Kyrgyz Banks Adopt Innovative Islamic Finance Tool

The Kyrgyz National Bank has announced updates to its regulatory framework governing commercial banks and microfinance organizations operating under Islamic finance principles.

A key highlight of the revisions is the introduction of a new Islamic financial instrument called Wakala bil-Istithmar, The Caspian Post informs via Kyrgyz media.

This contract enables one party, known as the agent, to manage funds on behalf of another party, the principal, with the goal of generating profits. The agreement can be structured on either a fee-based or gratuitous basis, offering flexibility in financial dealings.

Under the new rules, both banks and microfinance institutions are permitted to act as either agent or principal. While the investment profits accrue to the principal, the agent’s remuneration may be determined by a fixed fee, a share of the investment returns, or another mutually agreed-upon metric.

Additionally, the updated regulations set clear standards for establishing profit-smoothing reserves, outline the conditions for income distribution, and establish procedures for compensating losses. All operations must fully comply with Sharia law and are subject to supervision by a dedicated Sharia Board to ensure adherence to Islamic financial principles.

The National Bank views these changes as a significant step toward developing the Islamic finance sector in Kyrgyzstan, aiming to enhance the diversity and flexibility of financial products while promoting greater transparency and trust in the market.