Islamic Finance in Central Asia Expands on Reforms

Tashkent, Uzbekistan (UzDaily.com) — The Islamic financial sector in Central Asian countries is showing gradual signs of expansion amid regulatory reforms and growing investor interest from Gulf states, according to an analytical assessment by Fitch Ratings.

The agency links the sector’s growth prospects to increased government support and the development of regulatory frameworks across the region, while noting that the market remains fragmented and underdeveloped.

According to Fitch Ratings, key growth drivers include reforms implemented since early 2026, as well as expanding cooperation with members of the Gulf Cooperation Council and Islamic multilateral financial institutions. However, the agency stressed that further progress will require more equitable tax frameworks, stronger public trust, and improved financial literacy.

Fitch projects that Kazakhstan and Kyrgyzstan are likely to become the main centers of Islamic finance development in the coming years, while Azerbaijan and Uzbekistan are still in the process of building basic institutional infrastructure. The share of Islamic banking assets in Kyrgyzstan, Kazakhstan, and Tajikistan is expected to remain below 1.5% by the end of 2026, despite growth potential driven by high levels of financial exclusion.

World Bank data for 2024 shows that access to financial services in the region remains limited: financial exclusion stands at 45% in Tajikistan, 44% in Azerbaijan, 40% in Uzbekistan, 28% in Kyrgyzstan, and 13% in Kazakhstan. Against this backdrop, Islamic banking is viewed as one of the tools to expand financial inclusion.

Gulf countries and Islamic development institutions play a significant role in the sector’s growth. The Islamic Development Bank, headquartered in Saudi Arabia, has already allocated more than US$10 billion in financing to Central Asian countries as of April, with the largest shares directed to Uzbekistan, Kazakhstan, Turkmenistan, and Kyrgyzstan.

Countries in the region are taking steps to improve regulatory frameworks. In Kazakhstan, a new banking law was adopted in March 2026, expanding Islamic banking options, including permission for Islamic windows within conventional banks.

In Uzbekistan, similar legislative changes were adopted in March 2026, creating conditions for the development of Islamic banks and the introduction of related financial products under the Uzbekistan 2030 strategy, which envisages the rollout of Islamic financial instruments in several state-owned banks by 2030.

In Kyrgyzstan, Islamic finance development is included in national plans for 2025–2030, and in March 2026 requirements for implementing takaful insurance systems were approved.

In Azerbaijan, the central bank is considering the Islamic window model as a short-term development tool and continues to test Islamic financial products within a regulatory sandbox in 2026–2027 with support from the Islamic Development Bank.

Despite institutional progress, Fitch Ratings highlights persistent structural constraints, including a limited range of products, underdeveloped infrastructure, weak digital and branch networks, and a small number of active investors and market participants. Differences in religious and institutional acceptance of Islamic financial products across the region also remain a limiting factor.

The agency estimates that the total size of the Islamic finance market in Central Asia exceeded US$600 million at the end of 2025, excluding financing from international Islamic institutions.

Islamic banking accounts for the bulk of the market, while sukuk and takaful segments remain at an early stage of development, despite gradual expansion through initial retail issuances and new financial products in selected countries.