ALMATY: A $75 million Islamic bond issue by the Development Bank of Kazakhstan, the first sukuk issued in the former Soviet Union, is likely to spur more issues in Central Asia's largest economy, banking officials said on Thursday.

The 240 million five-year Malaysian ringgit ($75.5 million) issue on July 18, which generates an annual payment of 5.5 per cent, has set the benchmark for Islamic bond issuers in the former Soviet republic, the Development Bank of Kazakhstan said.

The issue is part of the bank's 1.5 billion ringgit Islamic note programme under the sharia principle of murabaha, approved this year by the Malaysian central bank and the Sharia Advisory Council of the Securities Commission of Malaysia.

“The next sukuk issue will depend on market conditions and the bank's borrowing requirements,” the state-owned Development Bank's press office said in a written response to questions.

“The number of issues will depend on the size (of each issue),” it said, adding that it could issue a further 1.26 billion ringgit under its existing programme.

Two decades after the collapse of the Soviet Union, majority Muslim Kazakhstan is making a bid to become a regional centre of Islamic finance, which is based on religious principles such as bans on interest and pure monetary speculation.

About 70 per cent of Kazakhstan's 16.7 million population is Muslim. Since the global financial crisis, investors are more receptive to alternative forms of banking and keen to tap pools of Islamic investment money in the Gulf and southeast Asia.

Malaysian investors took up 62 per cent of the Development Bank's debut issue. The bank said the highly developed Islamic finance market in Malaysia was the ideal model for Kazakh issuers.

In the first 11 months of 2011, Malaysia accounted for 71.2 per cent of total global sukuk issuance, it said.

“Not only is this sukuk issue the first in the history of Islamic finance in Kazakhstan. It is the first in the countries of the CIS (Commonwealth of Independent States),” the Kazakh bank said.

Halyk Finance (Kazakhstan), AmInvestmentBank and Kuwait Finance House acted as joint lead managers of the issue, with HSBC and RBS as coordinating joint lead managers.

'ICEBREAKER'

Yerlan Baidaulet, adviser to Kazakhstan's Ministry of Industry and New Technologies, said he was working on potential sukuk issues with other institutions in the country.

“We could have two or three deals. For sure, there will be one more sukuk from Kazakhstan (this year),” he said.

“The window has been opened. (The Development Bank) is playing the role of icebreaker.”

President Nursultan Nazarbayev, in power since Soviet times, has said he wants Kazakhstan's commercial capital, Almaty, to be a hub for Islamic banking in the former Soviet Union, which includes other majority Muslim states and Russian republics.

A sovereign sukuk issue mooted in 2010 did not materialise. Finance Minister Bolat Zhamishev told Reuters in June that Kazakhstan had no pressing need to borrow abroad. Its National Fund to collect windfall oil revenues contains $51.4 billion.

Nevertheless, the Development Bank said its issue would serve as a model for other quasi-sovereign companies and banks to tap Islamic finance markets.

“We are convinced that this deal will open the way for other issuers in the region looking to diversify their funding on Islamic markets,” Zhaslan Madiyev, deputy chairman of the bank's management board, said in a statement accompanying the issue.

Baidaulet, who is also executive director for the CIS and Eastern Europe at the Islamic Development Bank, a Saudi Arabia-based multilateral lender, said interest in sukuk reflected a desire among investors to work closely with the real economy.

“The way we are promoting Islamic finance in Kazakhstan is different,” he said.

“It's not just a religious matter. It's about the needs of the economy.”