islamic finance in Central Asia remains at an early stage, but momentum is building, supported by increasing engagement from some GCC investors and institutions, as well as multilateral entities such as the Islamic Development Bank Group,” Global Head of Islamic Finance and Managing Director at Fitch Ratings, Bashar Al-Natoor, told Arab News.

The ratings agency said initiatives introduced since the start of 2026 in countries including Kazakhstan, Uzbekistan, Kyrgyzstan and Azerbaijan are likely to support the sector’s long-term growth potential, although Islamic finance remains underdeveloped across the region with fragmented progress and limited market penetration.

Al-Natoor said GCC involvement is important given the region’s depth of liquidity, technical expertise, and track record in developing Islamic finance ecosystems across various markets.

“In Central Asia, this support can help lay the foundations for industry growth, particularly in areas such as Islamic banking and sukuk issuance, regulatory frameworks, and institutional capacity building,” he added.

Fitch’s report further stated: “Closer links with GCC countries could foster industry growth, as seen with GCC investors’ support for the Islamic finance industry in the UK, Turkiye, Malaysia, and Kazakhstan.”

Kazakhstan and Kyrgyzstan are expected to lead regional expansion over the coming years, while Azerbaijan and Uzbekistan are laying the groundwork for future growth.

However, Fitch forecasts Islamic banks’ domestic market share in Kyrgyzstan, Kazakhstan and Tajikistan will remain below 1.5 percent of total banking sector assets by the end of 2026.

Separate research published in January by AlBaraka Forum for Islamic Economy also pointed to accelerating momentum in Central Asia’s Islamic finance sector, citing regulatory reforms, rising demand for Shariah-compliant products and increasing regional cooperation.

AlBaraka’s report said Kazakhstan, Kyrgyzstan and Uzbekistan are leading development efforts as governments seek to expand financial inclusion and attract Islamic investment flows.

Fitch said enabling regulations and large unbanked populations could support broader adoption of Islamic banking products.

According to World Bank data cited by Fitch, unbanked population rates stood at 45 percent in Tajikistan, 44 percent in Azerbaijan, and 40 percent in Uzbekistan, as well as 28 percent in Kyrgyzstan and 13 percent in Kazakhstan as of 2024.

Kazakhstan introduced a new banking law in March, allowing conventional lenders to open Islamic banking windows, broadening the scope of the sector beyond standalone Islamic banks. Fitch said the measure could improve access to Islamic financial products by leveraging established banking brands and networks while lowering operational costs.

Separate research published in January by AlBaraka Forum for Islamic Economy also pointed to accelerating momentum in Central Asia’s Islamic finance sector, citing regulatory reforms, rising demand for Shariah-compliant products and increasing regional cooperation.

AlBaraka’s report said Kazakhstan, Kyrgyzstan and Uzbekistan are leading development efforts as governments seek to expand financial inclusion and attract Islamic investment flows.

Fitch said enabling regulations and large unbanked populations could support broader adoption of Islamic banking products.

According to World Bank data cited by Fitch, unbanked population rates stood at 45 percent in Tajikistan, 44 percent in Azerbaijan, and 40 percent in Uzbekistan, as well as 28 percent in Kyrgyzstan and 13 percent in Kazakhstan as of 2024.

Kazakhstan introduced a new banking law in March, allowing conventional lenders to open Islamic banking windows, broadening the scope of the sector beyond standalone Islamic banks. Fitch said the measure could improve access to Islamic financial products by leveraging established banking brands and networks while lowering operational costs.

“However, the industry remains underdeveloped, with low market penetration, limited product diversity, and evolving legal and regulatory structures,” he said.

In Azerbaijan, the central bank is preparing to introduce Islamic banking through an Islamic window model before potentially allowing standalone Islamic banks at a later stage.

Two conventional banks began offering Islamic products in the first half of 2026 under a regulatory sandbox framework, with testing scheduled through 2027.

Despite the momentum, Fitch said the sector still faces significant structural challenges, including low public awareness, regulatory gaps, limited product diversity and underdeveloped branch and digital banking networks.

The agency also cited a lack of profitable business models and limited competitiveness of Islamic products beyond their religious appeal.

Al-Natoor said broader geopolitical developments could have some moderating effect on the pace of GCC outward investment in the near term, potentially creating short-term headwinds for capital flows into Central Asia.

“However, over the medium term, ties between the GCC and Central Asia in Islamic finance are expected to strengthen further,” he added.

“This will be supported by strong structural drivers, including large Muslim populations, relatively high levels of financial exclusion, and governments’ focus on diversifying funding sources and attracting foreign investment,” the Fitch official added.

He said sustained progress will depend on continued policy support, improved regulatory clarity and deeper investor participation.

Fitch estimates the total Islamic finance market in Central Asia exceeded $600 million at the end of 2025, excluding Islamic multilateral financing.

Islamic banking accounts for the majority of activity, while takaful remains largely absent and sukuk markets are still in the early stages of development.