Islamic finance is still a matter in question in the Russian Federation. The laws have not been amended yet; however, the banks are not waiting for the amendments and are already providing Shariah compliant products. DMITRY CHURIN and MARIA AKSENOVA write.
Having an approximately 15% Muslim population and being under sanctions, Russia is motivated to develop Islamic finance. Before 2019, state authorities, as well as businesses, had taken many measures to implement Islamic banking, starting from the organization of and participation in thematic international forums and attempts in regulation, to ramping up financial services in accordance with Shariah rules. This year, the trends in the development of Islamic banking in Russia have proven to be stable.
Sberbank, the largest state bank in Russia, continues to expand its presence in Islamic banking. Recently, it announced the acquisition of a 25% stake in Islamic payment platform PayZakat which is used to raise charity for Muslims in need. Shortly before that, Sberbank confirmed a deal worth US$219 million to construct a 214 km section of the TAPI pipeline (Turkmenistan–Afghanistan–Pakistan–India).
The peculiarity of this contract is that it involves not only ChelPipe Group and the State Bank for Foreign Economic Affairs of Turkmenistan, but also the IDB. Sberbank acted as the confirming bank with the role of structuring a financial instrument that meets both international and Islamic banking requirements. As a result, this deal is the first letter of credit compliant with Islamic banking, structured by the combined work of Sberbank and the IDB.
Another notable event is the launching of a Shariah compliant mortgage program by AK BARS, the largest bank in the Republic of Tatarstan. The product was introduced in April during the XI International Economic Summit ‘Russia — Islamic World: KazanSummit 2019’. The Islamic mortgage is a Murabahah contract drawn up in accordance with the standards of AAOIFI. Taking into account that Islamic banking standards prohibit lending money at interest, the bank’s subsidiary buys real estate and then acts as a seller, providing loans in installments for up to 25 years.
It can be assumed that the total amount of the Islamic mortgage can differ from the customary one, since value-added tax applies to the transaction. However, the mass media states the opposite. For now, the bank is issuing an Islamic mortgage in a pilot mode in the city of Kazan and has already confirmed receiving applications for this product. In case of a successful pilot program, such a mortgage will be expanded to other Russian regions.
At the same time, the Tatarstan Republic (with Kazan as the capital) is also developing a program for compensating interest rates on loans for businesses that comply with Shariah standards. Such a program may allow businesses to meet the Islamic requirements until the time Islamic banking is fully introduced. However, there is no common vision on the admissibility of compensation of interest in connection with its formal presence (even if a third party is paying it), which may be deemed a violation of the Islamic banking standards. This issue still needs to be clarified before the program can be implemented.
It should also be mentioned that in Russia, Islamic banking is supported by various business associations. For example, there is a platform uniting Muslim businessmen in Russia called the Association of Muslim Entrepreneurs of the Russian Federation. The assets of the members of the association exceed RUB60 billion (US$898.29 million).
Additionally, there is a Russian center of Islamic Economics and Finance created to improve the literacy of the public in the Russian Federation and Commonwealth of Independent States (CIS) countries in the respective field. In the course of creating an Islamic financing infrastructure, raising public and business community awareness of Islamic financial products is another important issue to be considered.
The aforesaid allows us to conclude that Russia continues to be interested in developing Islamic finance and is exploring its opportunities. Today’s regulation, however, is not very favorable to dynamic growth. Therefore, one of the main issues that Russia has to face when dealing with Islamic finance is the lack of special legislation, which slows the development of Islamic finance in Russia. Yet, it is developing, which is evidenced by the ongoing discussions (besides the named KazanSummit, the Volga Investment Summit is about to take place this October, where the agenda includes Islamic banking) and new banking products. Moody’s Investors Service also mentioned this in its recent report by saying that despite the fact that Russia is currently among countries with the lowest growth potential in this sector among CIS states, banks are seeking to raise Islamic finance.
There is an opinion that one should not expect new legislation in Russia, given the central bank’s conservatism and that banks will need to work within the framework of the existing legal instruments. According to the mass media, the Skolkovo Foundation and the Higher School of Economics through one of its institutes are working to attract large Islamic investments into the Russian Federation in the second half of 2020 under the current legislation as part of the AgroFinMost (Agro Financial Bridge).
That said, it should be mentioned that some experts share a more optimistic view of the legislation issue. According to AK BARS experts, if taxation of Islamic finance transactions is optimized, Islamic banking in Russia may increase tenfold by 2022. In addition, according to various estimates, the volume of banking assets under Islamic finance will be about US$3 trillion by that time. Given such potential and Russia’s repeatedly declared desire to turn to actively developing eastern markets, there is a good chance that the relevant legislative changes will be made.
Dmitry Churin is the head of corporate practice and Maria Aksenova is the associate at Capital Legal Services. They can be contacted at [email protected] and [email protected] respectively.