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Friday, 15 August 2014

Islamic banking faces challenging, yet promising future in Russia

One of the success stories in global finance of the last few decades has been the rise of Islamic banking, with $822 billion worth of assets being managed in banks compliant with Islamic principles around the world by 2009, according to banking industry publication The Banker.

The work of any Islamic bank is based on sharia norms, which prohibit charging or paying interest (riba), require it that transactions be linked to real assets and ban speculation. In addition, Islamic banks do not finance alcohol, tobacco and gambling business or the production of pork.
However, although the sector has been forging ahead in many parts of the world, including many western countries, sharia-compliant banks have found the going tougher in Russia. The country’s first Islamic bank, Badr-Forte, appeared back in 1991, but five years later it was stripped of its license by the Central Bank “in connection with the bank’s failure to implement federal laws …and the repeated violation during the course of a year of the federal law “On counteracting the legalization (laundering) of criminal proceeds, and the financing of terrorism”.
Since then there have been no attempts to establish a purely Islamic bank in Russia. However, several organizations that function in a similar way to Islamic banks have appeared in the country during the last five years.   

A partnership, not a bank

The main difficulty that Islamic banks come up against in Russia is that under the law on banks and banking, a loan is a paid service. Whereas under the requirements of Islamic economics a loan is granted free of charge, explains the head of the economic department at the Russian Council of Muftis, a member of the coordination council of the Russian Association of Experts in Islamic Finance, Madina Emirovna Kalimullina.
Since Islamic banks do not view granting loans as a source of profit, their work is limited to two areas: joint ventures, i.e. direct investment and shareholdings (mudaraba and musharakah), and trade, i.e. selling goods at a mark-up (murabahah). However, Russian laws limit banks' rights to have shareholdings and engage in trade, which creates challenges for Islamic banks in the country.
"In order to overcome these restrictions, entities are set up not as banks but as other legal forms, for example trust partnerships, partnerships, trade companies, consumer societies, etc., which perform the functions of Islamic banks," Kalimullina explains.
However, she adds, to have full-fledged operations, these entities need to be able to provide cash and settlement services and be able to perform other, purely banking, operations. That is why the issue of creating the necessary legal framework for Islamic banking in Russia is very much on the agenda.

(Russia And India Report / 14 August 2014)
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