Russia may amend its financial regulations to allow Islamic banking in abid to attract funds from Muslim countries, as its economy struggles with a recession and Western sanctions.
The move comes as economists, including those at the International Monetary Fund, say U.S. and European sanctions are having a significant negative impact on the Russian economy by blocking important Russian companies from accessing global financial markets.
Officials have created a task force charged with implementing Islamic banking in the country, including amending the country’s banking laws, said Dmitry Savelyev, deputy chairman of the State Duma Committee on Financial Markets and the leader of the task group, the TASS news agency reported.
Islamic law, known as Sharia, places restrictions on certain types of financial transactions, such as interest payments. Over the years, a sophisticated field of banking practices compliant with Sharia has arisen to facilitate financial activity among pious Muslims, including the issuance of Islamic bonds, known as “sukuk.”
The market for Islamic finance is expanding rapidly and should reach a total size of $2.6 trillion by 2017, according to a report by global consulting firm PricewaterhouseCoopers. Another estimate by the IMF said totalglobal Islamic assets would reach $3.4 trillion by the end of 2015.
Russia has a significant Muslim minority, estimated at about 15% of the population, which could make the practice attractive here.
Konstantin Baymukhashev, an attorney at UFS IC, said the changes in Russian legislation should help attract investment into the Russian economy from Arab countries.
Attracting Islamic assets
Rustam Minnikhanov, the president of Tatarstan, one of Russia’s predominantly Muslim regions, has been one of the most vocal proponents for bringing Islamic finance to Russia.
“The Muslim countries have not taken part in the attempts to isolate ourcountry on the international stage, and the latest developments in the world economy have shown that Islamic banks can withstand variousglobal crises and complement the global financial system,” Mr. Minnikhanov said in a speech in June at the KazanSummit Economic Forum.
Islamic finance will help Russian companies compensate for the lack of funding caused by the recent deterioration of relations between Russia and the West, he argued.
In July, Mr. Minnikhanov concluded a cooperation agreement with the president of Russia’s largest lender, state-owned retail banking giant Sberbank, involving the development of Islamic banking in Tatarstan.
Ahmed Mohammed Ali Al-Madani of the Islamic Development Bank, a multilateral Islamic lending organization based in Saudi Arabia, told RIR that Sharia-compliant bonds have also been issued by entities based in non-Muslim countries, including the United Kingdom, and that the worldwide amount of such assets has reached $120 billion.
“The republic of Tatarstan could be promoted as an Islamic finance hub within Russia,” Mr. Al-Madani said. Tatarstan’s largest bank, AK Bark, has already attracted some funds based on Islamic investment. Furthermore, in January 2015, local insurance operator Alliance began selling a specialized insurance product called“Halal Invest” that is compliant with Islamic norms.
“This kind of business is gaining momentum around the world, and by developing it in this country, we will diversify sources of funding and increase confidence in the banking system,” said Semyon Nemtsov, an analyst at Russ-Invest investment company.
However, analysts said Russia is unlikely to see a sudden surge of investment from Islamic countries.
“Islamic banking is first and foremost a religious and ideological concept. Its actual financial significance is secondary. This is why there are in fact a great deal of obstacles that hamper its implementation within Russia’s legal and financial system,” said Konstantin Korishchenko, deputy director of the Department of Capital Markets and Financial Engineering at the Russian Presidential Academy of National Economy and Public Administration.
According to Mr. Korishchenko, there are numerous factors that will significantly complicate the alignment of Islamic finance and standardized Western banking, including the facts that Islamic regulations require that assets be sorted according to their source and deny explicit interest payments or futures transactions.
Moreover, Russia is likely to have more difficulties introducing Islamic finance than do common law countries like the UK. The introduction of Islamic banking will require deep, fundamental changes to Russian law.
According to Mr. Baymukhashev, Islamic and Russian banking systems are radically different from each other. “Islamic banks do not provide their clients with loans in the classical sense, but rather sell actual products or act as partners (co-investors) in some kind of a project, thus bearing all the associated risks with the client,” Mr. Baymukhashev explains, adding that Islamic banking also precludes the financing of companies that produce or sell alcoholic drinks.
“The difference between those two financial systems is significant. Amending the law is only a part of the ground we will have to cover while implementing Islamic banking in Russia,” says Mr. Baymukhashev.
SANDTON – Responsible investing is becoming a major theme across the global industry. And one of the most significant areas within this sphere is faith-basedinvesting.
Speaking at the Money Expo 2015 at the Sandton Convention Centre, investment analyst at 27Four Investment Managers Nadir Thokan said that the Islamic Finance industry is still in the early stages of growth, but the potential is significant.
“The conventional financial services industry is more than 400 years old,” Thokan said. “But Islamic finance only dates back 40 years.”
While there has been substantial innovation over that time, the market remains relatively small.
“Currently the global market for Islamic finance is $1.5 trillion and its growing at 30% per annum,” Thokan said. “But penetration levels are still very low. Twenty-six percent of the world’s population is Muslim, but just 1% of banking assets globally are Shari’ah compliant. Given the huge pools of wealth in the Muslim world, this is poised for massive increases over the next few years.”
Thokan believes that the biggest potential for growth is in asset management, which still makes up a very small part of the Islamic finance industry as a whole.
“Of the $1.5 trillion in Shari’ah compliant assets, only $64 billion sits in fund management,” he said. “Only $25 billion of that is in equity mandates. But this is a multi-trillion dollar industry in the conventional asset management space.”
He argued that as penetration of products increases and as more people take a greater interest in Shari’ah compliant finance, this will also be a platform for very attractive returns moving forward. As flows into these products increase, returns will move upward.
In particular, he highlighted the global Sukuk market as one in which 27Four sees huge potential.
In simple terms, Sukuk can be described as a Shari’ah compliant bond product. With a bond, an issuer will receive capital from a pool of investors and in return will pay them an interest coupon over a set period and return their capital to them at the end of it.
Sukuk works in a similar way, but it is structured differently in that it gives ownership in a particular product. It therefore does not pay interest, but rather a share of the issuer’s earnings.
“With a conventional bond you take very little risk because unless the company goes bankrupt you are guaranteed the interest and your money back at the end of the term,” Thokan explained. “With Sukuk, however, you participate in profit and loss of that company. Typically what we’ve seen happening though is that it finances fairly low risk projects where cash flows are reasonably certain.”
Thokan said that there is huge potential in this market as it is tapping into a huge source of potential funding that is looking for good rates of return.
“In the Sukuk market there has always been more demand than supply,” he said. “So people have been willing to pay up. And as the industry grows and more people realise the benefits of issuing Sukuk we are likely to see the depth and liquidity of the market increasing.”
A significant benefit of Sukuk is that it shows very low correlation to other asset classes, including global bonds. It is therefore a great tool for diversification, making it appealing not only to investors looking for Shari’ah compliant products, but any investor looking for alternative sources of return.
The market is already showing signs of expanding out of its traditional base, with increasing numbers of issuers coming from outside of Asia and oil-producing nations. Recently Sukuk has been issued by the likes of investment bank Goldman Sachs, multinational conglomerate General Electric, and the German state of Saxony-Anhalt.
“We are going to continue to see rapid rates of growth because it is an attractive avenue for issuers to look at in terms of diversifying their funding base,” Thokan said. “And as the market gets bigger it will attract larger pools of money, bigger issuers and more attractive returns.
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