AIFC: An Emerging Financial Services Hub

After fully operationalized in January 2018, Astana International Financial Centre (AIFC) would have the capacity to serve as a financial hub for Central Asia, the Caucasus, the Eurasian Economic Union (EAEU), the Middle East, West China, Mongolia and Europe. The officials in Kazakhstan are optimistic about the potential of this Cntre. It is considered to be a major channel for Kazakhstan’s ongoing privatisation programme. Further up to $40bn foreign investment flow is expected through its infrastructure. It would emerge as a major centre of capital investment, asset management, Islamic and green finance, as well as fintech and private banking.

President of Kazakhstan Nursultan Nazarbayev signed the decree on the establishment of the AIFC in May 2015. It is a visionary step for diversification of economy. Kazakhstan’s capital city, Astana, is already looking beyond Expo 2017, which it hosts from June to September next year, and laying down the foundations of the offshore financial centre that will open up office in the iconic venue once the exhibition is over. Last year, Astana’s revenues exceeded the level of 400 billion Tenge. In the year before 2015, this figure was less than almost 50 billion Tenge.2572017

With Effect from July 1, 2017, the registration process for the foreign companies will be launched. Although the full-fledged functioning of AIFC is planned for January 2018 but the international stock exchange would start earning on the AIFC site from September 1, 2017. In the meantime the major institutions such as an independent court based on English law, international investment arbitration, a stock exchange and an independent regulator would also start functioning at the centre.

Both local and foreign companies are showing great interest in the process of registration. There is no doubt that now the Kazakh investment companies would have to compete with foreign companies. The local companies would have to improve their business reputation and the quality of their staff. Only one principle will operate here: either you compete or leave the space for foreign companies.

Kazakhstan has learnt a lesson from its previous initiative of making Almaty as the location of choice for central Asia’s financial industry, but failed due to the financial crisis, and more recently by the end of the commodity super-cycle. The AFIC is based on several innovative and successful international projects like the financial centers of New York, London, Dubai and Singapore. Regulations are a critical element in financial services and their quality directly determines the success of fintechs.

In order to attract foreign investment, the AFIC is aimed at creating a conducive environment for investment in financial services, developing the securities market, ensuring its integration with international capital markets. In addition to market of Islamic financing, the financial center also intends to develop insurance and banking services in the country. The introduction of an independent jurisdiction based on the principle of English common law, and independent AIFC courts is a right step designed to reassure investors’ confidence in the legal system of the country. In addition to these independent legal foundations, the Sovereign wealth fund Samruk Kazyna plans to start initial public offering (IPO) proceedings for national air carrier Air Astana, uranium producer Kazatomprom, and Kazakh Telecom in 2018, managing director for strategy and portfolio investment Baljeet Kaur Grewal told fDi Magazine in August. The IPO process for other local heavyweights such as KMG will start in 2020.

Several incentives are being provided to the consumers and employees. The regulations regarding visas are being simplified. The visa regime is facilitated by the Constitutional Law not only for employees and participants of the AIFC, but also for members of their families. Other incentives include: tax preferences, close to those in Dubai, exemption from corporate income tax and individual income tax, property and land tax for a period of 50 years.

The major consumers of the services of the Kazakh financial center are partners and regulators of the countries of the Eurasian Economic Union and Central Asia, as well as China. Discussions on the creation of a new, high-tech exchange platform based on the principles of the best world practice were held with in London, Hong Kong and Shanghai. AIFC plans to enter the top 10 Asian financial centers by 2020, a quite ambitious target indeed.

Astana International Financial Centre has the potential to become a driver of growth of financial services on the part of Kazakhstan companies. About 18,000 jobs are planned to be created in the next decade along with participation of 3,000 Kazakh experts – financiers, lawyers and consultants. All of them will have to speak English, since this is the working language of the functioning of the entire center. It is planned that the centre should contribute to the economic growth of the republic at least 1% of non-oil GDP.

AIFC’s management is now focusing on meeting the prerequisites for full functioning of AIFC   in 2018. In this respect, Kazakh judges are being sent to the UK to study English common law, agreements with advisers, partnerships are being developed, and the first potential investors, mostly from China, the Gulf Co-operation Council region, the Islamic finance world and Russia, are sharing their early feedback.  Astana will be the pioneer in the development of Islamic financing in the post-Soviet space. It has an understanding with the leading institutes of Islamic financing in Malaysia, Middle Eastern and Persian Gulf countries that are ready to enter the new platform.

The establishment of AIFC is in line with the objectives of the Asian Infrastructure Investment Bank (AIIB) that was established by China, mainly to support developing countries for advancing their infrastructural needs. Some experts believe   that the Chinese rationale for AIIB is fundamentally based on the fact that the World Bank and ADB have limited outreach to fulfilling Asia’s infrastructural need. Further, there was an imperative to have institutions and centers for financing infrastructure projects under OBOR.  According to Asian Development Bank the main purpose of any economic corridor is to connect hubs or nodes of economic activity along a defined geography. Therefore, the development of the financial Centres and stock markets are critical in providing investment for the mega projects especially economic corridors such as CPEC. These initiatives will provide opportunities for Pakistani companies and businessmen to explore opportunities to undertake projects in collaboration with these financial institutions.

Article originally published in Pakistan Observer on June 25, 2017.

Disclaimer: Views expressed are of the writer and are not necessarily reflective of IPRI policy.

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