Practical Note: The Development of the Banking Sector within the Astana International Financial Centre (AIFC)

[Liz Seyi]

Since its establishment, the AIFC has generated significant interest by developing its financial services sector, particularly in banking. The financial ecosystem in the AIFC was designed to attract foreign investment, and various incentives have been introduced to encourage the growth of both traditional and Islamic banking businesses. However, despite these incentives, the development of the banking sector within the AIFC has not reached its full potential.

1. Incentives for bank establishment within the AIFC
A series of tax exemptions and regulatory waivers have been provided to make it easier for banks to operate within the AIFC. These measures include:
• Tax exemptions: Both traditional and Islamic banks in the AIFC are eligible for tax exemptions until 2066, making it an attractive location for setting up banking operations.
• Reduced capital requirements: New banks can be established with reduced initial capital requirements. For Islamic banks, the minimum capital is currently set at USD 6 million, with a gradual increase to USD 10 million by 2027.
• Branches of foreign banks: Foreign banks can establish branches within the AIFC without adhering to separate prudential norms, as long as their parent bank complies with the regulations in their home jurisdiction. This applies to banks from 53 approved jurisdictions, many of which include major international financial centres and jurisdictions with well-established banking regulation.

2. Challenges to full bank operations
Despite the promising incentives, only a handful of banks have obtained licenses from the AIFC. Several factors contribute to this slower-than-expected growth:
• Currency regulations: In 2021, the AIFC's regulator (AFSA) and the National Bank of Kazakhstan signed a Currency Regulations Order. While seen as a milestone by many, these regulations impose significant restrictions on the types of foreign exchange and currency transactions that banks in the AIFC can engage in. As a result, traditional banks can only conduct transactions in foreign currencies, and only with a limited set of clients (e.g., they are prohibited from working with resident individuals). Furthermore, if a traditional bank wants to conduct transactions in the national currency (tenge), they can only do so through correspondent accounts with second-tier banks in Kazakhstan.
• Operational restrictions for traditional banks: Traditional banks face limitations in client eligibility and currency restrictions. These constraints significantly limit their ability to operate freely within the AIFC, particularly in offering comprehensive banking services.
• Islamic banks' advantage: Islamic banks face fewer operational restrictions compared to traditional banks. They are allowed to work with a broader range of clients (both residents and non-residents, including individuals and legal entities) and can conduct transactions in both tenge and foreign currencies. While there are some limitations on non-Islamic financing services, the regulatory framework is generally more flexible for Islamic banks, which has made the AIFC a more attractive location for them.

3. The current landscape of the AIFC
As of now, Al Safi Bank stands out as the only fully operating bank in the AIFC, benefiting from the more favourable regulatory environment for Islamic banks. There has been some resistance from the National Bank of Kazakhstan (“NBK”), which effectively seeks to maintain control over the banking sector within the AIFC. This regulatory oversight limits the growth of traditional banking services within the AIFC, as seen through the currency control measures.

4. Conclusion and outlook
While the AIFC offers significant advantages for banking institutions—such as tax exemptions, a favourable regulatory environmental, and access to an international financial market—banks are still constrained by certain regulatory limitations. The situation is especially challenging for traditional banks, which face a restricted operational environment due to the currency regulations and the oversight of the NBK. For Islamic banks, the AIFC presents a more favourable regulatory landscape, allowing them to operate with greater flexibility.
In the future, it remains unclear whether the regulatory approach will change, but for now, it appears that the NBK is focused on maintaining control over the banking sector in Kazakhstan, which may continue to limit the development of the banking sector within the AIFC.
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