Zubair Mughal, CEO – AlHuda CIBE, UAE
Islamic microfinance is a Sharia-compliant financial tool designed to provide ethical and inclusive financial services to individuals and businesses, particularly those excluded from conventional banking systems. Rooted in the principles of Islamic finance—such as the prohibition of interest (riba), risk-sharing, and the promotion of social justice—Islamic microfinance has emerged as a powerful mechanism for poverty alleviation and economic empowerment. By offering interest-free loans, profit-sharing arrangements, and other ethical financial products, it enables low-income households and micro-entrepreneurs to access capital, start businesses, and improve their livelihoods. Globally, the Islamic finance industry has been growing steadily, with total assets exceeding 4 trillion serving millions of clients across Asia, Africa, and the Middle East. This growth is driven by increasing demand for ethical financial solutions and the recognition of microfinance as a key tool for achieving the United Nations Sustainable Development Goals (SDGs), particularly in reducing poverty and promoting inclusive economic growth.
Geographical representation of Central Asian Countries
Central Asia, a region with a significant Muslim population, has seen a gradual but promising development of Islamic microfinance. Countries like Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan, and Azerbaijan are increasingly embracing Sharia-compliant financial services to address poverty, support small businesses, and promote financial inclusion. The region’s Islamic microfinance sector, though still in its nascent stages, is gaining traction due to government support, regulatory reforms, and the involvement of multilateral organizations. As of 2024, the Islamic microfinance market in Central Asia is estimated to be worth approximately USD 200 million, with a growing client base of micro-entrepreneurs, farmers, and low-income households. While this represents a small fraction of the global Islamic finance market, the region’s potential is significant, given its largely unbanked population and increasing demand for ethical financial products. The overall Islamic finance industry in Central Asia is on a growth trajectory, with estimations that the total volume of the industry has exceeded USD 500 million by the end of 2024, excluding multilateral financing.
Growth of Islamic Finance
Islamic microfinance in Central Asia operates on the principles of Sharia compliance, offering products that avoid interest and promote risk-sharing. Some of the most common products include Murabaha (cost-plus financing), Musharakah (joint ventures), Qard al-Hasan (interest-free loans), and Ijara (leasing arrangements). These products are tailored to meet the needs of micro-entrepreneurs, farmers, and small businesses, enabling them to access capital without compromising their religious beliefs.
Several Islamic microfinance institutions are actively operating in Central Asia, offering Sharia-compliant financial services to underserved communities. Some of the notable institutions include ADCB Islamic Bank, Zaman Bank, Al Saqr finance, Al Safi Bank (Kazakhstan), Eco-Islam, Bai-Tushum Bank, M-Bulak, AK Nur Capital, AK Karzi, Bereke Finans and Kompanion Bank (Kyrgyzstan), and in Tajikistan, Microcredit Deposit Organization Humo and Iman. These institutions provide a range of products, from Murabaha to Qard al-Hasan, catering to the unique needs of their clients.
The use of technology in Islamic microfinance has increased significantly in Central Asia, particularly in Uzbekistan, Kyrgyzstan, Kazakhstan, and Tajikistan. Peer-to-peer (P2P) networks and other fintech solutions have played a crucial role in expanding access to Islamic financial services. In Uzbekistan and Tajikistan, the concept of Buy Now, Pay Later (BNPL) has been widely adopted, providing consumers with Sharia-compliant deferred payment options. A notable Tajikistani Islamic microfinance institution has successfully expanded into Uzbekistan and is now aiming to extend its operations beyond Central Asia.
Kyrgyzstan and Tajikistan currently have the highest number of Islamic microfinance institutions in the region. However, multilateral organizations have recently begun to support the Uzbek market, which is expected to develop rapidly and emerge as a leader in Islamic microfinance. The Islamic Development Bank (IsDB) has been instrumental in this development, having launched programs to promote Islamic microfinance in the Commonwealth of Independent States (CIS) over the past 15 years, leading to significant growth.
Multilateral organizations such as the Islamic Development Bank (IsDB), the Asian Development Bank (ADB), and the World Bank have played a pivotal role in promoting Islamic microfinance in Central Asia. These institutions have provided technical assistance, funding, and capacity-building programs to establish and strengthen Islamic microfinance institutions (MFIs) in the region. The IsDB’s total funding to CIS countries reached USD 9.1 billion by the end of 2023, with significant allocations to Uzbekistan, Kazakhstan, and other Central Asian nations. This funding supports various development projects and contributes to the expansion of Islamic finance. While the ADB has facilitated partnerships between local banks and international Islamic finance experts. The Islamic Corporation for the Development of the Private Sector (ICD) is also helping via Islamic financing to develop the private sector in the region.
Despite these advancements, the CIS Islamic microfinance market still has considerable gaps, particularly in wholesale Islamic microfinance. There is a need for Islamic banks to provide wholesale Islamic financing to microfinance institutions, enabling them to serve the market more effectively and promote financial inclusion. Furthermore, European investors—where interest rates are relatively low—could achieve good returns by investing in Islamic microfinance in the CIS market, fostering further growth in the sector.
Despite the positive trajectory, Islamic microfinance in Central Asia faces several key challenges that hinder its widespread adoption and growth. One of the primary challenges is limited funding, as many Islamic microfinance institutions struggle to secure adequate capital to expand their operations and reach a larger segment of the population. Additionally, there is a lack of awareness and education about Islamic microfinance among the public, which limits its adoption and potential impact. The region also suffers from IT system constraints, as the technological infrastructure required for Sharia-compliant financial services is still underdeveloped, making it difficult to scale digital Islamic microfinance solutions. Another critical issue is the shortage of accounting and audit providers with expertise in Islamic financial reporting and auditing, which affects the credibility and regulatory compliance of Islamic microfinance institutions. Furthermore, the sector faces limited training opportunities, as there are not enough specialized programs to develop local expertise in Islamic microfinance. Addressing these challenges is crucial for fostering a sustainable and thriving Islamic microfinance sector in Central Asia.
Challenges in Islamic Finance in Central Asia
In CIS several promising opportunities can drive the growth of Islamic microfinance in Central Asia. The rapid advancement of fintech-driven solutions is transforming the industry, enhancing efficiency, and expanding outreach, particularly through digital platforms and mobile banking. Additionally, Islamic microfinance has the potential to significantly enhance financial inclusion, bringing more unbanked individuals and small businesses into the formal financial system. The expansion of Islamic banking in the region further strengthens the demand for Islamic microfinance, as customers seek Sharia-compliant financial solutions at both individual and institutional levels. Moreover, support from multilateral organizations such as the Islamic Development Bank (IsDB) and other international institutions is playing a vital role in facilitating sectoral development by providing funding, technical assistance, and capacity-building programs. These opportunities, if effectively leveraged, can position Islamic microfinance as a key driver of economic development and poverty alleviation in Central Asia.
Additionally, micro-Takaful (Islamic insurance) and Islamic fintech solutions have been gaining momentum in the region, aggressively expanding to meet the needs of underserved populations. These developments are expected to further drive the growth of Islamic microfinance in Central Asia.
The development of Islamic microfinance in Central Asia represents a promising avenue for promoting financial inclusion, reducing poverty, and fostering sustainable economic growth. With the support of governments, multilateral organizations, and innovative financial products, the region is well-positioned to harness the potential of Islamic microfinance and create a more inclusive and ethical financial ecosystem. As the sector continues to grow, it will play an increasingly vital role in empowering underserved communities and driving economic development across Central Asia.
The Role of AlHuda CIBE
AlHuda Center of Islamic Banking and Economics (CIBE) has been actively involved in the development of Islamic microfinance in the CIS market for the past 18 years. With extensive experience in the region, AlHuda CIBE has worked at the government level and in collaboration with the IsDB to develop Islamic microfinance products. The organization has played a key role in supporting the growth of the sector, providing training, technical assistance, and policy advisory services.
(Muhammad Zubair Mughal is a seasoned expert in Islamic banking. He is currently serving as the Chief Executive Officer of the AlHuda Centre of Islamic Banking and Economics in the UAE, he can be contacted at [email protected] )
