First Islamic banking center opened in Russia's Kazan

AhlulBayt News Agency - Russia's first center of partnership (Islamic) banking was opened today in Kazan. It will operate in full compliance with the principles of partnership funding, which are widely used in many countries of Southeast Asia and the Middle East.

The opening of the center was attended by the President of the Republic of Tatarstan, Rustam Minnikhanov, the first Deputy Chairman of the Bank of Russia, Alexei Simanovsky and the Mufti of the Spiritual Directorate of the Muslims of Tatarstan, Kamil Samigullin.

"We live in difficult times, difficult economic circumstances force us to look for new ways," the head of the republic said.

The center was opened in the framework of a cooperation agreement between the Spiritual Directorate of the Muslims of Tatarstan and Tatagroprombank, TASS reports.

The working group, which is headed by the first deputy chairman of the Central Bank, Alexei Simanovsky, drafted a "road map" for the development of partnership banking and related financial services in the Russian Federation in 2016-2017.

The center will conduct investment, leasing and trading activities. It will share financial risks with its clients.

The head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA, Konstantin Korischenko, said in an interview with a correspondent of Vestnik Kavkaza that Islamic banking is very actively developing form of financing.

"The only difficulty in the Russian context is that the banking does not quite fit in with the Russian Civil Code. Since the principle of payment for repayment of resources does not correspond to the basic principle of Islamic finance, which proposes a joint profit from economic activities. So active discussions are under way if changes in Russian legislation are possible. There are even proposals for a regulatory change, but unfortunately the problem has not been solved yet," the expert said.

The head of the department of stock markets and financial engineering of the Faculty of Finance and the Banking Business of RANEPA recalled that there is only one kind of legislation in Russia, which is the legislation of the Russian Federation, which, unfortunately, does not support such a type of financing now. "So the problem is how legal contracts between the parties will be signed." So currently research and consulting functions of the center will be more in demand," Konstantin Korischenko concluded.

The president of the Association of Russian Banks, Garegin Tosunyan, expressed opinion that "every banking service is in demand here," so "we should welcome this practice." "This type of banking, in terms of the specifics of provided services, may be attractive for a particular group of customers," he said.

The expert also noted that such banks will not be radically different from the usual, but they will be characterized by "forms of specialization, in which preference is given to only investment programs and approaches, while putting a particular emphasis on the cultural and ethical aspects of business.

(ABNA / 27 March 2016)

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Islamic finance set to grow in Russia with new hub in Tatarstan

Islamic finance is drawing more interest in Russia as the country struggles economically and requires fundamentally new approaches to attract investments from abroad.

The sector is just beginning to grow in Russia and its perspectives were discussed during the recent Gaidar’s Forum in Moscow, one of the major annual international conferences on economy in Russia.

Implementation of Islamic finance in Russia started through the so-called pilot projects in the predominantly Muslim republic of Tatarstan. It has both existing infrastructure and client base. It also has lots to offer to the potential partners from the Arabian Gulf countries.

Russia has a native Muslim population of roughly 20 million. As an example, the UK might be a role model for Russia in Islamic finance as it has issued Islamic bonds.

 

Islamic banking could account for up to 5 per cent of the entire financial market in Russia and it could follow the path of  neighbouring Kazakhstan that is expecting Islamic finance to constitute 10 per cent of its financial market by 2020.

Russia initially planned to introduce Islamic banking during the crisis of 2008, as it started looking for additional resources. However, because of unfamiliarity with Islamic banking rules the Russian bank VTB did not succeed in issuing a planned sukuk in 2009. The current crisis dictates new realities for Russia that excludes possibilities of a swift recovery similar to the post-2008 period and the Russian approach is more structural this time.

Tatarstan has nurtured close relations with the Gulf region for years. Delegations from many Gulf countries regularly participate in the international forum of Islamic business and finances ‘Kazan Summit’ in the capital of Tatarstan, Kazan. Several countries have already bankrolled $760 million into ‘Kazan Smart City’, the Tatarstan’s ambitious business hub, as a part of Tatarstan Gulf Investment Company.

In fact, the first Islamic bank in Russia is Ak Bars Bank from Tatarstan. It has already attracted a number of investments from the Gulf, including $60 million in 2011 and $100 million in 2013.  The republic has took its first steps into the world of Islamic finance by issuing a sukuk in 2015 for financing a major business centre in the capital of Kazan.

The pioneering status was highlighted by an agreement in April 2015 between a Malaysian-Russia consortium and the Tatarstan government during the Kazan Sukuk Conference. The agreement serves as a roadmap for opening of an Islamic bank or Islamic banking windows in the republic.

The establishment of Kazan as a centre of Islamic finance in Russia will help expand the sector to other Muslim and non-Muslim regions of the country.

If the Tatarstan’s plan succeeds more regions will follow. Dagestan is the second region in Russia that is undertaking serious efforts to implement Islamic banking and attract investors. It is lagging behind Tatarstan and does not have a clear roadmap yet. However, the local government is already working on implementing similar framework and will largely follow the Tatarstan’s path.

The major problem facing Islamic finance in Russia currently is related to the legal structure. There is neither an existing law nor a draft law regulating the sector in the country. There are also no legal framework that allow state regulators to support banks that have zero-interest operations. Thus, any investment in the field will be of a long-term nature as it will take time to bring in new  legislation.

Russian public as well as authorities are also largely sceptical about Islamic finance. Based on the National Agency for Financial Studies (NAFS) survey only 12 percent of Russian Muslims are ready to use the Islamic banking services. Such results are largely due to the low level of knowledge about the Islamic banking.

In many ways Islamic finance could be implemented in Russia with the bottom-up approach. Local banks could open so-called ‘Islamic banking windrows’ within their branches and see how it works in comparison to standard banking procedures. This approach would gradually reflect advantages of Islamic finance and raise its appeal among the general public.

It might become a feasible alternative to the traditional banking and appeal to both Muslim and non-Muslim Russians with its underlying principle to invest in tangible products. Furthermore, tolerance to customers who have missed payments under Sharia law will attract popularity in a country with infamous brutal practices of collection agencies.

(Al-bawaba Business / 28 February 2016)

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Russia’s Sberbank to launch Islamic banking

At a shareholder’s meeting on May 29, Sberbank’s CEO, Herman Gref, unveiled plans to introduce Islamic banking in Muslim areas across Russia. With a majority Muslim population, the Russian republic of Tatarstan is considered as key in the strategy.

As Russia pivots from west to east, the move hopes to attract morebusiness and capital from Arab countries. “We will actively promote the development of such a tool as Islamic banking, as it opens up a good opportunity to work with international partners amid sanctions,” Gref is reported as saying during the meeting.

Given the rising demand for Islamic banking tools from a growing Muslim population that resides in Russia, investors from the Gulf States have shown their willingness to set up hedge funds in order to facilitate the implementation. The details of how Moscow will incorporate the Islamic financial framework in conjunction with its conventional system are yet to be revealed.

According to Russian media group, Vesti Finance, if Islamic banking is also rolled out in Central Asia, Islamic financial assets within the region could reach $24bn within just three years.

Sberbank is one of the most profitable banks in the region and accounts for two thirds of revenue earned by the banking sector in Russia. Despite its prominence in the industry, the firm struggled considerably in 2014, with profit losses amounting to 19 percent. The bank’s performance is attributed to an unfavourable economic environment, which stems from the dramatic fall of the rouble’s value, coupled with Western sanctions. “We just made it through one of the most difficult years since 2008,” Herman Gref said during the meeting. “But, it turns out that we were better prepared for this crisis than we were in 2008.”

Islamic banking is based on sharia law and Islamic economics, which rest heavily on the principle that loss and profit are shared and prohibits the collection of interest. Moreover, the provision of company shares replaces the percentage basis, again contributing to the idea that the bank shares risks with the borrower. Islamic banks are barred from financing businesses, projects and trade that are involved in sharia-forbidden activities, such as alcohol and gambling.

(World Finance / 01 June 2015)

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Azerbaijan’s Islamic banking skills to drive Russian Islamic finance development

Islamic finance industry in Russia still needs to be developed, despite some 20 million Muslims living in the country, and Azerbaijan’s skills maybe helpful for Russia.

Russia hopes to learn from the experience of Azerbaijan in the field of Islamic banking, said Sergey Drobyshevsky, the scientific director of the Gaidar Institute for Economic Policy in Baku last week.

He said the presence of IBA Moscow, a Russian subsidiary of the International Bank of Azerbaijan, the largest lender and the only state-owned bank in Azerbaijan, must contribute to this.

Drobyshevsky believes it will be easier for the Azerbaijani banks and businessmen to work in Russia than the Malaysian specialists of that sphere, where Islamic banking is also developed.

“There is no language barrier between Azerbaijan and Russia, they have similar culture and a lot in common,” said Drobyshevsky.

He also touched upon the prospects for the development of Islamic banking in Russia.

“The more financial instruments the market has, the more differentiated they are, the more effectively it helps investors to diversify their risks, according to the theory of finance,” he said. “These are new possibilities and their implementation does not depend on the state - it depends on the participants of the market themselves and potential customers of Islamic banking.”

Islamic banking can claim only 5 percent of the Russian financial market during 5-10 years, but the main thing is to start the process, Drobyshevsky emphasized, Trend reports.

Behnam Gurbanzada, the director of Islamic banking at the IBA, earlier called Russia a "promising" platform to further the development of Islamic finance.

“Azerbaijan with all prerequisites to build a bridge between Asia and the Middle East, as well as between the CIS and the Gulf countries, is supposed to receive good financial dividends from applying Islamic banking. The IBA is keen to develop a plan of amendments to the regulatory to apply the full-fledged Islamic banking in the country. The amendments can fasten up the process of creating the Islamic development center in Azerbaijan,” he told AzerNews earlier.

The Baku-based IBA is a universal bank with subsidiary banks in Russia, Georgia and Qatar, as well as representative offices in London, Frankfurt, Luxembourg, Dubai and New York. The bank, 50.2-percent owned by the Azerbaijani Ministry of Finance, holds over 40 percent of banking assets in the country.

The IBA‘s reported consolidated total assets of 8.8 billion manats, aggregate capital of 1.008 billion manats and net profit of 64.5 million under audited IFRS as at year-end 2014.

(Azernews / 20 April 2015)

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Malaysia exports Islamic Finance Expertise to Drive Russian Islamic Finance Ambitions

A rising domestic Muslim population estimated at 17 million, as well as ambitions to tap alternative sources of investment and funding is driving a Russian push to develop its expertise in Islamic finance.

Recent developments include a draft law supported by Russian banks who lobbied the central bank on allowing Islamic finance institutions to enter the Russian market, as well as a recent agreement between Russia’s National Rating and the Islamic International Rating Agency to jointly rate sharia-compliant products.

To provide a further push Russia is looking to Malaysia to assist and build its knowledge and human capital within the sector. In February a delegation from Malaysia, consisting of representatives of the state corporation MATRADE, a subdivision of the Central Bank of Malaysia for development of Islamic finance IBFIM and one of the leading universities University Tun Adbul Razak visited Russia. The legal and economic environment in Russia was assessed, with a view for the development of a feasibility study for opening Islamic windows and launching Islamic banking products in the Russian Federation.

Kazan Federal University and University Tun Adbul Razak Sign Agreement

A more recent development has seen one of the oldest universities in Russia, the Kazan Federal University, located in Kazan, Tatarstan this week sign a Memorandum of Understanding with University Tun Adbul Razak to develop cooperation in the field of Islamic banking law.

A delegation from Malaysia visited several Kazan Federal University units including the Institute of Management, Economics and Finance, and the Faculty of Law.

Malaysia Exports Islamic Finance Expertise

Malaysia has developed considerable expertise in Islamic finance being a pioneer in modern Islamic Banking boasting the world’s biggest sukuk market. It is looking to export its Islamic finance expertise and its banks have successfully assisted in Singapore and the Hong Kong government to issue sukuk.

A planned 2011 sukuk issuance by the Tatarstan Republic was postponed due to “technical difficulties” Bloomberg reported in 2014, and Vnesheconombank, Russia’s state development bank, is seeking advice from lenders in the Middle East on how to sell its first Islamic bonds, the RIA Novosti state-news service reported Dec. 16.

Malaysia was instrumental in the first sovereign Sukuk in the Russian Commonwealth with the issuance in 2012 of the Development Bank of Kazakhstan sukuk for 240 Million Malaysian Ringgit, which was issued in Malaysia.

(Islamic Finance.Com / 16 April 2015)

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Russia to Lift Barrier to Islamic Finance as Western Sanctions Continue

Russian lawmakers have introduced to parliament a draft bill to support Islamic finance, aiming to attract capital inflows at a time when an economic slowdown is intensifying and Western sanctions show no sign of being lifted.

The draft law, sent to parliament's lower house, the State Duma, this week, proposes allowing banks to engage in trade activities, a concept central to many of the structures used in sharia-compliant financial products.

While many other obstacles remain, the bill is seen a first step to spur development of a sector which has posted double-digit growth in several Gulf and Southeast Asian countries, but which has struggled to get off the ground in Russia.

Instead of interest, which is prohibited on religious grounds, Islamic finance relies on banks charging service fees and depositors sharing in bank profits. Turkey is another country that is looking to expand in the sector.

"During a period of a practically total economic blockade from Europe and the U.S., our banks must find new ways to attract investment," said Dmitry Savelyev, who sits on the Duma's financial markets committee.

Western-imposed sanctions on Russian officials and large firms over the country's role in the Ukraine crisis have dried up access to international capital markets. A collapse in oil prices has further contributed to a slowdown in the economy, which is expected to contract by at least 3 percent this year.

The draft law must pass three readings in the Duma before it moves to the upper house and then to President Vladimir Putin's desk to be signed into law.

Lawmakers would have to pass further amendments in areas such as taxation before the sector can fully develop. The changes could take at least a year to be passed, experts say.

State development bank Vnesheconombank and VTB Bank, both hit by sanctions, have sought to build their Islamic finance know-how in a bid to develop new funding sources.

One impulse for the recent efforts is that Russia is looking to diversify its economic ties away from Western markets, said Linar Yakupov, the head of the Association of Regional Investment Agencies of the Russian Federation.

"This is where recent sanctions became a kind of catalyst, an extra push, to further look at the economic perspective in the relationship between Russia and OIC [Organization of Islamic Cooperation] countries," he said in an interview in Bahrain.

Islamic finance could attract foreign investment and also mobilize funds from Russia's 20 million Muslims, Yakupov added.

Political Will

Legislation is crucial to facilitating Islamic finance transactions which can attract double or triple tax duties as they require multiple transfers of underlying assets, moves which countries like Britain and Luxembourg have addressed.

"It is theoretically and technically possible for the government to prepare a law on Islamic banking, but it all depends on political will," said Murad Aliskerov, chief executive of LaRiba Finance, an Islamic financial company based in Russia's Dagestan republic.

"Islamic banks could have a huge social impact and act as an alternative to traditional banks."

A feasibility study is now under way between a consortium of Russian and Malaysian investors to create a standalone Islamic bank or an Islamic unit within a Russian lender, Yakupov said.

The study would be ready by September, allowing the sides to draw up concrete details for creating such an entity and assess which laws would have to be changed, he said.

Companies are also keen to explore Islamic bonds [sukuk] as alternative financing tools, with Russia's Tatarstan republic hosting an industry summit next month focused primarily on such instruments.

The impact could extend to former Soviet republics in central Asia. A proposal is being pushed to create a regional working group to coordinate Islamic finance efforts with countries such as Kazakhstan, Tajikistan and Kyrgyzstan.

(The Moscow Times / 20 March 2014)

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Russia Recognizes the Benefits of Islamic Banking

It’s very hard to conceptualize a banking without interest. Interest after all is the primary fuel and the metric of success in commercial banking. Well, thanks to Islamic prohibitions against charging interest, there is a very robust branch of alternative banking called Islamic banking.

Islamic banking doesn’t look money as a commodity. Instead, it looks at commercial transactions and makes its money off the commercial transactions made possible by its lending activities. Compare this with conventional banking where the bank is focused solely on the amount of money it lends out and the amount of money it collects. The amount of money it collects has to have an interest because that’s how it measures its success. Islamic banking, on the other hand, lends out money but profit and losses are shared by the bank. In other words, the money lent out by the bank is not the primary measurement of success, but the economic activity made possible by those funds.

This may seem mind-blowing and foreign to many economies focused on conventional banking. However, Islamic banking actually accounts for $2.6 trillion of global economic activity, and that rate is growing. It is no surprise that the UK, South Africa, and Luxembourg have forayed into this specialty type of banking. Now Russia is looking into Islamic finance.

There’s a lot of money to be made in Islamic finance. At the very least, if Russia opens its first Islamic bank, it might be able to attract capital from Indonesia, Malaysia, Arab states, and the cash-rich United Arab Emirates. This will be Russia’s way of getting around the tough international financial sanctions it’s facing due to its involvement in the Ukrainian civil war. Russia is looking towards Islamic banking as a way to keep the Russian economy from sliding towards a recession.

The Russian economy has been through a tough time recently. In addition to the sanctions, it’s been hammered hard by the crash in global oil prices. This is a seriously bad news for Russia because the vast majority of its GDP comes from its energy exports.

(Street Wise Journal / 27 February 2015)

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In search for economic 'blessings'? Russia's grand plans to tap Islamic finance

Russia is among the largest newsmakers in the world’s political and economic arena. Yet, in the world of Islamic finance, it still lags behind the rapidly developing industry.

The year 2014 brought changes for the Russian economy. The sanctions imposed by the European countries and the US and historically low oil prices have led to prices of many goods to double in the internal market, and this concerns not only imported items. Businesses have lost access to traditional finance and most banks supported by the government can suggest only limited financing at a very high cost.

Though the Russian economy is relatively stable, the market is troubled about the future.

During his speech at the annual Gaidar Economic Forum on January 14-16 Dmitry Medvedev, the Prime Minister of Russia, called for the development of sectors that could substitute the place of imports in the economy.

At the same forum, a session was dedicated to Islamic finance and its development prospects in Russia, thus confirming that the market has shown greater interest towards the industry.

Among the speakers at the session were Linar Yakupov, director of the Islamic Business and Finance Development Fund, Bulat Mulyukov, chairman of the Centre for Islamic Economics and Finance Development (CIEFD), Murad Aliskerov, director-general of the Islamic financial company, LaRiba Finance, and Victor Chetverikov, general director of the National Rating Agency.

For the first time in Russian history, an expert commission of the National Rating Agency, the second largest independent Russian rating agency, awarded diplomas this year to those who have made contributions to the development of Islamic finance in the country.

Among those awarded were: Aliskerov, for the creation of an efficient Islamic financial company, Rashid Nizameev, CEO of Amal Financial House (Kazan), for efficient management of the company, and Mulyukov for disseminating information in the sphere of Islamic finance.

Indeed, 2014, especially its second half, was filled with economic and finance forums and seminars, which embraced among other topics, the issue of Islamic finance. The industry, which is capable of bringing new investments into the market, finally seems to be taken more seriously. Islamic finance is now being studied at various government bodies and institutions, both at the federal and regional levels.

At the same time, experts of Islamic finance and Islamic financial companies pressed ahead with their work. 

Moscow Halal Expo, the annual meeting platform for Islamic financial companies and experts from all Russian regions, held a seminar devoted to the bases of Islamic finance. LaRiba Finance, based in Dagestan, was named the ‘Halal Company of the Year’ in an annual contest held by Moscow Halal Expo along with the National Rating Agency.

At a round table conference titled: ‘The practice of Islamic Business and Finance in Russia, Success Stories, New Horizons of Development’, Shaikh Abdulkaher Qamar, deputy chairman of the Islamic Fiqh Academy, talked of fatwas in economics, including Islamic finance.

Behnam Gurbanzade, head of the working group on the implementation and development of Islamic banking in the International Bank of Azerbaijan, announced the organisation’s willingness to offer services in Islamic finance to the Russian market.

Mulyukov said the CIEFD was created to solve problems related to the development of Islamic finance in Russia.

Aliskerov said the relatively high cost of Islamic financial instruments in the Russian market is related to the absence of any support from the government.

Rashid Nizameev, director of Amal Finance House, spoke about the pricing of Islamic financial services market in Russia.

Isa Barkhaev, executive director of EC Fikra, shared his experience on the evaluation of contracts for Shariah compliance.

In 2014, three AAOIFI Shariah standards were translated and published in the Russian language. In November 2014, the delegation visited Bahrain to meet the new secretary general of the main Shariah standard setting organisation.

In 2015, it is expected that the discussions over the best legal framework for Islamic financial companies will be continued on various levels. The process is likely to be time-consuming.

Islamic financial companies in the Russian market are likely to make attempts to combine efforts for creation of a fund that would attract investments. However, a law on Islamic banking is the need of the hour in Russia as it will facilitate international Islamic investors planning on entering the market.

(Albawaba Business / 16 February 2015)

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Russian Banks Look to Build Islamic Finance Knowledge in Face of Sanctions

Russian banks are developing their expertise in Islamic finance to help broaden funding sources for local firms, though Western sanctions over the Ukraine crisis and the absence of a regulatory framework could hinder those efforts.

Russia's Islamic banking sector is still in its infancy. But an estimated 20 million Muslims living in the country are a potential source of money, as are cash-rich Islamic funds abroad.

Islamic finance has become a mainstream funding source for some other governments and companies over the past several years, with even non-Muslim nations such as Britain and South Africa issuing debut Islamic bonds (known in Arabic as sukuk) last year.

However, the European Union and the United States are seeking to cut overseas funding to Russian firms over Moscow's support for rebels in eastern Ukraine. Banks in the Middle East and southeast Asia, the major markets for sharia-compliant debt, are wary of becoming tangled in the sanctions.

So some Russian lenders are trying to build their own in-house knowledge of Islamic finance.

State development bank Vnesheconombank (VEB), which has been targeted by the sanctions, is seeking help from Middle East firms to develop its Islamic finance expertise, a spokesperson said, without naming those institutions.

"VEB sets as it goal diversification of project financing instruments, and among those considers Islamic finance tools."

VTB Bank, Russia's second-largest lender and another sanctions target, is exploring sukuk deals for several of its clients, although some questions remain over the accounting treatment of such transactions, the bank said in response to questions.

"Nonetheless, this remains a current issue, especially given growing interest in Asian markets."

In December, officials from institutions including Moscow Industrial Bank, VEB, SME Bank and the Russian Direct Investment Fund took part in a trade mission to the Gulf region, with Islamic finance featuring in the discussions.

In the same month, Russia's National Rating Agency signed an agreement with the Bahrain-based Islamic International Rating Agency to jointly assign ratings for Islamic financial products.

This will allow sharia-compliance quality ratings to be assigned for sovereign debt and Islamic financial institutions, the Russian agency said in a statement. Firms ranging from an Islamic leasing firm in the Russian republic of Dagestan to a fish skin leather manufacturer in Ingushetia, another Russian republic, have received such ratings in the past.

Regulation 

The lack of a Russian regulatory framework for Islamic finance is an obstacle; both issuers and investors rely on clear regulations to reduce risk and costs.

In October, the Association of Russian Banks asked the Central Bank to help develop Islamic finance, suggesting it adopt a special federal law.

The regulator continues to study the question of introducing Islamic finance regulation but work is at an early stage, a Central Bank spokesperson said last week. It is not yet clear when any new rules would be drafted, he added.

The Central Bank could draw on the experiences of former Soviet republics Azerbaijan, Kyrgyzstan and Kazakhstan, all of which are drafting new laws to regulate Islamic banking.

Even without a regulatory framework, Russia's banking sector has seen some small-scale Islamic finance deals. Kazan-based AK BARS Bank, Russia's 18th largest bank by assets, has raised a combined $160 million via two Islamic syndicated loans since 2011 and is open to tapping the market for a third time.

"We will continue working in this direction, further diversifying our funding," said Elina Khayrullina, an official at AK BARS.

A sukuk issue by a local or regional government would be needed to encourage issuance by Russian companies, she said. "In general, sukuk might be an option for Russian companies given there is a benchmark at state or regional level."

Azerbaijan's largest bank plans to set up a stand-alone Islamic unit which would seek business across the region, including through its Russian subsidiary.

There have been false starts, however. The Russian republic of Tatarstan has planned for a sukuk issue as far back as 2011, but no deal has materialized.

(The Moscow Times / 12 February 2015)

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Facing sanctions, Russian banks look to build Islamic finance know-how

Russian banks are developing their expertise in Islamic finance to help broaden funding sources for local firms, though Western sanctions over the Ukraine crisis and the absence of a regulatory framework could hinder those efforts.

Russia's Islamic banking sector is still in its infancy. But an estimated 20 million Muslims living in the country are a potential source of money, as are cash-rich Islamic funds abroad.

Islamic finance has become a mainstream funding source for some other governments and companies over the past several years, with even non-Muslim nations such as Britain and South Africa issuing debut Islamic bonds (sukuk) last year.

However, the European Union and the United States are seeking to cut overseas funding to Russian firms over Moscow's support for rebels in eastern Ukraine. Banks in the Middle East and southeast Asia, the major markets for sharia-compliant debt, are wary of becoming tangled in the sanctions.

So some Russian lenders are trying to build their own in-house knowledge of Islamic finance.

State development bank Vnesheconombank (VEB) [VNSCB.UL], which has been targeted by the sanctions, is seeking help from Middle East firms to develop its Islamic finance expertise, a spokesperson said, without naming those institutions.

"VEB sets as it goal diversification of project financing instruments, and among those considers Islamic finance tools."

VTB Bank, Russia's second-largest lender and another sanctions target, is exploring sukuk deals for several of its clients, although some questions remain over the accounting treatment of such transactions, the bank said in response to Reuters questions.

"Nonetheless, this remains a current issue, especially given growing interest in Asian markets."

In December, officials from institutions including Moscow Industrial Bank, VEB, SME Bank and the Russian Direct Investment Fund took part in a trade mission to the Gulf region, with Islamic finance featuring in the discussions.

In the same month, Russia's National Rating Agency signed an agreement with the Bahrain-based Islamic International Rating Agency to jointly assign ratings for Islamic financial products.

This will allow sharia-compliance quality ratings to be assigned for sovereign debt and Islamic financial institutions, the Russian agency said in a statement. Firms ranging from an Islamic leasing firm in the Russian republic of Dagestan to a fish skin leather manufacturer in Ingushetia, another Russian republic, have received such ratings in the past.

REGULATION

The lack of a Russian regulatory framework for Islamic finance is an obstacle; both issuers and investors rely on clear regulations to reduce risk and costs.

In October, the Association of Russian Banks asked the central bank to help develop Islamic finance, suggesting it adopt a special federal law.

The regulator continues to study the question of introducing Islamic finance regulation but work is at an early stage, a central bank spokesperson told Reuters last week. It is not yet clear when any new rules would be drafted, he added.

The central bank could draw on the experiences of former Soviet republics Azerbaijan, Kyrgyzstan and Kazakhstan, all of which are drafting new laws to regulate Islamic banking.

Even without a regulatory framework, Russia's banking sector has seen some small-scale Islamic finance deals. Kazan-based AK BARS Bank, Russia's 18th largest bank by assets, has raised a combined $160 million via two Islamic syndicated loans since 2011 and is open to tapping the market for a third time.

"We will continue working in this direction, further diversifying our funding," said Elina Khayrullina, an official at AK BARS.

A sukuk issue by a local or regional government would be needed to encourage issuance by Russian companies, she said. "In general, sukuk might be an option for Russian companies given there is a benchmark at state or regional level."

Azerbaijan's largest bank plans to set up a stand-alone Islamic unit which would seek business across the region, including through its Russian subsidiary.

There have been false starts, however. The Russian republic of Tatarstan has planned for a sukuk issue as far back as 2011, but no deal has materialized.

(Reuters / 09 Febuary 2015)

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Russian Banks Warm to Shariah as Crisis Looms

Russian lenders are stepping up efforts to tap Islamic finance as international sanctions and a slump in oil prices push the world’s biggest energy exporter to the brink of a recession.

Vnesheconombank, Russia’s state development bank, is seeking advice from lenders in the Middle East on how to sell its first Islamic bonds, the RIA Novosti state-news service reported Dec. 16. Banks and companies are seeking Shariah financing after the nation’s currency weakened to an all-time low almost two weeks ago, according to the Russian Business Council in Dubai.

The increased efforts underscore how the highest overnight lending rate since at least 2006 and U.S.-led sanctions linked to the conflict in Ukraine are putting a squeeze on banks including Gazprombank and VTB Bank OJSC. Lawmakers rushed through legislation on Dec. 23 allowing the Deposit Insurance Agency to buy stakes in banks before they face bankruptcy proceedings to keep the system stable.

Banks and corporates “want to know how it works and how they can get into this market,” council Chairman Igor Egorov said in an interview at his Dubai office on Dec. 23. “They see an urgent need within one-to-two years, when the hunger for finance will be very acute because at the moment we still don’t see the full effect of sanctions.”

Attitude Shift

Adopting Islamic finance would mark sea change for the predominantly Russian Orthodox nation. Alexei Ulyukayev, who was first deputy chairman of the central bank until last year and is currently economy minister, said in 2011 the industry isn’t of “primary, secondary or even tertiary importance,” Gazeta.ru reported.

The central bank is now considering legislature for Islamic finance following requests from lenders, Governor Elvira Nabiullina said on Nov. 26.

Russia’s economy will probably contract next year and won’t see growth for four consecutive quarters, according to a Bloomberg survey of economists. The ruble declined almost 40 percent in 2014 as Brent crude headed for its biggest drop in six years. It’s the worst performance of about 170 currencies tracked by Bloomberg after Ukraine’s hryvnia. Brent rose 0.9 percent to $60.01 a barrel at 12:11 p.m. in Moscow.

The Bank of Russia increased the interest rate 6.5 percentage points to 17 percent on Dec. 16, which means Islamic banks can offer better deals than their conventional counterparts, according to the Association of Russian Banks.

Sensitive Issue

“There’s a strategic opportunity for Islamic finance to develop in Russia because given the 17 percent rate, clients won’t go to regular banks,” Sergey Grigoryan, head of analysis division at the association, said by phone from Moscow on Dec. 23. “The market is forcing the central bank to take a closer look at the current situation.”

While Muslims make up as much as 15 percent of the nation’s 142 million people, U.S. government data show, a limited understanding of Shariah finance’s principles may delay its development in Russia.

“It’s quite a sensitive area because many people don’t really understand it, or they may see it as a threat, something unknown,” Egorov said. “They don’t understand how business is related to religion.”

Cash Pool

That hasn’t stopped businessmen from exploring the industry. The heads of Russian banks and companies, including Vnesheconombank and Uralvagonzavod, discussed Islamic finance as part of a two-day meeting in Bahrain with their counterparts from the six-nation Gulf Cooperation Council this month, state-run news agency BNA reported Dec. 14.

“It’s now on the agenda,” Egorov said of Shariah-compliant banking. “There’s no reason why Russia should limit itself and not get funds through Islamic finance.”

(Bloomberg / 29 December 2014)

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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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Azerbaijan's top bank to drive Islamic banking in Russia

The International Bank of Azerbaijan, the major state-owned bank holding at least 40 percent of all bank assets in the country, is determined to play an active role in the Islamic finance markets of the Persian Gulf and Russia.

Director of the Islamic Banking Department of IBA Behnam Gurbanzade told Trend Agency that the bank is constantly expanding its ties with financial institutions interested in Islamic financing which in turn would create a favorable investment environment in Azerbaijan.

"Currently, the total amount of funds attracted by the IBA from the Islamic financial institutions stands at 218.7 million," he said.

The bank's goal is to attract $400 million in 2014. The current share of Islamic banking in the IBA loan portfolio, which was 5,695 billion manats as of July 1, 2014, is around 3 percent.

Gurbanzade further said that the IBA plans to establish a working group and prepare a package of proposals to the Central Bank of the Russian Federation given the interest of Russian banks in Islamic banking.

"We see that the Central Bank of Russia is actively working to improve the banking system of the country. Russia specifically revoked the licenses of more than 30 banks that didn't meet the requirements of the Central Bank of the country, and this process is still underway. We assume it would be appropriate to establish a working group and prepare a package of proposals to the CBR after the reforms are implemented. IBA-Moscow has initiated this process, and today the IBA and IBA-Moscow are working to analyze Russian legislation to provide financial services based on Islamic principles and to develop Islamic banking products there," he said.

The IBA has repeatedly announced that Azerbaijan has a good chance of setting up an Islamic banking center across the CIS. The IBA is ready to take the responsibility of promoting Islamic banking in the CIS countries as requested by Financial-Banking Council of the CIS.

Azerbaijan with all prerequisites to build a bridge between Asia and the Middle East, as well as between the CIS and the Gulf countries, is supposed to receive good financial dividends from applying Islamic banking. The IBA is keen to develop a plan of amendments to the regulatory to apply the full-fledged Islamic banking in the country. The amendments can fasten up the process of creating the Islamic development center in Azerbaijan.

So far the Islamic Banking Department of the IBA, which began to offer the Islamic banking services from April 2013, has several products to offer to their clients such as two types of Ijarah - house financing and goods financing, Qard-Hasan (current account) - for Individuals and Corporate customers, Wakalah deposit - from 3 up to 120 months, Islamic Bank cards - Jasmine card, Qibla card. The IBA has already proceeded to work on Sukuk structuring.

The bank is also actively working in the field of improvement of the legislation. The work on adoption of legislation on Islamic banking in Azerbaijan will begin in September.

Gurbanzade said the bank has officially notified the Economy and Industry Ministry about the approval of a $200,000 grant for this purpose.

"We've formally applied to the Cabinet of Ministers on the proposal of the ministry to set up a working group that will prepare the Islamic banking laws for the country. So far the candidates for group's members were proposed from the Economy and Industry Ministry, the Central Bank, the IBA and other organizations. In parallel, the text of the grant agreement is under coordination with the IDB. The deal may be signed by late August. In turn, this will enable the working group to embark on the 12-month project as early as in September 2014," Gurbanzade said.

He further added that the working group will finish its analysis of the international Islamic banking legislation during September-December, and in the spring of 2015 will submit the draft for consideration to the Central Bank.

The bill can be adopted by the parliament in 2015 should it is coordinated by late this year.

Gurbanzade said despite lack of the Islamic banking legislation the internal Islamic banking in Azerbaijan has reached grandmaster performance.

"The Islamic finance in the country through the Department alone is about $215 million," he underscored.

In addition to the IBA specialized department, the country also has another full-fledged Islamic financial institution - Ansar Leasing, whose volume of business is few times less than the activity of the department.

(Azernews / 02 August 2014)

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