Conventional finance may need to make room for the Islamic variety, at least in Russia. In 2009 and 2010, one survey found that 97 percent of people who were mainly Muslim or from an Islamic background were interested in using an Islamic bank. Of that 97 percent, 40 reside in Moscow. How far has Islamic finance come in a country that’s one of the most influential game-players in the financial world?
The Voice of Russia invited two experts in the field, Farmida Bi, lawyer and partner at Norton Rose LLP and Adnan Halawi, Head of Islamic Finance at Zawya, to share their views on the market's current trends and future potential.
Though not formally allowed to be practiced in America or Russia, it's still growing at an annual rate of around 15 to 20 percent. So, what makes this faith-based financial concept so appealing? One possible factor that may appeal to the public about Islamic finance is that it prohibits riba, the charging of interest on a loan. Despite the ban on interest charges though, Islamic banks and financial firms still manage to make money.
“For example, the institutions can share in the profits of their customers since the institutions will have entered into joint ventures or investment arrangements with their customers which entitles the institution to a share of the profit generated, or it may be receiving rental under a lease arrangement or a higher price for a commodity it sells than it paid to buy it,” explained Farmida Bi, lawyer and partner at Norton Rose LLP.
There are though certain loopholes involved in this more appealing aspect of Islamic finance, with demonstrably low risk for both sides, specialists question its stability and longevity. “Islamic finance is a new trend and debates are mostly around sharia compliance of certain products and sharia structures. For example, certain sharia structures are accepted in Malaysia and not in the GCC,” said Adnan Halawi, Head of Islamic Finance at Zawya and continued, “However, the industry is witnessing continuous consolidation and efforts to bring opposing concepts closer and into consensus with everyone.”
Halawi is not the only expert to have realised that the road to Islamic finance is still being paved. “There is debate about a small number of things such as whether debt can be traded at any price other than par, but each Islamic participant has to determine whether the product being offered, which will normally have the benefit of a fatwa (a religious Islamic decree) from leading scholars, is acceptable,” Bi told the Voice of Russia.
There are still a few roadblocks to clear before it can achieve its true potential in Russia. As Halawi said, “Russia should introduce some Islamic banking regulations and laws before companies there start to offer Islamic finance products. Currently if a Russian company wishes to sell Islamic and Shariah Compliant bonds (sukuk), the company has to sell it overseas in countries where the Islamic bond market is well established such as Malaysia.”
Bi made it clear that, “there has been growing interest in Islamic finance in Russia and as the industry grows in Russia's trading markets, such as Turkey, it is likely to become of greater interest in Russia.” Russia’s financial sector could get a boost by exploiting the Islamic financial market to its own advantage, but present policies need revision and accessible resources and education on the subject are called for.
If Russia does choose to accept Islamic finance, job creation, investment diversification, and foreign investment could serve to give the Russian economy a boost according to Halawi. Expansion would be welcomed as the demand is certain to be exist in the country. The Pew Forumon Religious and Public Life reported that the Muslim population in Russia alone is expected to grow from 16.4 million in 2010 to 18.6 million in 2030. Even though Muslims are likely consumers of Islamic finance, any religious background can do business with this sector, offering an almost unlimited potential client database.
For now, Russia is missing out on a groundbreaking opportunity. “The Islamic market is buoyant at the moment and we are busy on a number of transactions,” said Bi, who works on both conventional and Islamic deals. As the public and private sector demands more options in the market, Islamic finance may become a viable option for people on both sides of the trading world.
(The Voice Of Russia / 15 March 2013)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com