Sanctions-hit Russia mulls legalising Islamic banking

Russia is drafting a new law to regulate Islamic banking in the country, a growing sector that could help state-run banks hit by Western sanctions to attract investors from Muslim-majority countries as well as cater to domestic customers.

The mass-circulated Russian daily Kommersant reported that the non-credit banking institutions would operate as financing partnership organisations (FPO) and offer Sharia-compliant financial products to their customers.

The report added that the FPOs would be under Russia’s Central Bank, which would maintain a register of all such companies and oversee their operations.

The head of the State Duma Committee on Financial Market, Anatoly Aksakov, said that the draft law could be submitted to the Lower House by the end of the week for approval.

Islamic banks operate under religious and ethical guidelines and ban interest payments and monetary speculations. The global Islamic banking sector is growing at 14 percent annually and is estimated to be worth $1.99 trillion. It accounts for a six percent share in the non-Islamic global banking industry. 

A trillion dollar sector

According to the draft legislation, such organisations can raise funds from individuals and legal entities and invest them in projects according to the norms of Islamic law on a partnership basis. The Bank of Russia, the publication said, is ready for innovation, but prefers to test the new system on a limited range of entities first.

According to the bill, Islamic laws prohibit lending money at interest, so banks and any other credit institutions with their standard products cannot provide this service.

FPOs will provide the following operations: granting money loans to legal entities and individuals without charging a fee, financing them as a trade intermediary by entering into installment sale contracts or leasing contracts, financing production and trade activities by participating in the share capital of legal entities on a partnership basis and granting sureties.

"In the new situation characterised by cutting ties with Western financial markets, the need of Russian citizens, the companies of the real economy, and financial institutions in the tools of (Islamic) financing partnership is growing," the authors of the bill say.

At the same time, Islamic banking imposes several prohibitions and restrictions. For example, a ban on the payment of interest (riba) and derivative interest transactions, a ban on transactions with uncertainty (gharar) and a ban on the financing of certain sectors of the economy, including gambling, pork, alcohol, etc.

The idea of introducing Islamic banking in Russia has long been discussed. 

Last spring, it was reported that the State Duma Committee on Financial Market would establish a working group on Islamic finance. It was supposed to introduce selective amendments to the laws in order to stimulate the inflow of finances from the UAE and other Islamic countries. In late November 2014, the head of the Central Bank Elvira Nabiullina, in her speech in the Federation Council, said that the Bank of Russia is studying the issue of introducing regulations for Islamic banking. 

The regulator considered it possible to develop the system of financing partnership in stages, including creating the conditions for the regulatory experiment, a representative of the regulator explained to the publication. 

"This will give great opportunities for the development of lending to the economy and the development of the financial sector," she said.

Qatar, Türkiye, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, Kuwait and Pakistan account for 93 percent of Islamic banking assets. Outside Muslim-majority countries, the first Islamic bank was established in the United Kingdom in 2004.