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Islamic securities — a uniquely flexible instrument

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Islamic securities were first included into Kyrgyz legislation about 15 years ago, but their implementation at that time kind of fell by the wayside. In 2016, with the backing of Islamic donors, modifications to the Civil Code and the Securities Market Law were enacted, integrating more comprehensive provisions into the legal system. Despite these changes, no entity showed interest, or perhaps capability, in issuing Islamic securities in Kyrgyzstan. The regulatory measures proved to be too intricate and unfitting to the Kyrgyz legal landscape. Finally, in May this year, the State Financial Supervision Authority registered the first issuance of Islamic certificates. While it is a private issue for qualified investors without a public offering, it is crucial that the inaugural issuance has occurred. Swiss firm John Tiner & Partners, experts in securities issuance and asset securitization in over 50 jurisdictions, served as the legal consultant to the issue. This article has been compiled with the help of their experts.

Understanding Islamic Securities

Most are familiar with shares – securities that signify ownership of a part of the company’s capital. They entitle the holder to a portion of the company’s profits via dividends and allow for voting on significant company matters at shareholder meetings. Most are familiar with bonds, too – those are securities that represent a debt obligation to repay the principal amount and pay interest. However, Islamic securities do not neatly fall into either of these categories, although they bear similarities to both.

Similar to shares, Islamic securities give the holder a right to a fraction of the profits from a specific business, but they do not provide voting rights or a formal share in the capital. Like bonds, these securities have a face value and an expiry date, yet the return on them can not be guaranteed due to Shariah restrictions.

Islamic securities are unique in that they grant their holders income rights from a specific business or asset. What sets them apart from conventional securities is that the business financed through them must adhere to Shariah rules.
In the issuance context, Islamic securities are known as «sukuk» (from the Arabic «sakk», roughly meaning a «legal instrument»). They are also referred to as «Islamic certificates,» a term also used within the Kyrgyz regulatory framework.

Shariah Restrictions

The main Shariah constraints relating to investments include the following:

• It is prohibited to guarantee a rate of return to investors
• The investor and investment recipient must proportionately share the project’s risks
• Speculation and gambling-like activities are forbidden
• Financing businesses and assets that are religiously prohibited (haram), such as alcohol production, interest-bearing loans, gambling etc., is not allowed.

Any Islamic certificates must comply with these limitations. The most challenging of them is the prohibition to quote a rate of return; such a restriction does not resonate well in the context of global financial markets. By doctrine, the investor must be entitled only to a portion of the profits, without a fixed rate of return.

To ensure securities are issued in adherence to these norms, a Shariah Council must be set up for each issue of Islamic certificates. According to the legislation of the Kyrgyz Republic, the council must consist of at least three members with relevant education and experience in Islamic finance.

The Emergence of Islamic Securities

Historians can trace the origins of Islamic contracts (sakk) back to the 7th century, when the first agreement based on Islamic principles was allegedly enacted in the Great Mosque of Damascus. However, Islamic securities as we understand them today emerged relatively recently, around 1990. Their conception can be linked to earlier events. Following the devastating war against Israel in 1973, the Arab world experienced a surge in the accumulation of financial capital due to rising oil prices (the Arabs effectively shutting down the «oil tap») and at the same time, a heightened sense of Arab and Islamic identity. The oil sheikhs sought to invest their wealth in accordance with Islamic principles, leading Western consultants to devise an appropriate issuance standard over the subsequent decade.

Islamic Securities Issuance Scheme

Western consultants» involvement in establishing issuance standards for Islamic securities in Arab nations heavily influenced the issuance scheme. Much like Eurobonds, which are not issued by the fundraising entity itself but by a designated shell company (SPV) that issues securities and transfers the raised funds to the final beneficiary, Islamic certificates are also issued through specially created firms. In Kyrgyzstan, these entities are known as ISFCs — Islamic Special Financial Companies. The individual who ultimately receives the funding from the securities issuance is known as the «originator,» mirroring the English term.

To issue Islamic securities in Kyrgyzstan, a company seeking to raise investment for a specific project (the originator) must establish an Islamic Special Financial Company under Kyrgyz jurisdiction. This company (ISFC) then becomes the issuer of the Islamic certificates. The fact that any company from any country can act as an originator under the law greatly aids Kyrgyzstan’s development as an international Islamic financial center. This means that projects worldwide can now secure financing through Kyrgyz Islamic securities issuance.

State Interest and Economic Significance

In November of the previous year, the President of the Kyrgyz Republic issued Decree No. 376 titled «On measures for the further development of the stock market and exchange activities.» The decree instructs all relevant organizations to expand the range of financial instruments. Further, this year, the Concept for the Development of the Islamic Economic Platform in the Kyrgyz Republic for 2023–2027 was approved by a decree from the Cabinet of Ministers (March 3, 2023, No. 87-r). This document dedicates a separate section to stimulating the issuance of Islamic securities in Kyrgyzstan.

The significance of becoming an Islamic securities issuance center is not universally understood. Demand for Sharia-compliant financial products is substantial, as Kyrgyzstan maintains economic ties with Islamic countries such as those in the Gulf, as well as Pakistan, Malaysia, Indonesia, and more. However, global issuance centers for these securities are limited, as internal regulations in these countries can create complexities in the issuance process. The Kyrgyz Republic, advocating for an open economy and active in attracting international business, could prove a favorable jurisdiction for international issuances. Kyrgyz-based issues can indeed be use to raise finance by originators from any country while using the Kyrgyz jurisdiction for the issuing SPV. This is a classic export of financial services, providing an excellent source of additional budget revenue and the creation of skilled jobs in the financial sector.

What Can Be Financed Through Islamic Securities Issuance

Islamic securities can finance:

- Rental businesses (such as the leasing of real estate or other assets)
— The development of any other businesses (including trading; for example, Islamic securities can raise funds for replenishing the working capital of trading companies)
— Long-term investment projects (such as the construction of a factory, real estate development, or field development)
— Raising funds for portfolio management in investment markets (essentially similar to an investment fund, but in the form of a simple security rather than a complex fund structure).

Types of Islamic Securities in Kyrgyz Legislation

Five types of Islamic securities can be issued in the Kyrgyz Republic:

• Islamic rental certificates (for financing rental businesses)
• Islamic project finance certificates (where investors finance the creation of an asset and share in the profits from its operation)
• Islamic equity certificates (where investors contribute money to manage a business for a share of the profits)
• Islamic investment agency certificates (effectively an investment fund in the form of a security)
• Islamic partnership certificates (where investors finance the business alongside its organizer and share the profit).

Islamic investment agency certificates warrant a special mention. Their issuance circumvents the need to create a joint-stock or mutual investment fund, as the managed portfolio is effectively «packaged» into a security. For those familiar with European securities, these Kyrgyz Islamic certificates closely resemble Swiss «actively managed certificates» with one crucial difference: bonds and other fixed income instruments cannot be included in the investment portfolio due to the Shariah prohibition.

A Tool of Unparalleled Flexibility

Islamic certificates are an exceptionally flexible tool. They can finance almost any business or investment project. They can be used to pool client funds for portfolio management, forming a joint investment portfolio akin to an investment fund. They can also be employed to simply structure control over a specific asset. Consequently, academic legal literature often refers to Islamic certificates as «Islamic securitization» – practically any asset or business can be «packaged» into securities, to sell its potential profit flow to investors.

Unlike shares (where the investor invariably has to receive a stake in the company) and bonds (where the company raising funds is obliged to return them with interest), the terms of an Islamic security can be fine-tuned according to the unique agreement between parties concerning how the project’s risks and profits will be distributed.

The traditional use of Islamic securities is capital raising to finance a business or asset, with risk-sharing between the investor and the project operator. Shariah rules in this context only limit the payment of interest and investments in assets and businesses that are religiously prohibited in Islam (like the production of alcohol, for instance).

Size of the Global Islamic Securities Industry

Islamic certificates are not a niche product in global financial markets but represent a massive industry. The total value of outstanding Islamic securities currently exceeds $400 billion. The cumulative value of Islamic securities ever issued surpasses $2 trillion.

The principal countries where these securities are distributed include Malaysia, Indonesia, the Gulf countries, Pakistan, Turkey, and certain African countries. The issuance centers are these same countries, as well as London, Singapore, Hong Kong, and the Cayman Islands for international issuances.


While the Shariah principle of not earning money without risk (which includes guaranteed interest) has a solid foundation for structuring life in a traditional community (by preventing usury), it is often perceived as inconventeint in today’s financial markets. Guaranteed interest in global capital markets no longer poses the ethical issue at the individual level that Shariah principles aimed to combat in the 7th century AD. Furthermore, it is challenging to envision the functioning of any developed financial system without guaranteed returns on capital.

First-time researchers of Islamic securities issuance often pose a logical question: «You say that interest cannot be guaranteed, but why do almost all sukuk issuances carry some form of interest? Isn’t that forbidden?» Incidentally, the same question applies to Islamic bank deposits: while interest cannot be promised, the advertising for such deposits widely indicates interest.

Indeed, the practices of the modern financial world have found several doctrinal «loopholes» to mitigate the effect of strict Sharia prohibitions on the financial products and instruments. According to certain interpretations of Sharia norms (which remain a matter of debate among Islamic scholars), it is possible, firstly, to indicate indicative (expected) interest – a kind of anticipated return. This is then adhered to during payout (with the guarantee being the brand of the bank or corporate issuer). Secondly, some interpretations of Islamic standards suggest that if the person raising finance can’t guarantee interest, why can’t someone else guarantee it? This has led to the appearance of sukuk issuances, where a third party acts as a guarantor of a certain minimum return on invested capital – typically an entity affiliated with the originator (the person raising funds). According to strict interpretations of Sharia, this is unacceptable, but Islamic theology is a dynamic field, without a single absolute center of authority (except for the Holy Book), allowing room for differing viewpoints on this issue.

Issues with Kyrgyz Law

Credit is due to the consultants who in 2015 devised the provisions for the issuance of Islamic securities in the Kyrgyz Republic. However, as soon as practitioners commenced the actual first issuance, numerous deficiencies and shortcomings came to light. We will not bore the reader with a list of these, particularly since the group that managed the first issuance is now preparing an extensive package of amendments to normative acts for approval – there will be dozens of them.
The second unresolved aspect of Islamic issuances in Kyrgyzstan is the tax-related one. Banks in Kyrgyzstan have a powerful lobbying resource; consequently, in the Tax Code, all aspects of Islamic financial operations of banks are well regulated. So well regulated, in fact, that banking lobbyists have essentially «hijacked» the very definition of Islamic finance – in the Tax Code, it refers to the operations of banks (plus leasing companies). Not a word is said about the activities of ISFCs or professional participants in the securities market with Islamic certificates. This situation needs to change, and promptly. Otherwise, fundamental questions remain unanswered – for instance, whether the allocated assets of an Islamic special financial company are accounted off balance sheet (as per the Law «On the Securities Market») or not. According to global practice, the issuing company (specially created «shell» for the issuance) must be 100% tax transparent for the investment and income flows passing through it, but this is yet to be codified in law.

A Bright Future 

The issuance of Islamic securities in Kyrgyzstan does indeed hold great potential. This applies to both financing projects within the country (in areas such as mining, construction, energy, nationally important projects, boosting the working capital of banks, etc.), and for developing an international financial center based in Kyrgyzstan — an international center of Islamic finance. Islamic securities offer businesses seeking financing considerable flexibility that traditional securities do not possess. The Sharia principles with which both the securities issuance and underlying assets must comply do impose certain restrictions on the use of the funds raised, but these restrictions are not critical in most cases. As a result, the introduction of this new instrument into Kyrgyz issuance practices opens up grand opportunities for the country, investors, and professional operators in the investment market.

Here are some useful resources on issuing Islamic securities in Kyrgyzstan:

1. Website of the stock market regulator — Financial Market Regulation and Supervision Service under the Ministry of Economy and Commerce of the Kyrgyz Republic (Gosfinnadzor): https://fsa.gov.kg/#/home
2. The underwriter and representative of the holders of the first issue of Islamic securities is the Kyrgyz investment company Interstan Securities: https://interstan.finance
3. Thematic resource on Islamic securities: https://interstan-islamic-securities.com
4. General resource on instruments and institutions of the stock market of Kyrgyzstan: https://kyrgyzstan-finance.com
5. International legal advisor for the issue, drafter of the documentation — John Tiner & Partners (subsidiary in Kyrgyzstan — John Tiner and Partners Eurasia): https://tiner.ch
6. The Sharia Council is organized on the basis of CJSC «Stock Exchange of Kyrgyzstan — BTS»: https://bts.kg



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