Today the Islamic banking system is regarded worldwide as a promising direction. As it was with Islamic banking: niche business turned into one of the fastest-growing segments of the financial market. Despite the fact that Islamic products apply in the Russian Federation, nevertheless Islamic banking cannot develop in a full way in a context of the current legislation. At the round-table in the State Duma on March 18, participants discussed the issues of creating a legislation framework corresponding to Islamic financial institutions.
The session was opened by Dmitry Vladimirovich Savelyev, Deputy Chairman of the State Duma Committee on Financial Markets. As he noted, this theme is periodically discussed in the Russian Federation, but without particular results. Islamic banking functions on absolutely other philosophic, religious, technological principles. That is the reason why there is a necessity of modification in legislation for successful implantation of Islamic banking.
First bills are already working out in the State Duma. This is a commencement. In spite of everything, there is a lot of job to do.
Alexander Torshin, State Secretary and CBR Deputy Chairman, highlighted an importance of the topic and noted that there are some pitfalls. He reminded that about 20 million Muslim are living in Russia. However, a problem of Islamic finance implication awakes traditional bank’s interest as soon as Islamic, because traditional banks are waiting for long-term money sources.
«Bank of Russia, – said A. Torshin – is not against of this problem. In principle, a certain part of Islamic banking and its features are quite appropriate to fall into active bank legislative. Intensive study of this case is necessary, though.
An appearance of Islamic banks will promote to raising confidence in banking system. Muslim will be able to feel himself more comfortable and calm in Islamic bank, will put his savings into it, thus, they will work for holder as far as for the whole country. It is necessary to make good use of financial resources of Muslim in national economy.
Russia is an observer under the Organisation of Islamic Cooperation. While Russia doesn’t use the advantage of such (even if associated) membership at all.
A. Torshin noted a lot of work on introduction of Islamic banking in the Republic of Tatarstan. At the same time, he warned about an impossibility of appearance “heavy shower” of financing from Islamic countries simultaneously with appearance of Islamic banks. This banking system is very conservative, very cautious. Therefore, the discussion should consider both positive and negative sides: what wins a banking system, what loses.
According to the speaker concerned market participants have reliable partner in the person of the Central Bank. CBR is willing to examine initiatives aimed at strengthening of banking system, to take part in discussions.
A.Torshin reminded about a plan of creation International Financial Centre in Moscow, implying the presence of Islamic institutions.
Viam supervadet vadens
According to D. Saveliev we should try to follow a right direction; we should start with a small stream, even if it is impossible to expect an investment rain immediately. American and European sanctions against Russia will be long-term. As a result, Russia establishes connections with Asian countries, including China, more actively, however with Arabian countries more scanty.
Behnam Bai-zad-oglu GURBANZADEH, Director of Islamic banking department of the International Bank of Azerbaijan, shared experience of Islamic banking development in Azerbaijan, and his own initiatives about its introduction in Russia and CIS countries.
Workgroup was created in Azerbaijan in 2004. Progress was slow because of absence of Islamic “window” – foreign partners didn’t understand how to create further assets after taking up liabilities. The first big deal was organized only at 2010th. Nowadays total assets of Islamic financial system in the country amount to average $620 million – that is a result of two-year activities.
Certified professionals, who passed specific programmes in the universities of Great Britain and Malaysia, were prepared for development of Islamic institutions. The International Bank of Azerbaijan has created front office, back office and treasury separately. Today about $600 million of assets has been attracted, they are managed by the Department, are invested in IBA projects in the context of Islamic bank legislation.
A portfolio is diversified, substantial percentage falls to the share of corporate clients – about 85%, 15% falls to the share of individuals. Corporate projects are, predominantly, large public infrastructure projects: construction of roads, refinancing of production capacity.
As a result of a one-year activity, net profit average approximately $11, 5 million. Due to the fact, that the portfolio was formed, primarily, in dollars, currency risks were taking into account, in a process devaluation bank losses were little. Maintenance in regions began – in such cities of Azerbaijan as Ganja, Sumgait and Lankaran.
Legislation hampers the full functioning of Islamic banks in Russian Federation; banking system, tax structure, customs structure and civil code should allow using Islamic finance institutions. Products and services, that can be used in context of actual legislation, are limited.
Today, state workgroup, which analyses the legislation, is already created under the aegis of the IBA. The first document package is already ready to be passed to the Parliament. There is a hope to approve a bill up to the next year. Amendments in united banking legislation and code of banking institutions are scheduled to insert too.
Today, IBA uses Islamic instruments, predominantly, for trade financing and project financing, participating on an equality with clients, it means sharing profit and loss. Besides, Islamic instruments take part in asset management, Islamic bankcards are issued for retail financing, leasing transactions fulfil, commercial and residential real estate finance.
In the Moscow subsidiary bank “IBA-Moscow” was opened the Department of Alternative Financing, operating in accordance with Russian legislation and the rules of Islamic law. Pilot project starts in April: $1 million will be attracted, and then 3-4 corporate projects in Moscow will be refinanced. Further, there is a plan to attract money of population.
In Baku deposits are already attracted, they make up about 82 million. These deposits are not only from the local population. Individuals from the Gulf States and Turkey showed large interest, because of a high rate. Such rates are inaccessible for markets of mentioned countries.
B. Gurbanzadeh specified positive aspects of Islamic Finance. Firstly, the lack of loan interest. Secondly, participation in the risks. Today clients should be treated as partners – profit-and-loss sharing. This significantly increases customer confidence in the banking system. Customers can bring projects, new ideas, scientific and technological developments.
Speaker was in the firm belief that it is quite possible to found Islamic financial center of CIS countries. It is necessary to create workgroup and workplan in the CIS countries taking into consideration experience of Kazakhstan and Kirghizia, where appropriate legislation already existed.
Looking ahead, the speaker expressed confidence that it is possible to establish an Islamic financial centre in the CIS countries. There is a need to create a working group and to develop a workplan in the CIS countries, based on the experience of Kazakhstan, Kyrgyzstan, where appropriate legislation already exist. There are a lot of companies and individuals who are interested in cooperation with Russia, Azerbaijan, Kazakhstan, the CIS countries. Diversification of investment attraction sources, access to new capital markets contribute to economic security.
According to B. Gurbanzadeh we can consider a creation of unified Islamic development Bank CIS countries as the ultimate goal. Large financial institutions of the republics can be its participants. Such Institute can be serve as a good platform for further development of economic and financial relations within the CIS.
Sergey Leonidovich BATEEN, the member of the Council of the Federation Committee on budget and financial markets, inclined to believe that the there is no need of producing new working groups for the implementation of Islamic banking . He spoke about urgent problems faced by the working groups. For example, a group that worked in the Council of the Federation, faced with the problem of so-called double taxation, i.e. the forced payment of VAT. This issue, like several others, is extremely difficult to overcome in Russia within the context of current legislation in accordance with the Federal Law on Banking, tax laws. In this connection, it is necessary to create a Federal law that would allow Islamic banks to work in the Russian Federation. S. Bateen reminded that in 2014 at the summit in Kazan was created a task to prepare a working document for the next economic summit of Russia and the countries of the Organization of Islamic cooperation (OIC). It will be held in Kazan on June 15-16. The deadline is nearing, but there is a hitch somewhere.
Issues feasibility’s basis of establishing an Islamic bank or “Islamic window”
Linar Yakupov, Adviser to the Prime Minister of the Republic of Tatarstan on dealing with Islamic financial institutions, specified that the Russian Federation has prerequisites for development of Islamic financing. The Republic of Tatarstan, as a region with a large share of Muslim population and due to the fact that Russia is an observer under the Organisation of Islamic Cooperation, began to interact with the institutions of mentioned organization as well as with the Islamic Development Bank.
Working relationship began in 2006, in 2007 an agreement to study the possibilities of introducing Islamic financial instruments, structures, institutions within the existing Russian legislation was signed between Tatarstan and the Islamic Development Bank (IDB)
In 2008, at first time in cooperation with the Islamic Development Bank, there was held an international investment conference, which showed the interest of both parties to the interaction.
Investors from the Gulf States have an interest to participate in various projects of the Russian regions. Domestic businessmen also have an interest to enter these markets, to cooperate in trade, in investment. Islamic finance was seen as a toolbox that allows engaging these processes more actively.
The Russian Centre of Islamic Economics and Finance was created in 2008, it became an educational center for training specialists in the field of Islamic Finance. Human resources training is on agenda today as one of the most important issues, because even the change of legislation, preparation of any documents in this industry, certainly, linked to the availability of the necessary specialists.
Annual international economic summits, so-called KazanSummits, started to launch in Kazan since 2009, taking into account a need in area for constant interaction with investors from Gulf States and all companies, banks who practice Islamic financial instruments. The business realizes that Islamic financing is very demanded product. Number of citizens who categorically do not want to use a traditional banking system is growing day by day. Therefore, there are alternative products that can meet the needs of this population even in context of existing legislation. The financial house “Amal” can be serve as a striking example, because it uses Islamic instruments ijara, murabaha to provide services to the population today in accordance with existing Russian legislation.
The initiation of Tatarstan International Investment Company (TIIC) in 2010 was a significant step in relations with the IDB. This company, in turn, created the Eurasian leasing company (ijara).
Ahbash-Bank first attracted $ 60 million from the markets of Near East in 2011 and $ 100 million in 2013, using tools of murabaha.
Thus, today $ 180 million attracted in the Republic of Tatarstan with the use of various Islamic financial mechanisms through leasing, investment companies, several projects, the lion’s share of them falls on Ahbash-Bank.
However, the lag of the regulatory framework hinders the development of the industry. Fully prepared documents, which allow Islamic banking institutions to begin functioning on the territory of the Russian Federation, are absent, said Linar Yakupov.
To discuss a specific document, representatives of Tatarstan last year launched an initiative to prepare a feasibility study of establishing an Islamic Bank or Islamic banking “Windows” on the territory of the Russian Federation. The purpose of the feasibility study is to examine the demand and supply on the market to launch Islamic banking and finance industry in the Russian Federation. This technical justification would serve as a basis for the preparation of legislation changes.
Towards this end, Russian-Malaysian consortium was created with the support and assistance of the Islamic development Bank and Malaysia. Negotiations at region level with the assistance of the President of the Republic of Tatarstan were held in the Council of the Federation. To complete the work on the feasibility study until September, and then to consider it as a document that would allow to make the necessary changes in legislation – these problems are solved with active cooperation with the Association of Russian banks, Association of Regional Banks of Russia.
As regards to stages of development in the country of Islamic financing, L. Yakupov noted that on the summit in 2010 was presented so-called road map, it suggested two approaches. The first was applied by the Kazakhstan. This country became the first in the CIS and Central Asia that has adopted laws and amendments, allowing to carry out the activities of the Islamic banks and Islamic investment funds. For the Russian Federation this option was not acceptable.
The second approach consists in next: initially produced certain practices within the framework of existing legislation. This practice of using tools of Islamic Finance is already established, convinced L. Yakupov.
Now it is necessary to give Islamic financial Institutions an opportunity to function in a full way in the Russian Federation. Here are two variants too. First way is to create a separate Islamic banking legislation, but this process required a long period of time – for consideration, study and acceptance. Second way, which is more acceptable according to L. Yakupov, – to propose amendments in the current legislation and as result to remove all existing barriers. Here the leading role should be played by the regulator . “We – said L. Yakupov, are ready to assist in establishing relationships with leading international organizations, which regulate Islamic financial market. There is also an agreement with the Central banks of Malaysia, the United Arab Emirates on the adoption of specialists of the Bank of Russia, Ministry of Finance, other banking institutions for training”.
The speaker underlined that Islamic banking, Islamic finances are primarily considered like economic instruments for the part of the population that does not want and cannot use traditional banking products. Islamic tools are intended not only to attract foreign investment. First of all it is a complete economic mechanism that allow citizens to participate in the economic development of the country, and, accordingly, there are rules for these people (legal, etc.).
For the Muslim world and the Middle East, Southeast Asia the presence of the relevant legislation in the partner-country is a signal that investments can be direct. Thus, stressed Linar Gabdelnurovich, the first aim of Islamic banking is at servicing people, and then in the attraction of foreign investors
Returning to the subject of creating a feasibility study, L. Yakupov noted that detailed program and technical document will be prepared for making changes. He urged to consider the option of launching the pilot project “The opening of the Islamic Bank” or Islamic banking Window in the Republic of Tatarstan, stressing that it went further, compared with other regions in this matter, and also there are staff resources.
Islamic tools include microfinance and Islamic insurance. The first steps on the market of Islamic insurance – Kazan branch of the company “Alliance insurance” with the active participation of German shareholders and the Republic of Tatarstan has launched Islamic insurance product – Takaful.
Linar Yakupov drew the participant’s attention to the fact that Azerbaijan investment forum discussed the proposal of the representatives of Kazakhstan, Kyrgyzstan, Azerbaijan to use the Eurasian platform for making Islamic financial tools the link between these regions. Hence, it is suggested to create a coordinating Council of the CIS countries.
Long-range outlook – internationalization of the sphere of Islamic Finance, increase of competitiveness through the introduction of new technologies, development of stress tolerance by entering new markets and the shortage of specialists in the field of Islamic Finance, and minimizing systemic risk.
In terms of work – the study of banking products and banking operating environment, development of recommendations about creation of an operational model of the banking system, which do not contradict Islamic principles, instructions and manuals about Islamic banking products and services, implementation of processes and procedures; conducting training for staff involved in the process of introducing new banking products and services. In addition, the provision of the annual programme of consultation on the compliance of Sharia law after the implementation phase.
Linar Gabdelnurovich expressed confidence that the pilot project will be an important step in the development of the Russian financial system, smooth its integration into the international financial system.
Modification of legislation: necessity and sufficiency
Chairman of the branch office of Islamic Finance of the All-Russian Public Organization “Business Russia” Renat Anvarovich EDIKHANOV believes that Islamic banking should not be associated with credit institution, with bank, because most probably it is a principle of attraction and distribution of money. Therefore, the infrastructure of the market of Islamic Finance are Islamic trade-financial companies. In this regard, changes in the banking should include not only assets but also liabilities. At the same time, it is necessary to put changes in the reservations, regulations, etc. Actually there is a need to create an analogue of existing banking legislation, but fully adapted to the requirements of the Islamic economic model.
It is better to provide work opportunities on the market for Islamic trading-financial companies by analogy with companies that are licensed in the stock market. In this case, Shariah Council will monitor the compliance with the Sharia law and legislative initiatives related to the possible development of new products. The Central Bank, as regulator, which is responsible for all financial markets, have to analyze the proposals of the Shariah Council and implement them, as far as possible.
Speakers rightly pointed out that there are issues connected with a taxation. The adoption of changes, addressing to solve these issues, in particular lump sum payment of VAT in the transaction of hire-purchase or instalment selling and others, can cause a very large number of companies in Russia suddenly become “Islamic” and stop paying VAT. Thus, the simultaneous introduction of the changes, concerning the banking, tax and a number of related legislations, is fraught with problems, including coordination in different departments. According to
R. Edikhanova, point impact on the legislative framework should be applied at the initial stage.
These point changes in legislation, which will allow to provide Islamic financial services to population and organizations, will not affect on the whole legislation’s layer (because it will entail serious consequences), but at the same time will give an opportunity to collect statistics. In future, as a result of information analysis, it will be able to have extensive studies of legislation.
For example, in the context of the current Russian legislation, you can make leasing transactions and sales in installments. VAT pays on the accrual monthly payment, there are no problems with the taxation of companies who are on the simplified system of taxation. However, in transactions of sale and purchase in installments, if the organization is on the common system of taxation, there is a problem with VAT.
Therefore, for retail it is advisable to use the simplified taxation system. However, there are limitations – the company’s revenue cannot exceed 60 million rubles with yearly use of a multiplier. Here is a possible option: to provide economic activity for the organizations involved in trading-financial activities related to religious restrictions. At the same time to amend two articles of the Tax code to abolish restrictions on 60 million for these companies. Quarterly statements will show a weighted average initial payment, the weighted average effective rate of mark-UPS, weighted average maturity for the entire portfolio. The analysis of this information, collected from all market participants, will allow to change the law in the future. It will be based on concrete data showing how people use essential Islamic Finance.
Changes, as regards the passive operations, i.e. raising funds – the problem at issue is not just about attraction only funds of the population, but also attraction large capitals, including from the Gulf States. It is necessary for legislative framework to allow freely issuing debt securities corresponding with Sharia law, but these securities should be issued without special add-ons and schemes. Accordingly, changes in the Tax code will be required to regulate the levying of value added tax in assignation, if securities sukuk “al-Murabaha” or sukuk “Alidgara” are issued.
Risk assessment in the implementation of Islamic banking in Russia
Madina Emirova KALIMULLINA, Executive Secretary of the coordination council of Russian Expert Association in Islamic Financing, Director of Economic Department of Russia Muftis Coucil, offered to discuss key issues of Islamic bank introduction, which can cause negative consequences in the case of wrong approach.
The experience of different countries shows, she said, that there is no any common ideal form, that just need to be accepted and realized – there are different approaches to different issues. Russia is able to proceed from experience of different countries as well as to create own approach.
One issue is the terminology: should the financial institution, working with the Islamic tools, have to be called Islamic? In Turkey, for example, these banks are called “participation banks”, in the Great Britain words “Islamic” is out of legislation. From the point of view of Islamic Law, question is in essence, not in form, i.e. not in the title, but in the principles. There is an important caveat. As world practice shows, the development of Islamic financial institutions requires the full support of the government. For potential partners from Gulf having official statements, including top officials, that the country is open to this market, is important. For example, in the UK top officials repeatedly spoke at various prestigious forums about the openness towards the Islamic banking. The phrase “there are no principle objections from the Russian regulator” may not have the best consequences in case of the disposition of potential partners and investors to work with Russia, supposed M. Kalimullina.
Road map of Islamic Finance in Russia
Aleksey Kovalenko, Business Development Manager at public company “World Business Bank”, determined organizational aspects about how to implement the law. In his opinion, it takes a solution of three key issues.
The first question is – who will organize this routine law-making process? The second question is – how to coordinate State institutions with experts? The third question is – who will finance all of it? Logical deduction would be to create some institution, maybe under the Committee of the Federation Council, said A. Kovalenko.
Moreover, there are some crucial questions, which have to be regulated, – coordination Sharia Councils with the Bank of Russia, conducting political-psychological training of the society.
In 2014 total assets of Islamic commercial banks in the world increase almost to $1 trln 800 bln. Total assets of Islamic economy – basically, Arab League, Turkish and Iran- exceed almost $2, 5 trln.
Annual increase of assets of Islamic banking average out 17–18% – ten times more than the increase of the world financial system.
ROE of the top-20 Islamic banks is 12, 5%, of the traditional banks – 15%. It is especially interesting to note that as soon as Islamic banking started to develop, such large financial institutions as JPMorgan, City, HSBC Bank (РР), Barclays Plc., Lloyds Bank, Bank of America, Deutsche Bank started to open Islamic subsidiaries in order to use the available funds from the Gulf States. Islamic Finance was elected by these large financial institutions because of the stability of the system itself, as well as economic and political stability of the Islamic centres such as London, Malaysia, Dubai.
According to the analysis of Islamic banking in 2018 is expecting to increase the ROE of Islamic banks to 15%, and the total asset growth to 15-16%. It means that each year Islamic financing assets will increase to 15-16%, the growth rate is significantly higher than in the traditional world system.
Today, 40% of Islamic banking assets accounted for Iran’s Islamic banks, 16% – of the Kingdom of Saudi Arabia, 8% Malaysia, 5% – United Arab Emirates and 2% of Turkey.