## 1kazea2024007-print-pdf

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### Executive summary — purpose, structure, scale
- Purpose: Review links between the Astana International Financial Center (AIFC) and the Kazakhstan financial system and implications for financial stability; does not assess the AIFC jurisdiction’s legal or regulatory framework.
- AIFC design:
  - Launched in 2018 as a distinct and separate jurisdiction with its own legal structure, governance arrangements and regulatory framework based on the common law framework applied in England and Wales and using English as the working language.
  - Dedicated Court, International Arbitration Center (IAC), and regulatory authority (Astana Financial Services Authority (AFSA)).
- Initial core pillars and business lines:
  - Core: capital markets; asset management; private banking; Islamic finance; green finance; fintech.
  - Additional: bank lending in foreign currency; specialist insurance (reinsurance, catastrophe, cyber).
- Regulatory scope and participation (mid-2023):
  - Regulations cover some 35 types of financial and market activities, and requirements for professional services (legal, accounting, audit).
  - About 2000 registrants in the AIFC, of which some 85 percent are non-regulated firms.
  - Some 60–70 financial firms are authorized and prudentially supervised by AFSA.
  - Financial assets in the Center were some 0.6 percent of GDP at end-Q1 2023.
  - Trading and liquidity on KASE far outstrips that on the AIX.

### Interconnections, constraints, and emerging risks
- Multiple interconnections exist despite separate jurisdictional status; segregation applies in some areas and not in others:
  - Clear segregation example: AIFC-licensed intermediaries are prohibited from providing local currency banking and offering traditional deposit accounts to Kazakhstan residents.
  - Areas with little restriction: capital markets, Islamic banking.
- Examples of close linkages:
  - AIX operating alongside KASE.
  - Crypto-assets pilot linking AFSA-licensed crypto-exchanges with selected domestic Kazakhstan banks supervised by ARDFM and regulated by the NBK for payment processing.
- Strategic direction and potential tightening of interconnections:
  - The “Concept for the Development of the Financial Sector until 2030” (signed 2022) contemplates expansion of services offered by AIFC participants to Kazakhstan residents, which could increase systemic importance and financial stability risks.
- Risks from co-existence of separate jurisdictions:
  - Fragmentation in information.
  - Lack of clarity on regulatory responsibilities and boundaries, leading to gaps or overlaps and parallel frameworks.
  - Misalignment of mandates and objectives, potentially spurring regulatory competition and lower standards.
  - Inconsistencies in regulations and supervisory approaches encouraging arbitrage.

### Participation, size, and activity — detailed statistics (preserve source figures)
- Participation and composition (at-end May 2023):
  - Total registrants: 2000 (registrations reached 2000 in mid-2023).
  - Non-financial firms: 85 percent of AIFC participants.
  - Firms undertaking financial and professional activities requiring AFSA: around 280.
  - Firms registered to undertake financial activities: close to 90.
  - AIFC Fintech Lab registered participants: some 40 firms.
- Geographic composition (at-end May 2023):
  - Reported representation from some 75 countries; top nationalities by number of firms:
    - Kazakhstan 1150
    - China 190
    - Russia 104
    - United Kingdom 53
    - United States 44
    - Singapore 30
    - United Arab Emirates 29
    - Other Nationalities 331
- Licensed financial firms (end-May 2023):
  - Total licensed financial firms: 74
    - Banks: 7 (o/w Kazakh 4; Foreign 3)
    - Investment firms: 47 (o/w Kazakh 33; Foreign 14)
    - Insurance: 4 (o/w Kazakh 3; Foreign 1)
    - Other financial activities: 17 (o/w Kazakh 8; Foreign 9)
  - Of the 74 licensed firms, 47 (or just over 60 percent) are from Kazakhstan, and 27 are foreign firms.
- Financial assets in the Center (end-period, US $ million):
  - 2020: Banks 399; Investment Firms 9; Insurance Firms 17; Total 425
  - 2021: Banks 1021; Investment Firms 33; Insurance Firms 19; Total 1072
  - 2022: Banks 774; Investment Firms 80; Insurance Firms 29; Total 884
  - 2023 Q1: Banks 1168; Investment Firms 137; Insurance Firms 46; Total 1351
- Aggregate metrics:
  - Financial assets in the Center totaled 0.6 percent of GDP at the end of March 2023.
  - Assets of the Kazakhstan financial system represented slightly more than 60 percent of GDP as at end 2022.
- Employment and sector scale (selected figures):
  - Investment firms employment: 442 (estimate) 2020; 646 2021; 1048 2022; 1062 (Q1 2023).
  - Banking: 65 (estimate) 2020; 117 2021; 95 2022; 97 (Q1 2023).
  - Insurance: 14 (estimate) 2020; 12 2021; 25 2022; 25 (Q1 2023).
  - Ancillary Service Providers: 831 2020; 1140 2021; 1205 2022; 1223 (end May 2023).

### Market infrastructure and product development — AIX, fintech, green finance
- AIX listing and market metrics (end-May 2023 and selected history):
  - Listed issues: May 2023 133 (2018 14; 2019 47; 2020 83; 2021 134; 2022 129).
  - Issuers: May 2023 89 (2018 9; 2019 31; 2020 56; 2021 87; 2022 85).
  - Debt capital raised $mn: 2019 813; 2020 148; 2021 708; 2022 557; May 2023 811.
  - Equity capital raised $mn: 2018 64; 2019 152; 2020 105; 2022 35.
  - Trading volume $ mn: 2018 9; 2019 49; 2020 59; 2021 311; 2022 173; May 2023 111.
  - No. registered accounts in AIX CSD end period: >59K 2018; >62K 2019; >103K 2020; >160K 2021; >500K 2022; >800K May 2023.
  - Retail initiatives: Tabys mobile application; total active investors on Tabys 17000 at end-2022; trading volume in 2022 amounted to $3.5 million.
  - AIX participation in dual listing: KazMunayGaz IPO raised $327 million total; $35 million (11 percent) was raised on AIX.
- FinTech and innovation:
  - FinTech Lab: just under 40 firms licensed in the sandbox at any one time.
  - Graduates from the Lab have obtained full AFSA licenses, including money services and regulated crowdfunding platforms (a first for Kazakhstan).
  - Crypto asset pilot: 5 AFSA-licensed crypto exchanges partnered with 8 domestically-regulated Kazakhstan commercial banks for fiat settlement rails; pilot to be completed by the end of 2023 as AIFC approves the procedure for interaction between AIFC crypto exchanges and Kazakh banks in coordination with NBK and ARDFM.
- Green finance (AIFC Green Financial Center):
  - Kazakh market for green and sustainable instruments almost doubled to just over $400 million in 2022.
  - GFC supported verification of some 60 percent of the total Kazakhstan market for these instruments.

### Legal, governance, AFSA mandate and regulatory coverage
- Governance:
  - AIFC Management Council chaired by the President of Kazakhstan; Deputy Chairmen: the Prime Minister and the Adviser to the President on economic development and governance.
  - Council members include Ministers of Finance, Foreign Affairs, National Economy; Governor of NBK; Chairperson of ARDFM; two external members.
  - AIFC Governor appointed by the President; Governor is a member of the Management Council.
- AIFC Bodies:
  - AIFC Authority; AIFC Court; AIFC International Arbitration Center (IAC); AFSA (integrated financial regulator and registrar).
  - Supporting organizations: Astana International Exchange (AIX); Green Financial Center (GFC); AIFC Tech Hub; Bureau for Continuing Professional Development (BCPD); AIFC Academy of Law.
- AFSA objectives (nine stated objectives preserved verbatim):
  1. Regulate, control and supervise financial activities in the AIFC by participants with a view to the maintenance of the safety and soundness of the financial system within the AIFC.
  2. Ensure that financial markets in the AIFC are fair, efficient, transparent and orderly.
  3. Create fair, transparent and non-discriminatory conditions for AIFC participants, aimed at maintaining fair competition in the financial services market in the AIFC.
  4. Foster and maintain confidence in the AIFC’s financial system and regulatory regime.
  5. Foster and maintain the financial stability of the AIFC’s financial services industry and capital markets, including the reduction of systemic risks.
  6. Prevent, detect and restrain actions that may cause damage to the AIFC’s reputation or to the financial activities carried out in the AIFC by taking appropriate measures, including imposing sanctions.
  7. Protect the interest of investors and users of financial services.
  8. Implement a regulatory regime in the AIFC that complies with international standards in the sphere of regulation of financial services.
  9. Foster development of financial technologies in the AIFC.
- Regulatory coverage (end-2022):
  - 29 Regulated Financial Activities in capital markets, asset management, banking and insurance, Islamic financing, and financial technology.
  - 6 Market Activities: exchange; clearing house; digital asset trading facility; loan crowdfunding; investment crowdfunding; private financing platform.
  - 5 Ancillary Services: legal, audit, accounting, consulting, and credit rating.
- AFSA governance and operations:
  - AFSA Regulations developed by AFSA, subject to public consultations, reviewed by AFSA Board, and recommended to the AIFC Governor for approval; Regulations enter into force upon signing by the AIFC Governor.
  - AFSA Board appointed by AIFC Management Council; Executive Body comprises CEO and 3 senior staff appointed by the Board.
  - AFSA acts as registrar for the AIFC; the registrar function is a separate unit distinct from licensing and regulation.

### Currency arrangements and permitted services to Kazakhstan residents (exact currencies and modalities)
- Currency Regulations (agreed 2021 by AFSA, NBK, ARDFM) — key elements:
  - Banks in the AIFC can only offer services in foreign currency.
  - Services provided by AIFC participants to Kazakhstan residents must conform to agreed schedules set out in AIFC rules.
  - AIFC participants may deliver all regulated and non-regulated services to non-residents and to other AIFC participants, provided currency transactions passing through AIFC banks are only in foreign currency (such transactions may be passed through Kazakhstan commercial banks—second-tier banks (STB)—in any currency).
- Constraints on services to Kazakhstan residents:
  - AIFC banks cannot open deposits to residents in any currency, except to AIFC participants that are more than 50 percent owned by non-residents (with some exceptions for Islamic banks).
  - AIFC banks cannot undertake transactions on behalf of residents relating to the import or export of goods and services, or exchange transactions using the national currency.
  - AIFC insurance sector is not allowed under the Currency Regulations to offer traditional motor, property and life insurance (Islamic insurance is permitted).
- Permitted services to Kazakhstan residents (as of May 2023) — currency indications preserved exactly as in source:
  - Banking and Payment services
    - Islamic banking and financing — Any
    - Loans to legal entities in Kazakhstan — Foreign currency
    - Opening and maintaining current bank accounts for clients (for lending and investment banking services) — Foreign currency
    - Receiving and making payments and/or money transfers using current bank accounts (for permitted services) — Foreign currency
  - Insurance (Direct voluntary insurance, reinsurance, reinsurance broking, additional types of insurance (title, Islamic etc.), specific risks insurance (climate, cyber, catastrophe, terrorism etc.) — Any
  - Investment services (investment banking, dealing, brokerage, custody, investment management, trust services) — Any
  - Related services — Any (Arranging custody; Investment advice; Arranging investment deals; Advice on credit facility; Providing investment fund establishment and administration; Acting as a trustee; Managing a restricted profit-sharing account based on an Islamic financial contract.)
  - Professional services — Any (Legal; Accounting; Audit.)
  - Other activities and services (Consulting; Credit rating; Non-regulated activities — National currency)
- Operational detail:
  - Services rendered by AIFC participants in domestic currency must be provided using the bank accounts of the participants in Kazakhstan STBs; services provided in foreign currency may be provided either through their accounts with AIFC banks or with STBs.
  - Payments must be made through Kazakhstan STB only.

### Governance, coordination, and current cooperation measures
- Positive cooperation measures in place:
  - Chairperson of ARDFM and NBK Governor participate in the AIFC Management Council.
  - 2020 Agreement on the Exchange of Information among ARDFM, NBK and AFSA exists to facilitate supervision, financial stability support, and AML/CFT efforts.
  - An agreement defines services that can be provided to Kazakhstan residents from the AIFC, providing clear separation in some areas.
  - Cross-jurisdictional working groups on supervision and the crypto asset pilot.
  - The 2030 concept paper notes need for synchronization in regulatory standards and consistency of regulation to integrate the AIFC into the common financial market.
- Gaps identified in cooperation:
  - Information sharing may be constrained by Agreement drafting; unsolicited provision is permitted but Agreement does not encourage it or foster more open sharing for systemic risk identification.
  - No standing body regularly brings domestic agencies and AFSA together to discuss emerging risks and spillovers.

### High-level principles for jurisdictionally-separated international financial centers (JSIFC)
- i. Promote financial stability as a primary goal across all regulatory agencies (domestic and JSIFC).
- ii. Readily share data and financial information among regulatory agencies while preserving strict commercial confidentiality.
- iii. Apply high standards of financial regulation and supervision in line with international standards across both jurisdictions; alignment should extend to recovery and resolution frameworks.
- iv. Ensure clarity of regulatory responsibilities, boundaries, and transparent rules for institutions and market users.
- v. Avoid duplication of regulatory and supervisory frameworks wherever feasible; ideally one agency per activity.
- vi. Where the same activities are provided under two authorities, work together to agree a common (ideally harmonized) approach; share proposals for comment in advance.
- vii. Hold regular discussions of risks and spillovers supported by a coordination framework; start at working level with option to integrate into an existing financial stability council or committee.
- viii. Provide scope for JSIFC authorities to participate in domestic financial stability arrangements as needed (periodic invitation, request, or permanent status depending on assessed risks).

### Main policy recommendations and implementation steps (priorities preserved)
- Reinforce regulatory arrangements to lower risks of spillover, arbitrage, and gaps from co-existence of separate regulatory frameworks.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Immediate.
- Develop a Financial Stability Protocol to codify objectives, responsibilities and working procedures among NBK, ARDFM, and AFSA.
  - Responsible agencies: NBK, ARDFM, AFSA.
  - Priority: Immediate.
- Review and enhance data sharing arrangements to facilitate information sharing supporting financial stability analysis, regulation, resolution, supervision, and enforcement.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Short-term.
- Strengthen risk identification by establishing a cross-agency working group that meets regularly to monitor interconnections and identify systemic risks and policy responses.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Immediate.
- Review regulatory responsibilities to minimize duplication by undertaking a comprehensive review of permissible financial activities in Kazakhstan and develop options to minimize duplicated frameworks; where feasible, assign single-agency responsibility.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Short-term.
- Develop and apply consistent regulation and supervision:
  - Reaffirm commitment to uphold international standards across all regulatory agencies with effective supervision and enforcement.
  - Strengthen procedures to develop and apply consistent (ideally harmonized) regulations in domestic and AIFC systems where duplication cannot be avoided.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Short-term.
- Affirm the primacy of financial stability in regulatory objectives:
  - Adjust AFSA objectives to highlight the primacy of supporting financial stability in Kazakhstan (as recommended in the BCP assessment for ARDFM).
  - Responsible bodies: AIFC Management Council, AFSA.
  - Priority: Short-term.
- Codify Financial Stability Council (FSC) participation arrangements to ensure the AIFC participates as needed and consider an annual FSC discussion on interlinkages between the AIFC and the domestic financial system and associated risks.
  - Responsible body: Financial Stability Council.
  - Priority: Immediate.
- Implementation mechanism proposed:
  - Develop a Financial Stability Protocol prepared by a high-level working group of staff of ARDFM, NBK, and AFSA, tasked by the FSC and the AIFC Governor to prepare, sign off and publish the Protocol and manage workstreams.
  - Optionally progress incrementally via workstreams addressing gaps against individual principles; a high-level group would provide leadership and momentum.

### Conclusion — risk outlook and rationale for policy action
- Current scale: financial activities in the AIFC are relatively small (financial assets in the Center 0.6 percent of GDP at end-March 2023).
- Outlook: planned expansion and greater interactions with the Kazakhstan financial system under the 2030 Concept will increase interlinkages and associated risks.
- Policy rationale: action is needed to preserve financial stability; protect consumers and investors; ensure financial market integrity; and mitigate risks from regulatory gaps, arbitrage and information fragmentation.
- Implementing the recommendations above is expected to mitigate additional risks generated by the co-existence of the domestic regulated system and the legally distinct AIFC jurisdiction.

*Source: 1kazea2024007-print-pdf — excerpts from the AIFC chapter of the IMF country report.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Overview and Purpose
- The Astana International Financial Center (AIFC) was launched in 2018 with the objective of establishing a leading international center for financial services in Astana, attracting foreign investment, and supporting the growth and development of Kazakhstan and the region.
- The AIFC was established as a distinct and separate jurisdiction operating under its own legal structure, governance arrangements and regulatory framework, based on the common law framework applied in England and Wales and using English as the working language.
- The AIFC has established its own dedicated Court, Arbitration Center, and regulatory authority (the Astana Financial Services Authority (AFSA)).
- This note reviews links between the AIFC and the Kazakhstan financial system and the implications for financial stability; it does not assess the AIFC jurisdiction’s legal or regulatory framework.

### Infrastructure, Business Lines, and Scale
- Initial core pillars include: capital markets; asset management; private banking; Islamic finance; green finance; and fintech.
- Additional business lines include: bank lending in foreign currency and specialist insurance (reinsurance, catastrophe, cyber).
- Regulations cover some 35 types of financial and market activities, and requirements for professional services (legal, accounting, audit).
- Specialist centres established for fintech, green finance and Islamic finance; active use of the Court and AIFC International Arbitration Center (IAC).
- By mid-2023:
  - About 2000 registrants in the AIFC, of which some 85 percent are non-regulated firms.
  - Some 60–70 financial firms are authorized and prudentially supervised by AFSA.
- Financial activity remains small:
  - At end-Q1 2023, financial assets in the Center were some 0.6 percent of GDP.
  - Trading and liquidity on KASE far outstrips that on the AIX.
- The AIFC established the Astana International Exchange (AIX), which operates alongside and in parallel to the Kazakhstan Stock Exchange (KASE).

### Interconnections and Emerging Risks
- Multiple interconnections exist between the AIFC and the domestic Kazakhstan financial system despite the AIFC’s separate jurisdictional status.
- Clear segregation applies in some areas (e.g., AIFC-licensed intermediaries are prohibited from providing local currency banking and offering traditional deposit accounts to Kazakhstan residents), but in other areas (capital markets, Islamic banking) there is little restriction.
- Examples of close linkage:
  - AIX operating alongside KASE.
  - Crypto-assets pilot bringing together AFSA-licensed crypto-exchanges and selected domestic Kazakhstan banks supervised by ARDFM and regulated by the NBK for payment processing.
- The strategic “Concept for the Development of the Financial Sector until 2030” (signed by the President in 2022) includes plans to consider expansion of services offered by AIFC participants to Kazakhstan residents, which could further tighten interconnections.
- Co-existence of separate domestic and AIFC jurisdictions creates risks of:
  - Fragmentation in information.
  - Lack of clarity on regulatory responsibilities and boundaries, leading to gaps or overlaps and parallel frameworks.
  - Misalignment of mandates and objectives, potentially spurring regulatory competition and lower standards.
  - Inconsistencies in regulations and supervisory approaches encouraging arbitrage.
- Given the AIFC’s strategy, service provision is expected to increase and interlinkages with the Kazakhstan financial system to grow, raising systemic importance and associated financial stability risks.

### Current Cooperation Measures
- Positive steps already taken:
  - The Chairperson of the domestic regulatory authority (ARDFM) and the central bank Governor participate in the AIFC Management Council.
  - An MoU on information sharing is in place.
  - An agreement defines services that can be provided to Kazakhstan residents from the AIFC, providing clear separation in some areas.
  - Cross-jurisdictional working groups exist on topics such as supervision and the crypto asset pilot.
  - The 2030 concept paper notes the need for synchronization in regulatory standards and consistency of regulation to integrate the AIFC into the common financial market.

### Main Policy Recommendations (summarized from Table 1)
- Reinforce regulatory arrangements to lower risks of spillover, arbitrage, and gaps from co-existence of separate regulatory frameworks for the domestic system and the AIFC.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Immediate.
- Develop a Financial Stability Protocol to codify objectives, responsibilities and working procedures among NBK, ARDFM, and AFSA.
  - Responsible agencies: NBK, ARDFM, AFSA.
  - Priority: Immediate.
- Review and enhance data sharing arrangements to facilitate information sharing supporting financial stability analysis, regulation, resolution, supervision, and enforcement.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Short-term.
- Strengthen risk identification by establishing a cross-agency working group that meets regularly to monitor interconnections and identify systemic risks and policy responses.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Immediate.
- Review regulatory responsibilities to minimize duplication by undertaking a comprehensive review of permissible financial activities in Kazakhstan and develop options to minimize duplicated frameworks; where feasible, assign single-agency responsibility.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Short-term.
- Develop and apply consistent regulation and supervision:
  - Reaffirm commitment to uphold international standards across all regulatory agencies with effective supervision and enforcement.
  - Strengthen procedures to develop and apply consistent (ideally harmonized) regulations in domestic and AIFC systems where duplication cannot be avoided.
  - Responsible agencies: ARDFM, NBK, AFSA.
  - Priority: Short-term.
- Affirm the primacy of financial stability in regulatory objectives:
  - Adjust AFSA objectives to highlight the primacy of supporting financial stability in Kazakhstan (as recommended in the BCP assessment for ARDFM).
  - Responsible bodies: AIFC Management Council, AFSA.
  - Priority: Short-term.
- Codify Financial Stability Council (FSC) participation arrangements to ensure the AIFC participates as needed and consider an annual FSC discussion on interlinkages between the AIFC and the domestic financial system and associated risks.
  - Responsible body: Financial Stability Council.
  - Priority: Immediate.

*Source: 1kazea2024007-print-pdf - EXECUTIVE SUMMARY*

### 7.      Drawing on the model adopted earlier in the United Arab Emirates (UAE)

### 7.      Drawing on the model adopted earlier in the United Arab Emirates (UAE)

### Background and objectives of the AIFC
- The concept was to create an entirely new financial center, separated jurisdictionally from the domestic financial system, offering a legal and regulatory environment familiar to foreign investors and international financiers, "based on principles and arrangements that are used extensively in global finance."
- A liberal tax regime was announced to apply in the AIFC to provide an additional incentive to locate business in the new hub.
- The statutory objectives of the AIFC are enshrined in a Constitutional Statute; Article 2 highlights that “the purpose of the AIFC is to establish a leading international center for financial services.”
- The objectives, as specified in the Statute, are:
  - Attracting investment into the economy of the Republic of Kazakhstan by creating an attractive environment for investment in the financial services sphere.
  - Developing a securities market in the Republic of Kazakhstan and integrating it with international capital markets.
  - Developing insurance markets, banking services, Islamic finance, financial technologies, digital assets, electronic commerce and innovative projects in the Republic of Kazakhstan.
  - Developing financial and professional services based on international best practice.
  - Achieving international recognition as a financial center.
- The AIFC commenced operations in 2018.

### Mission and vision
- Vision: To become a driver and the main hub for investment and financial innovation in the economy of Kazakhstan for its further growth.
- Mission: To contribute to the sustainable economic development of Kazakhstan by providing a unique infrastructure for investments and doing business, a reliable jurisdiction, an independent court and arbitration, as well as supporting innovation and the development of financial products and services.

### Legal, physical and jurisdictional arrangements
- The AIFC is structured as a separate jurisdiction operating in a distinct physical location in Astana.
- Participants must have a physical presence within the enclave specified by the boundaries of the AIFC.
- Within the jurisdiction, AIFC laws and regulations apply to all commercial arrangements, and are upheld by a dedicated Court and judiciary.
- The Center occupies "1632 hectares of land centered on the site of the 2017 Expo exhibition."
- The Republic of Kazakhstan retains jurisdiction over criminal and administrative proceedings. Kazakhstan law in relation to Anti Money Laundering (AML) and Countering the Financing of Terrorism (CFT) applies to the AIFC (AIFC AML Rules also apply).

### Governance and leadership
- The AIFC jurisdiction is headed by a Management Council, chaired by the President of Kazakhstan; the Council is the supreme governing body of the AIFC and sets strategy and is responsible for “fostering favorable conditions to establish the development of the AIFC as a leading international financial center.”
- Two Deputy Chairmen support the Chair: the Prime Minister; and the Adviser to the President of Kazakhstan on economic development and governance.
- Members of the Council include the Ministers of Finance, Foreign Affairs, and National Economy; the Governor of the National Bank of Kazakhstan (NBK); the Chairperson of the Agency for Regulation and Development of the Financial Market (ARDFM); and two external members.
- Under the Constitutional Statute, the Management Council is authorized to adopt AIFC Acts, determine the structure of the AIFC Bodies, the composition of the AIFC Court, and the basis for the establishment of the International Arbitration Centre, appoint the management of AFSA, and approve annual reports on the activities of the AIFC.
- Leadership of the AIFC is provided by the AIFC Governor, appointed by the President; the Governor is a member of the Management Council and undertakes special administrative and managerial functions and is conferred with certain regulatory powers for coordinating AIFC Bodies.

### AIFC Bodies, organizational structure and supporting organizations
- Four AIFC Bodies established by the Constitutional Statute supply management, legal and regulatory infrastructure:
  - An Authority tasked with promotion, strategic direction and management of the Center (the AIFC Authority).
  - A commercial court (the AIFC Court).
  - A separate arbitration center (the AIFC International Arbitration Center (IAC)).
  - An integrated financial regulator and registrar (AFSA).
- The Center is supported by several organizations established by the AIFC (not formal Bodies in the Statute), including:
  - Astana International Exchange (AIX): established to develop an extensive and liquid capital market in Kazakhstan and Central Asia.
  - Green Financial Center (GFC): established to attract investments into the sustainable economy of Kazakhstan and the Central Asian region.
  - AIFC Tech Hub: to use the latest financial technologies and develop a fintech ecosystem.
  - Bureau for Continuing Professional Development (BCPD): promotes development of human capital.
  - AIFC Academy of Law: provides legal education programs on the AIFC Law and international commercial law.

### AFSA: mandate, vision, mission, governance and objectives
- AFSA is the integrated regulatory authority for the AIFC, responsible for the regulation and supervision of financial services and related activities, promoting “the application of international standard and international best practice.”
- AFSA Vision: To be a globally respected regulator of financial services in Eurasia delivering a legal and regulatory framework that demands high standards of behavior, inspires innovation, and creates a safe environment, which is trusted by business and investors.
- AFSA Mission: To establish an environment that delivers fair and transparent financial and capital markets, in which individuals and institutions act with integrity.
- AFSA Goal: To facilitate business by maintaining the safety and robustness of the AIFC financial system, ensuring that financial markets In the AIFC are fair, efficient, and transparent.
- AFSA has nine objectives:
  1. Regulate, control and supervise financial activities in the AIFC by participants with a view to the maintenance of the safety and soundness of the financial system within the AIFC.
  2. Ensure that financial markets in the AIFC are fair, efficient, transparent and orderly.
  3. Create fair, transparent and non-discriminatory conditions for AIFC participants, aimed at maintaining fair competition in the financial services market in the AIFC.
  4. Foster and maintain confidence in the AIFC’s financial system and regulatory regime.
  5. Foster and maintain the financial stability of the AIFC’s financial services industry and capital markets, including the reduction of systemic risks.
  6. Prevent, detect and restrain actions that may cause damage to the AIFC’s reputation or to the financial activities carried out in the AIFC by taking appropriate measures, including imposing sanctions.
  7. Protect the interest of investors and users of financial services.
  8. Implement a regulatory regime in the AIFC that complies with international standards in the sphere of regulation of financial services.
  9. Foster development of financial technologies in the AIFC.
- AFSA has powers to develop and adopt AIFC Acts which provide the regulatory framework governing the provision of financial and related services in the Center.
- AFSA is governed by a Board of Directors, appointed by the AIFC Management Council (the Chair of the AFSA Board) and the AIFC Governor. Senior management (the CEO and 3 senior staff appointed by the Board of Directors) form the Executive Body of AFSA.
- AFSA performs the role of registrar for the AIFC, responsible for registration, recognition and licensing of AIFC Participants; the registrar function is a separate unit, distinct from licensing and regulation to minimize potential conflict of interest.

### Regulatory coverage and activities
- As at end-2022, the AFSA regulatory framework covered:
  - 29 Regulated Financial Activities in the fields of capital markets, asset management, banking and insurance, Islamic financing, and financial technology.
  - 6 Market Activities: operating respectively an: exchange; clearing house; digital asset trading facility; loan crowdfunding; investment crowdfunding; and private financing platform.
  - 5 Ancillary Services: legal, audit, accounting, consulting, and credit rating.
- The AFSA Regulations are developed by AFSA, subject to public consultations, reviewed by the AFSA Board of Directors, and recommended to the AIFC Governor for approval and signing. The Regulations enter into force upon signing by the AIFC Governor. The AIFC Rules are developed by AFSA, subject to public consultations and are approved by the AFSA Board of Directors; the Rules enter into force after approval by the Board.

### Principal business lines and sectors
- Initial priority sectors outlined in 2015 included capital markets, Islamic finance, private banking, and asset management; financial innovation and technology, and green finance were also highlighted.
- The AIFC was established with 6 core pillars as set out in the AIFC Annual Report 2019 and subsequently expanded; twelve key business areas are identified:
  - Capital markets
  - Asset management
  - Private banking
  - Islamic finance
  - Financial Technology
  - Green finance
  - Brokerage
  - Fund management
  - Banking
  - Insurance, reinsurance
  - Ancillary services
  - Holding companies and corporate offices

*Source: Chapter section "7. Drawing on the model adopted earlier in the United Arab Emirates (UAE)" from 1kazea2024007-print-pdf.*

### 19.      A crucial consideration conditioning the early development of the Center was reaching

### 19.      A crucial consideration conditioning the early development of the Center was reaching agreement with the domestic financial authorities on the range of services that could be provided to Kazakhstan residents, and on the currency arrangements governing business in the AIFC.

### Currency arrangements and regulatory constraints
- The Currency Regulations agreed by AFSA, NBK and ARDFM in 2021 set out the governing arrangements.
- Key elements of the agreement:
  - Banks in the AIFC can only offer services in foreign currency.
  - Services that can be provided by AIFC participants to Kazakhstan residents must conform to agreed schedules set out in AIFC rules.
  - AIFC participants are allowed to deliver all regulated and non-regulated services to non-residents and to other AIFC participants, provided that currency transactions passing through AIFC banks are only in foreign currency (such transactions may be passed through Kazakhstan commercial banks—known as second-tier banks (STB)—in any currency).
- Constraints on services to Kazakhstan residents:
  - AIFC banks cannot open deposits to residents in any currency, except to AIFC participants that are more than 50 percent owned by non-residents (with some exceptions for Islamic banks).
  - AIFC banks cannot undertake transactions on behalf of residents relating to the import or export of goods and services, or exchange transactions using the national currency.
  - Some limitations apply to services by AIFC participants to Kazakhstan residents in sectors such as insurance; the AIFC insurance sector focuses on specialist services and is not allowed under the Currency Regulations to offer more traditional motor, property and life insurance (Islamic insurance is permitted).
- Ongoing policy work:
  - Discussions are continuing between AFSA, NBK and ARDFM on potential amendments to the Regulations that might expand the list of services that may be provided to Kazakhstan residents.

### Permitted services to Kazakhstan residents (as of May 2023) — summary of Table 3
- Financial services — Currency indicated exactly as in the source:
  - Banking and Payment services
    - Islamic banking and financing — Any
    - Loans to legal entities in Kazakhstan — Foreign currency
    - Opening and maintaining current bank accounts for clients (for lending and investment banking services) — Foreign currency
    - Receiving and making payments and/or money transfers using current bank accounts (for permitted services) — Foreign currency
  - Insurance (Direct voluntary insurance, reinsurance, reinsurance broking, additional types of insurance (title, Islamic etc.), specific risks insurance (climate, cyber, catastrophe, terrorism etc.) — Any
  - Investment services (investment banking, dealing, brokerage, custody, investment management, trust services) — Any
- Related services — Any
  - Arranging custody; Investment advice; Arranging investment deals; Advice on credit facility; Providing investment fund establishment and administration; Acting as a trustee; Managing a restricted profit-sharing account based on an Islamic financial contract.
- Professional services — Any
  - Legal; Accounting; Audit.
- Other activities and services
  - Consulting; Credit rating; Non-regulated activities — National currency
- Operational detail from the Regulations:
  - For all services, those rendered by AIFC participants in domestic currency must be provided using the bank accounts of the participants in Kazakhstan STBs; while services provided in foreign currency may be provided either through their accounts with AIFC banks or with STBs.
  - The payments must be made through Kazakhstan STB only.

### Participation in the AIFC and size of the Center
- Overall participation:
  - The AIFC has attracted some 2000 participants since the launch in 2018 (registrations reached 2000 in mid-2023).
  - Non-financial firms account for 85 percent of AIFC participants; these firms are mainly engaged in IT services, cryptocurrency mining, data processing and hosting activities, agricultural, manufacturing, non-profit activities, activities of holding companies and other non-financial activities.
- Financial and professional firms:
  - Around 280 firms undertake financial and professional activities that require AFSA—just over half of these are providing ancillary services, while close to 90 firms are registered to undertake financial activities.
  - Some 40 firms are registered participants in the AIFC Fintech Lab.
- Geographic composition (at-end May 2023):
  - Majority of firms registering in the Center are from Kazakhstan, although foreign registrants provide over 40 percent of the total.
  - Reported representation from some 75 countries; top nationalities by number of firms:
    - Kazakhstan 1150
    - China 190
    - Russia 104
    - United Kingdom 53
    - United States 44
    - Singapore 30
    - United Arab Emirates 29
    - Other Nationalities 331
- Licensed financial firms (end-May 2023):
  - Total licensed financial firms: 74
    - Banks: 7 (o/w Kazakh 4; Foreign 3)
    - Investment firms: 47 (o/w Kazakh 33; Foreign 14)
    - Insurance: 4 (o/w Kazakh 3; Foreign 1)
    - Other financial activities: 17 (o/w Kazakh 8; Foreign 9)
  - Of the 74 licensed firms, 47 (or just over 60 percent) are from Kazakhstan, and 27 are foreign firms.

### Size of financial assets in the AIFC
- Financial assets in the Center (end-period, US $ million, from Table 7):
  - 2020: Banks 399; Investment Firms 9; Insurance Firms 17; Total 425
  - 2021: Banks 1021; Investment Firms 33; Insurance Firms 19; Total 1072
  - 2022: Banks 774; Investment Firms 80; Insurance Firms 29; Total 884
  - 2023 Q1: Banks 1168; Investment Firms 137; Insurance Firms 46; Total 1351
- Aggregate metrics:
  - Financial assets in the Center totaled 0.6 percent of GDP at the end of March 2023.
  - Assets of the Kazakhstan financial system represented slightly more than 60 percent of GDP as at end 2022.
- Sector developments:
  - The largest share of assets is held by the AIFC banking sector.
  - Financial assets of investment firms have quadrupled since the end of 2021.
  - Assets of the AIFC insurance sector have doubled since the end of 2021.

### Key developments in principal business areas of the AIFC
- Employment and sector scale (Table 8 highlights):
  - Investment firms: 442 (estimate) 2020; 646 2021; 1048 2022; 1062 (Q1 2023) — together these firms employ over 1000 staff.
  - Banking: 65 (estimate) 2020; 117 2021; 95 2022; 97 (Q1 2023).
  - Insurance: 14 (estimate) 2020; 12 2021; 25 2022; 25 (Q1 2023).
  - Ancillary Service Providers: 831 2020; 1140 2021; 1205 2022; 1223 (end May 2023).
  - AIFC Authority, AFSA, AIFC Court, International Arbitration Center staff counts provided in the source.
  - AFSA does not collect information on employment by non-regulated entities.
- AIX (Astana International Exchange) developments:
  - At end-May 2023 the exchange listed 133 issues of securities from 89 issuers, including 20 Exchange Traded Notes (ETNs).
  - Some 85 percent of issuers on AIX are firms from Kazakhstan.
  - Debt capital forms the bulk of new issuance and secondary market trading.
  - AIX participated with KASE in the large 2022 IPO of KazMunayGaz (dual listing); $35 million (11 percent) of the $327 million total IPO was raised on AIX.
  - AIX trading membership and activity (from Table 9, selected indicators):
    - No. of listings: 2018 14; 2019 47; 2020 83; 2021 134; 2022 129; May 2023 133
    - No. of Issuers: 2018 9; 2019 31; 2020 56; 2021 87; 2022 85; May 2023 89
    - Debt capital raised $mn: 2019 813; 2020 148; 2021 708; 2022 557; May 2023 811
    - Equity capital raised $mn: 2018 64; 2019 152; 2020 105; 2022 35
    - Trading volume $ mn: 2018 9; 2019 49; 2020 59; 2021 311; 2022 173; May 2023 111
    - No. registered accounts in AIX CSD end period: >59K 2018; >62K 2019; >103K 2020; >160K 2021; >500K 2022; >800K May 2023
  - Retail market initiatives:
    - AIX launched a mobile application (Tabys) enabling citizens to invest via ETNs and participate in IPOs.
    - Registered accounts in the AIX Central Securities Depository rose from 160 thousand at end-2021 to some 800 thousand by end-May 2023.
    - The total number of active investors on Tabys was 17000 at end-2022; trading volume in 2022 amounted to $3.5 million.
- Banking and insurance activity:
  - As of end-May 2023, AFSA has authorized seven banks (including branches and Islamic banks) and a handful of specialist firms offering credit, payment and leasing services.
  - In line with Currency Regulations, banking sector activities focus mainly on loans for corporates and trade financing (via the commercial banks of Kazakhstan).
  - Loans form some 60 percent of the total assets of just under $1.2 billion (source: AFSA).
  - Insurance sector remains small: financial assets of the 4 AIFC insurance companies at end-March 2023 were around 1 percent of the assets held by the Kazakhstan domestic insurance sector; sector focus on reinsurance, captive insurance and specialist insurance (climate, catastrophe, cyber).
- Islamic finance priorities and targets:
  - The AIFC has published guidance and guidelines on Islamic banking, insurance, financial products, and Sukuk.
  - A Central Shari'ah Advisory Board was established.
  - An Islamic Finance Master Plan for Kazakhstan for 2020-2025 was prepared with the Islamic Development Bank (IsDB), recommending that Islamic finance should form 3–5   percent of total financial assets in Kazakhstan by 2025.
  - As at end March 2023, AFSA has authorized three Islamic financing institutions (two banks and one finance company).
  - AIX cross-lists Sukuk issued by IsDB and the Qatar International Islamic Bank and offers ETNs that are Shari’ah compliant.

*Source: Excerpt from IMF country report chapter on the AIFC (content unit supplied).*

### 32.      Promoting financial innovation and the development of new financial services is

### 32.      Promoting financial innovation and the development of new financial services is

### AIFC Tech Hub and FinTech Lab: operations and outcomes
- The AIFC Tech Hub oversees multiple workstreams to promote innovation and the use of Fintech.
- The FinTech Lab provides a regulatory sandbox for approved firms to test new products and services in a tailored ‘live’ environment; firms are subject to regulatory oversight but do not have to meet full regulatory requirements in the trial phase.
- Just under 40 firms are licensed by AFSA to operate in the sandbox at any one time—services covered have included: custody; digital asset trading; crowdfunding; money and credit services; operating an exchange and a multiple trading facility; and dealing and arranging investments.
- Several firms have graduated from the FinTech Lab and have been granted a full regulatory license by AFSA; graduate firms include firms offering money services and regulated crowdfunding platforms (a first for Kazakhstan).
- Other Tech Lab initiatives include support services for startups, partnerships between fintech firms and banks through a fintech accelerator, and participation as an affiliate Center for the Fourth Industrial Revolution (C4IR) of the World Economic Forum.

### Crypto asset pilot project
- The pilot allows for the circulation of both unsecured and secured digital assets—with significant restrictions—serving largely residents in Kazakhstan and utilizing the fiat settlement rails of commercial banks domiciled and registered in Kazakhstan.
- Under the pilot, 5 crypto exchanges licensed, regulated and supervised by AFSA, partnered with 8 domestically-regulated Kazakhstan commercial banks to allow the exchanges access to fiat settlement while also ensuring that transactions comply with the national currency regulations and controls.
- The pilot project will be completed by the end of 2023 as the AIFC approves the procedure (mechanism) for interaction between AIFC crypto exchanges and Kazakh banks in coordination with NBK and ARDFM.

### AIFC Green Financial Center (GFC)
- The GFC was established to facilitate the development of green finance in Kazakhstan and Central Asia, drawing on guidance of a Green Finance Advisory Council of external experts.
- The GFC promotes investments in the sustainable economy through green and social bonds and loans and supports policy development (including a concept note on green financial instruments and principles), production of the government’s green taxonomy, and development of the AIX Green Bond Rules.
- In 2022, the Kazakh market for green and sustainable instruments almost doubled to just over $400 million.
- The GFC provided support and verification of some 60 percent of the total Kazakhstan market for these instruments.
- Green and sustainable instruments were issued on both AIX and KASE; the GFC supported the first issuance of social (gender) bonds in Kyrgyzstan in 2022.

### Ancillary/professional services and dispute resolution
- AFSA authorizes ancillary or professional service firms as participants in the AIFC.
- Some 147 firms offering one or more of the 5 recognized services (audit, accounting, legal, consulting, and credit rating) have been licensed by AFSA as at end-May 2023 (102 are from Kazakhstan, and 45 from foreign jurisdictions).
- The AIFC Court and International Arbitration Center (IAC) uphold the common law framework of the Center and provide a forum for resolution of commercial disputes.
- By 7 June 2023, the Court had completed some 2,174 cases, including 64 AIFC Court Judgements, 415 arbitration awards, and 1695 mediation settlements.
- Case participation characteristics:
  - In 97.7 percent of the cases, the parties had business in Kazakhstan and agreed to ‘opt in’ to the AIFC dispute resolution framework.
  - Kazakhstani law was applied in 97.5 percent of the cases, AIFC law in 2.3 percent, and other laws including English law in the remainder.
  - Close to half the cases involved a foreign/non-Kazakh investor with business in Kazakhstan; parties came from 23 countries.
- An AIFC Court and IAC Eurasia Expansion Initiative has been launched, adding new premises in 8 Eurasian countries from which users originate.

### Professional financial development initiatives
- The AIFC has established a Bureau for Continuing Professional Development (BCPD) to provide preparatory courses for internationally recognized financial certifications, develop human capital, and create a pool of local professionals with international recognition to serve the AIFC and beyond.
- The BCPD launched the University of the Future, an online platform to provide training and development solutions for professionals and corporations in Kazakhstan and the CIS region.
- The Academy of Law supports development of the AIFC legal system by teaching students and professionals AIFC law and international commercial law practice.

### Strategy and targets through 2025 and medium-term objectives
- Initial Management Council targets for the period until 2025 included numerical targets for raising external capital and registration of participants and regulated firms, and objectives to raise external perceptions of the Center and increase Kazakhstan’s weighting in market indices.
- External capital objective: raise $10 bn by 2025; just over $ 8bn had been achieved by mid-2023.
- Registrant objective: goal of 2000 registrants by 2025 had been met by mid-2023.
- Regulated financial and professional services firms: some 276 firms had been registered by May-2023 against a target of 600 such firms by 2025.
- Strategic refinement to emphasize supporting Kazakhstan’s economic growth through attracting foreign direct investment and raising foreign and domestic equity and debt capital via the securities market.
- Planned initiatives to support investment attraction include:
  - focus on facilitating investment in high priority regions, sectors and investor segments in Kazakhstan;
  - accelerate the growth of securities markets through efforts to list and develop new investment opportunities, and increase international fund managers’ engagement;
  - develop the AIFC’s legal and regulatory environment to support growth of the equity, debt, carbon, funds and asset management markets and attract new domestic and offshore firms that offer or support these markets;
  - focus on new financial services innovations, such as the development of a digital asset ecosystem, in a way that carefully manages the risk to users and the AIFC.

### Medium-term AIFC contributions to the Presidential Concept to 2030: specific goals and timelines
- Creation of a single liquidity pool between KASE and AIX to increase market depth and consolidate liquidity (by 2030);
- Creation of a consolidated settlement and clearing infrastructure (by 2030);
- Conducting future IPOs of state-owned companies, providing for the potential of both exchanges (ongoing);
- Consideration of expanding the list of financial and professional services that AIFC participants can provide to residents of Kazakhstan, as well as access to the national infrastructure (by 2023);
- Synchronization of regulatory standards, and ensuring the consistency of financial market regulation and coordination of new regulatory initiatives, in order to integrate the AIFC into the common financial market (ongoing);
- Creation of local rating agencies in the AIFC, to diversify from the big 3 international firms and reduce the cost of borrowing (by 2024);
- Adopting measures to support the recognition of the AIFC settlement regime by the International Swaps and Derivatives Association (ISDA) (by 2023);
- Exploiting the potential of the AIFC regulatory sandbox to test innovative financial technologies, and to activate new tools and services (by 2025).
- Additional sector and instrument objectives:
  - Proposals for the further development and regulation of crypto exchanges, based on the results of the pilot project and study of international experience (by 2023);
  - Attracting large global banks to the AIFC and increasing their involvement in financing large projects (by 2025);
  - Further development of Islamic banking in Kazakhstan, including through the AIFC (by 2026);
  - Development of leasing markets, including in the AIFC (by 2025);
  - Development of a syndicated lending market by increasing the attractiveness and participation of AIFC banks, together with Kazakh banks, through regulatory incentives (by 2023);
  - Development of an alternative funding market, including through venture funds or crowdfunding platforms registered on the AIFC (by 2024);
  - Promoting innovation in insurance markets, including building and drawing on the experience of AIFC participants (ongoing).

### Interactions with the Kazakhstan financial system: policy issues and coordination measures
- The AIFC’s objectives emphasize developing a domestic securities market and a broad spectrum of financial services in Kazakhstan; the revised strategy accentuates supporting Kazakhstan’s financial and economic development directly through attracting FDI and raising capital.
- Increasing provision of financial services to Kazakhstan residents from the AIFC raises potential additional challenges for managing financial stability risks, including:
  - New sources of systemic risk from services and interconnections between the domestic financial system and that of the AIFC;
  - Spillover risks that may be reputational as well as financial;
  - Risk of regulatory arbitrage or exploitation of uncertainties and gaps in regulatory perimeters; and
  - Greater difficulty identifying and analyzing emerging systemic risks and the need for coordinated policy responses across jurisdictions.
- Measures taken to address these risks include:
  - Strategic direction: The Chairperson of the ARDFM and Governor of the NBK both participate in the Management Council of the AIFC.
  - Information exchange: In 2020, the ARDFM, NBK and AFSA signed an Agreement on the Exchange of Information (including confidential information) to facilitate financial supervision, support financial stability, and combat money laundering and financing of terrorism.
  - Working Groups: Several cross-Agency Working Groups were established, including the Working Group on Regulation and Supervision of Financial Organizations; a Management Committee on improving Kazakhstan’s position in the MSCI and FTSE indices; and the Working Group on Crypto Assets which developed arrangements for the pilot between AFSA-regulated crypto-exchanges and selected ARDFM-regulated Kazakhstan commercial banks.
  - Currency regulations: The 2021 Currency Regulations (agreed between AFSA, NBK and ARDFM) set out which financial services may be offered by specified AIFC participants to domestic Kazakhstan residents and in which currency, and which are prohibited.
  - Financial stability engagement: Although AFSA is not a member of the Financial Stability Council (FSC), an invitation was provided to the AIFC/AFSA to participate in the June 2023 meeting discussion on the crypto-asset pilot and potential next steps; the Governor of the AIFC joined the meeting.

*Republic of Kazakhstan — International Monetary Fund, selected excerpts from the AIFC chapter.*

### 45.      While these steps are positive, further reinforcement and formalization of the financial

### While these steps are positive, further reinforcement and formalization of the financial

### Background and risks
- Active provision of financial services to Kazakhstan residents occurs from both the domestic and AIFC jurisdictions under different legal and regulatory frameworks.
- Currency regulations restrict AIFC participants from offering certain services to residents, such as banking in local currency and provision of retail banking services,91 and thus associated stability risks from these activities are contained in the domestically-regulated sector.
- Some services may be provided only from the AIFC, such as crowd-funding;92 other financial services (such as many capital market activities, and Islamic banking) may be provided by both “domestically-regulated” and AFSA-regulated intermediaries.
- Business and operational interconnections between financial intermediaries in the two jurisdictions are increasing and will increase further under the government strategy for financial services to 2030.93
- Notable interlinkages cited:
  - Growing interlinkages between KASE and AIX, and plans to provide one pool of liquidity and a unified clearing and settlement platform.
  - Connections between AFSA regulated crypto-exchanges and Kazakhstan banks.
  - Provision of reinsurance by AFSA-regulated firms to domestic insurance companies.
  - Joint participation in syndicated lending operations by domestically-regulated and AIFC banks.
- The role of the AIFC jurisdiction in the Kazakhstan financial system is thus likely to rise further.

### High-level principles for jurisdictionally-separated international financial centers (JSIFC)
- i. All regulatory agencies (domestically and in the international center) should promote financial stability as a primary goal.
  - Example: Basel Core Principles for Banking Supervision emphasize safety and soundness of the banking system as the primary objective of banking supervision.95
  - Assigning primacy to financial stability guards against pressures to lower regulatory standards for other objectives such as financial development or development of business in the international center.
- ii. Data and financial information should be readily shared by all regulatory agencies (domestically and in the JSIFC) to support regulatory, supervisory, resolution and financial stability responsibilities, while preserving strict commercial confidentiality.
- iii. High standards of financial regulation and supervision, in line with international standards and best international practices, should be applied by all regulatory agencies, both “domestically” and in the JSIFC.
  - Alignment should extend to recovery and resolution frameworks, recognizing that distinct and separate arrangements for crisis management will apply domestically and in the JSIFC.96
  - Implementing and upholding international standards will help counter incentives for regulatory competition and arbitrage.
- iv. There should be clarity of regulatory responsibilities, with clear boundaries and delineation of regulatory and supervisory responsibilities for financial activities and financial institutions.
  - Responsibilities, rules, regulations, resolution procedures, crisis management arrangements, and consumer and investor protections should be clear and transparent to intermediaries and system users.
- v. Duplication of regulatory and supervisory frameworks should be avoided wherever feasible; ideally one regulatory agency responsible for each activity.
- vi. Where the same activities can be provided under two regulatory authorities, the authorities should work together and agree a common (ideally harmonized) approach.
  - Proposals for new regulations and supervisory approaches should be shared in advance for comments and feedback from other regulatory agencies prior to finalization.
- vii. Domestic financial authorities and JSIFC regulatory agency should hold regular discussion of risks and spillovers, supported by a coordination framework that fosters collaboration on risk identification and policy responses.
  - Such a coordination framework may be established initially at working level, with an option to integrate arrangements into a pre-existing financial stability council or committee (perhaps as a working group).
- viii. There should be scope for the international financial center authorities to participate in domestic financial stability arrangements (periodically, by invitation, at request, or as a permanent member).
  - The extent of participation depends on assessment of risks to domestic financial stability from the international center’s provision of services.

### Preliminary recommendations for Kazakhstan (areas to strengthen)
- Affirm the primacy of financial stability in regulatory objectives.
  - Authorities are recommended to review and adjust mandates of regulatory agencies (domestically and in the AIFC) to support this principle.
  - AFSA currently has an objective to “foster and maintain the financial stability of the AIFC’s financial services industry and capital markets, including the reduction of systemic risks” (Box 2). Amending this to highlight the primacy of fostering and supporting financial stability in Kazakhstan (and in the future to support the achievement of financial stability by domestic authorities in other jurisdictions where AIFC financial activities gain importance) would be helpful.
- Ready sharing of data and financial information.
  - The 2020 Agreement on the exchange of information provides a valuable framework by enabling authorities to make official ‘requests’ to each other to access important data, and permits agencies to provide unsolicited information; however, the Agreement does not encourage unsolicited provision and current drafting does not inspire more open sharing to facilitate systemic risk identification and broader financial stability analysis.
  - Three years after the Agreement was signed, conduct an ex-post review of experience and consider whether amendment and updating is needed to enhance sharing of data and foster financial stability analysis.
- Application of international standards.
  - The BCP assessment undertaken for the FSAP contains recommendations to strengthen observance by ARDFM.99
  - The FSAP has not undertaken any assessment of the regulatory or policy framework of the separate AIFC jurisdiction.
- Clear delineation of responsibilities and boundaries, supported by monitoring and rapid adaptation to close identified gaps.
  - Currency Regulations specify permissions and restrictions on provision of financial services to residents from the AIFC; periodic amendments are likely due to innovation and experience.
  - Current amendment approach appears relatively ‘reactive’: AIFC/AFSA make a proposal which is then considered and reviewed by domestic authorities prior to final decision.
  - Recommend earlier and more continuous engagement on potential financial innovations and amendments, and introduce a more formal and transparent analytical framework for assessing impact of potential regulatory changes.
  - Clarity on responsibilities would facilitate communications on complaints and dispute resolution procedures, consumer and investor protection schemes, and safety net arrangements, which likely differ across jurisdictions.100
- Minimization of potential duplication of frameworks and overlaps.
  - Example: Islamic banking is currently very small in Kazakhstan (substantially less than 1 percent of financial assets), but the government has set a target of 3–5   percent of financial assets by 2025.
  - There are four licensed Islamic banks: two operating in the domestic system (licensed, regulated and supervised by ARDFM), and two licensed and operating from the AIFC. Authorities are recommended to review permissible financial activities with dual systems of regulation and examine scope for streamlining responsibilities.
- Development of consistent (ideally harmonized) regulations where duplication cannot be avoided.
  - The 2030 Concept note: “In order to integrate the AIFC into the common financial market, regulatory standards will be synchronized, the consistency of financial market regulation and the coordination of new regulatory initiatives will be ensured.”101
  - Authorities are encouraged to establish a framework for stronger cooperation on development of regulation where two regulatory systems exist.
  - Capital market regulations cited as an example where closer integration of financial infrastructure and a single pool of liquidity may require consistency across frameworks.
- Implementation of a coordination framework to strengthen risk identification and policy responses.
  - Existing arrangements: AIFC Management Council, Working Group on Regulation and Supervision of Financial Organizations, and Working Groups on specific topics (such as crypto-assets).
  - There is no standing body that brings domestic agencies and AFSA together regularly to discuss emerging risks and market developments and associated financial stability implications.
  - Recommend establishing a standing working group of staff of ARDFM, NBK and AFSA on risk identification and mitigation that meets periodically (quarterly or six monthly) to fill gaps in information and analysis and focus on linkages and spillover risks.
  - The group could oversee review of data sharing arrangements and ensure data and financial information are readily shared while preserving strict commercial confidentiality.
- Enabling participation of AIFC/AFSA in the Financial Stability Council (FSC) on relevant topics.
  - The invitation to the AIFC Governor in the June 2023 Council discussion on crypto assets demonstrates flexibility.
  - Consider periodic (at least annual) FSC discussion on linkages between Kazakhstan financial system and the AIFC and associated risks, underpinned by rigorous analysis of emerging and potential risks.102

### Implementation and next steps
- Consider development of a Financial Stability Protocol between domestic authorities and AFSA setting out an overarching framework and approach to enhance cooperation and coordination in support of financial stability in Kazakhstan, based on the principles listed.
- Proposed mechanism: establish a high-level working group of staff of ARDFM, NBK, and AFSA, tasked by the FSC and the AIFC Governor to:
  - prepare the Protocol for deliberation, sign off and publication;
  - manage and oversee potential workstreams on specific topics.
- Progress may also be made incrementally (for example, by setting up a series of workstreams on gaps in fulfillment of individual principles), but a high-level group could provide leadership and momentum to overcome inertia and resistance to change.

### Conclusion
- While financial activities in the AIFC are currently relatively small, planned expansion and greater interactions with the Kazakhstan financial system will increase associated risks.
- Policy action is needed to develop and enhance frameworks and procedures to:
  - preserve financial stability;
  - protect consumers and investors;
  - ensure financial market integrity and protection of a well-functioning financial system in Kazakhstan.
- Implementing the recommendations above will help mitigate potential additional risks generated by the co-existence of the domestic regulated system and the legally distinct AIFC jurisdiction.

*Source: Republic of Kazakhstan — Financial Sector Assessment Program (FSAP) chapter text as provided.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kazea2024007-print-pdf.pdf_