Following the first Islamic finance deal of a syndicated Murabahah, and the opening of the first Islamic window at Elips Bank, the Russian market has seen a spate of interesting new products. ROUSTAM VAKHITOV looks at the key areas in which Islamic finance industry is finally developing in one of the world’s biggest markets.
A new project, launched in the second half of 2012, was the first Shariah compliant insurance service (Takaful) in Russia. The insurance company Euro-policy began selling Shariah compliant insurance policies in Kazan, the capital of Tatarstan, touted as one of the brightest Islamic centers in Russia with a high ratio of ethnic Muslims in its population.
Euro-policy now offers a limited number of products (in comparison with conventional insurance companies) including comprehensive motor coverage, world traveler insurance and property insurance (for both individuals and companies). World traveler insurance and comprehensive motor coverage are reportedly the two most popular products with customers. In the near future, the insurance company also hopes to obtain a license to provide the population with obligatory motor insurance.
The company has adopted “the provisions of the Shariah council”, however it has not been reported whether a proprietary Shariah council has been formed. The AAOIFI standard on Takaful was used as the basis for the provisions.
Euro-policy originally planned to sell at least 150 insurance policies, and since this target has been reached, the company has been even more optimistic on the future of Islamic insurance in Russia. Renat Bekkin, the Shariah advisor of the insurance company, is responsible for Shariah supervising control and the enhancement of new Takaful-based products. He feels confident about the future of the project but admits that the product range is below market level — partially due to the fact that the insurance rules and standards of the Russian Federation impose limitations on the use of insurance funds for investment purposes (for example, in some circumstances the funds can only be invested in a limited number of finance instruments, which may be not Shariah compliant) while on the other hand, Shariah also limits the use of the Takaful fund resources.
Another major problem, according to Bekkin, is the absence of a developed Islamic banking sector in Russia. However, with the emergence of more Islamic banking projects, the problem is losing its urgency. Moreover the Islamic banks themselves also depend on the Islamic insurance.
Local authority incentives
Recent months have marked a high level of involvement by local governments in Islamic finance projects. SmartCity, the largest and most ambitious project to develop a business suburb in Kazan, was presented to the president of Tatarstan in July 2012 and upon approval was successfully promoted to investors. SmartCity aims to create a regional and international business hub in Tatarstan, as well as becoming a major exhibition and conference center. It is hoped that Islamic finance will be one of the major sources of financing for this project. The project has a significant Malaysian presence: with AJM Planning, Urban Design Group and Amanah Capital Group all participating. From Tatarstan’s side, the project is supported by Tatarstan Investment Development Agency and JSC ‘Tatarstan Development Corporation’.
Future developments
Over 2011-12 Russian financial institutions, businesses, government agencies and the population itself have become more and more involved in Islamic finance projects.
So far Islamic finance projects in Russia have not faced any intentional prohibitive measures. The major restrictions are to be found in banking and insurance rules and standards. However these restrictions are rationalized by the authorities as necessary in order to minimize possible frauds in the conventional banking system of Russia. The system itself was established only in the 1990s so it has not had enough time to develop and fraud still takes place, albeit at a lower rate than previously.
In order to further propel the development of Islamic finance in Russia, the following are required: a) facilitation and assistance to businesses which are willing to be involved in Shariah compliant activities; b) knowledge dissemination; c) efficient cooperation with investment banks and funds prepared to invest in such projects; and d) efficient instruments of selection of attractive investment projects, ready to structure them in a Shariah compliant way. In any case, the Islamic finance sector continues to grow from standalone deals into a niche market, potentially available to a larger number of domestic businesses.
Following the success of Islamic windows in Kazan and Ufa, it is expected that in the future we will see the opening of Islamic windows in Moscow. Within Russia, it is reasonable to expect that not only Tatarstan and Bashkortostan but other Russian regions, including non-Muslim parts of Russia, will become more involved in Islamic finance projects as well.
Two local banks in Tatarstan, one of which is Tatagroprombank, recently announced programs related to Islamic finance. Tatagroprombank announced a program of implementing Islamic trade finance products; while another Tatartani bank intends to execute an Islamic finance program worth US$100 million. The program is focused on financing local Shariah compliant projects using Islamic finance instruments.
Following Russia’s WTO accession in 2012, the Russian market has become more open to foreign products and services, so more Halal products and services may be imported. The banking restrictions are also to be liberalized.
Overall, the Russian business community and retail customers will receive access to a larger volume of products and services, while foreign players have become more active in the Russian market and may enter it with retail services in the coming years.
Roustam Vakhitov is a partner and the head of tax at Baker Tilly Tax Service. He can be contacted at
[email protected]
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