Islamic Finance in Central Asia Poised for Growth Outlook

Tashkent, Uzbekistan (UzDaily.com) — Central Asia has significant potential to develop Islamic finance, as Muslims make up the overwhelming majority of the population across all five countries in the region and regulatory frameworks are rapidly improving. However, according to international rating agency Moody’s, the gap with global leaders such as the Gulf countries and Southeast Asia—where Islamic finance accounts for around 40% of total financial assets—will close only gradually.

The region includes Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. The Muslim population is described as young, economically active and increasingly urbanised, providing a strong demographic base for long-term growth. At the same time, limited public awareness, a narrow range of products and underdeveloped Islamic financial infrastructure continue to constrain development.

Kazakhstan: regional leader with ambitions

Kazakhstan holds a leading position in Islamic banking in Central Asia. As of the end of 2025, three Islamic banks are operating in the country: ADCB Islamic Bank JSC (formerly Al Hilal Bank Kazakhstan), Zaman-Bank JSC, and Al Safi Bank, the first Islamic bank licensed within the Astana International Financial Centre (AIFC). Combined assets of the three banks amount to around $600 million, or about 0.4% of total banking sector assets.

A turning point came in December 2025 with the adoption of a new banking law allowing conventional banks to offer Sharia-compliant products through Islamic windows. This channel is expected to become the main driver of Islamic finance expansion, particularly in retail banking and among small and medium-sized enterprises. Requirements for separate accounts and Sharia supervisory boards are designed to ensure compliance with religious standards.

The AIFC plays a key role in building the Islamic finance ecosystem. Its internationally recognised legal framework has attracted Islamic banks, asset managers, takaful operators and Sharia advisers. To encourage new entrants, a temporary reduced capital requirement has been introduced: $8 million from May 2026, $9 million from November 2026 and $10 million from May 2027.

The AIFC estimates that the long-term potential of Kazakhstan’s Islamic finance market could exceed 6.8 trillion tenge (about $15.2 billion). The most in-demand products remain murabaha and ijara, which account for more than 90% of demand.

Uzbekistan: starting from scratch

In March 2026, Uzbekistan adopted a law on Islamic banking, which is set to take effect in June 2026. The country, with a population of 37.7 million—88% of whom are Muslim—previously had no formal Islamic banking sector. Banks were explicitly prohibited from offering Sharia-compliant products, while a small number of non-bank providers operated on a very limited scale. According to a UNDP survey cited in the report, 68% of the population and 60% of businesses avoid conventional banking for religious reasons.

The new law allows the establishment of Islamic banks, Islamic windows in conventional banks, and Islamic microfinance organisations. It also introduces legal definitions for key contracts including murabaha, mudaraba, musharaka, wakala and salam.

Under the updated Uzbekistan–2030 strategy, the first nationwide Islamic financial services are expected to appear in 2027 through one commercial bank, expanding to at least three banks by 2029–2030. Moody’s considers the reforms credit-positive for the country’s banking system.

Kyrgyzstan: most advanced market in the region

Kyrgyzstan is the most developed Islamic finance market in Central Asia, supported by an established regulatory framework and a state development strategy for 2022–2027.

The region’s first Islamic bank, EcoIslamicBank, was established in 2011 in Kyrgyzstan. As of March 2026, the country has 24 commercial banks, six of which offer Islamic banking services: one fully fledged Islamic bank and five conventional banks with Islamic windows—Bakai Bank, Aiyl Bank, Eldik Bank, MBANK and Optima Bank.

Growth has been rapid in recent years. In 2024, Islamic finance volume rose by 58.4% to 10.3 billion som ($118 million), and in 2025 growth accelerated to 125% to 23.1 billion som ($264 million). The structure of financing has also shifted, with the share of mortgage financing rising from 17% to 40.1% by 2025.

Tajikistan: small but expanding market

Tajikistan has one licensed Islamic bank, OJSC Tawhidbank, converted from a conventional bank in 2019. The second major player is Alif Bank, a fast-growing fintech company operating mainly on Islamic principles. By the end of 2025, combined assets of the two institutions accounted for about 6% of the country’s total banking system assets. Islamic finance has grown at an average annual rate of 38.5% since 2021. However, financial intermediation remains very low, with private sector credit at only around 15% of GDP.

Sukuk and takaful: capital markets taking first steps

Kazakhstan is already the undisputed regional leader in Islamic bonds. In 2025, it issued its first retail sukuk (Asia Mineral Resource, $10 million) and launched a major auto-financing programme, Tayyab Finance, worth 20 billion tenge.

Tajikistan’s Alif Bank issued its first tranche of sukuk al-mudaraba worth $5 million as part of a $50 million programme to fund expansion into Uzbekistan. Kyrgyzstan issued its first local currency-denominated sukuk in 2023. In Uzbekistan and Tajikistan, regulatory frameworks for domestic sukuk issuance are still being developed.

In takaful, Kyrgyzstan made the most progress in 2025, integrating takaful into its new insurance law and licensing its first specialised operator, Bakai Insurance CJSC. In Tajikistan, LLC Takafful has been operating since 2018 as the first takaful provider in the region.

Key barriers to growth

Despite positive regulatory momentum, Moody’s identifies three structural barriers that will continue to slow the development of Islamic finance in the region in the foreseeable future.

The first is low public awareness. Many potential customers who prefer Sharia-compliant products do not know how to access them or do not fully understand Islamic finance principles, leading them to continue using conventional banking services even where Islamic alternatives exist.

The second is a shortage of liquidity management instruments. The limited supply of Sharia-compliant securities, particularly sukuk, constrains sector growth by limiting banks’ ability to manage liquidity and meet prudential requirements. While Kazakhstan is a regional leader in sukuk issuance, Islamic capital markets in other countries remain at an early stage.

The third is the early stage of institutional ecosystem development. Legal and regulatory frameworks, professional expertise and financial infrastructure are still being formed across the region, slowing product innovation and market entry.

Outlook

According to Moody’s, growth will be uneven. Kazakhstan and Uzbekistan are expected to lead Islamic finance expansion over the next three to five years, with both markets potentially accessing international sukuk markets in the future.

However, development will remain gradual due to persistent challenges: low financial literacy in Islamic products, limited liquidity instruments and the early stage of institutional infrastructure across the region.