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Why Is Russia Introducing an Islamic Banking System?

2022/07/24 08:07:00 | Ranya Turki | Reports
“Islamic banks are operating under religious and ethical regulations.”
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Russia is drafting a new law legalizing and regulating Islamic banking in the country, and it will be initially introduced in four Muslim-majority republics as part of a plan, including Chechnya, Dagestan, Tatarstan, and Russian Bashkiria.

The non-credit banking institutions would function as Financing Partnership Organizations (FPO), which, according to the Russian daily Kommersant's report, will offer Sharia-compliant financial products and fit Muslims' needs.

The same report said that FPOs would be under Russia's Central Bank's control to oversee all operations.


Resorting to Islamic Banks

The State Duma is preparing to adopt a new law based on Islamic banking in Russia; the news was reported by the Association of Banks of Russia with reference to Anatoly Aksakov, Chairman of the State Duma Committee on Financial Markets, announced on Friday, July 15, 2022, that the new system will be introduced in four countries which are Dagestan, Chechnya, Tatarstan and Bashkiria, Russia, as a first step.

He said, "these initiatives are gaining attention because some countries in the Middle East and Asia have shown their interest in investing in these Russian regions, but they have not made this investment for religious reasons."

In a previous interview with RT, Aksakov said that if this plan works, the project can be launched throughout Russia.

He added that the initiative would attract entrepreneurs from the Middle East to invest in Russia.

After being hit with western sanctions because of the ongoing military operations in Ukraine, Russia has taken this step in a bid to lure alternative investors from Muslim countries.

Last year the State Duma Committee on Financial Markets set up a working group on Islamic finance to encourage investment from the UAE and other Muslim states.

"The global Islamic banking sector is said to be growing at an annual rate of 14 percent and is estimated to be worth $1.99 trillion, accounting for a six percent share in the non-Islamic global banking industry," according to MEMO.


Islamic Banking System

The first Islamic bank established outside the Muslim world was in Britain in 2004.

Countries having a larger number of Muslims like Qatar, UAE, Turkiye, Saudi Arabia, Malaysia, and Pakistan, represent the vast majority of Islamic banking assets (93 percent.)

Thanks to the Russian new law, the FPOs can raise funds from legal entities and even from individuals to invest them in projects based on Islamic law on a partnership basis and the proposed legislation states.

Islamic banks operate under religious and ethical regulations and do not accept interest payments or monetary speculations.

According to Pars Today, the 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 an 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."

According to Islamic law, it is not acceptable to lend money at interest; instead, there are "legal" ways to replace classical lending, like an installment plan, equity financing, and leasing.

According to the explanatory document of the bill, there will be non-credit financial structures, OPF, where the Central Bank will become their supervisor.

In fact, a working group on Islamic finance has been created since May 2021 to introduce targeted adjustments to laws to attract inventors from the UAE and other Muslim countries.


Cutting Ties

"In the new situation characterized 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.

Aksakov said that the new system of Islamic banking in Russia could be adopted this autumn, and the bill was sent to all coordinating bodies.

FPOs will have the right to provide cash loans to legal entities and individuals without imposing remuneration but with the condition of installment or financial lease agreements.

These organizations can also finance the production and trading activities "through participation in the authorized capital of legal entities and (or) on a partnership basis" while providing guarantees, according to Hindustan News Hub.

FPOs also will be able to raise funds and invest them in projects that comply with Islamic law on a partnership basis. Such a scheme threatens to lose money, lawmakers warn. "By transferring funds to the FPO, the investor participates in the profits and losses of the partner financing organization, which excludes the guaranteed return of the invested amount," the explanatory note to the bill says.

The Central Bank supports the decision but said a deep discussion is required.

This is why the new regime will be implemented in a limited number of regions during two years. "It involves the exemption of a number of FPO operations from taxes on value-added and profits," Hindustan News Hub writes.


Islamic Banking System as an Alternative

After the economic recession of global banking in many countries around the world, the attention to Islamic banking has increased.

The principles of Islamic banking are essentially based on Shariah which emerged from the Koran. What makes the system attractive for many western countries is that there is no profit return, which does not require any risk.

In fact, the system does not use any financial instruments which are not covered by assets (derivatives).

On the other hand, these banks, while granting loans, assume all or a part of risk and value mutual cooperation, if in the case of implementation of a project. The main goal of which is to finance projects and promote business development.

Conventional banks' main goal is to maximize profit based on loans, unlike Islamic banks that strictly prohibit the use of interest. Many economists were dubious when the first Islamic banks were established, believing that interest-free banking couldn't survive for a long time. However, this skepticism disappeared because Islamic banks are one of the fastest-growing financial industries and are among the rapidly-growing components of the world's financial system.

Islamic banks are gaining momentum not only in the Muslim world but also in the developed countries of the West.





Russia is considering introducing an Islamic banking system [Arabic]


Russia is considering introducing an Islamic banking system


Russia mulls introducing Islamic banking system


The State Duma is going to legalize Islamic banking – The Moscow Times

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fpo islamic banking russia