Islamic banking adopted in the first reading

The draft law on conducting an experiment on the introduction of Islamic banking in the Russian Federation, adopted in the first reading, will need to be finalized. In particular, according to the legal department of the State Duma, in its current form it contradicts the law on banks. The bankers themselves expect that the bill will help to significantly reduce the cost of launching a new service and accelerate its implementation in the country. Experts, however, doubt that the segment will take more than 5% of banks’ assets and liabilities, noting the difficulty in attracting serious investments from Islamic countries against the backdrop of the current geopolitical situation.

The State Duma adopted in the first reading a bill on conducting, from February 1, 2023, an experiment on organizing partner financing (OPF, Islamic banking) in four regions of Russia: Dagestan, Chechnya, Bashkiria and Tatarstan. The experiment will last two years with the possibility of extension and expansion to other regions.

Participants will carry out financial transactions under Sharia law, which prohibits taking and giving money at interest, as well as financing a number of businesses, such as the production of pork and alcohol. To solve these problems, partnership financing is used, when either the client invests in a business that the bank buys (deposit), and then receives part of the profit during the sale, or it is an installment plan in which the property purchased with the bank’s money is transferred to the client with a trade margin (loan) .

But questions remain about the document. In its opinion on the draft law, the legal department of the State Duma notes that the conclusion of sale and purchase agreements within the framework of partnership financing is not a violation, but it still contradicts the law on banks and banking activities. In addition, the participant in the experiment (which, according to this law, can be a bank) is prohibited from taking interest, but it is possible to issue funds without charging a fee for their use, which contradicts the relevant law – according to it, making a profit is the main goal of the bank.

The Central Bank “conceptually” supports the bill. “It contains rules according to which the implementation of operations is not a violation of the ban for credit institutions on trading activities, provided for by the law on banks and banking activities,” the regulator clarifies.

Bankers support the bill, because its rules significantly reduce their costs. As Aleksey Akimov, deputy chairman of the board of Ak Bars bank, noted, OPF are non-banking structures that do not have sufficient liquidity, technology, experience, etc. To develop the direction, according to him, serious capital, IT services and skills in working with financial clients. “The bill will allow banks to carry out financial transactions independently, without the participation of additional structures, this will reduce the cost of Islamic financial products, which will make them more accessible to the end buyer,” Alexey Akimov is sure.

In the explanatory note to the bill, much attention is paid to the possibility of attracting investments from Islamic banks in Central and Southeast Asia, as well as the Persian Gulf. According to market participants, in 2020 the amount of finance managed according to Sharia rules reached $3 trillion, and by 2024 it may exceed $3.7 trillion. However, according to independent expert Olga Ulyanova, the main factor in attracting Islamic investments is not the presence or absence of legislation on Islamic banking, but geopolitics.

As for the domestic market, the adoption of the experiment law is only the first step. “Islamic loan products are difficult to structure and sell, since both regulation and even tax legislation are geared towards traditional interest-bearing lending,” explains Olga Ulyanova. In her opinion, it will be necessary to develop and adopt “a whole hierarchy of legislative and by-laws.”

The expert notes that the acceptance of citizens’ funds to accounts that do not accrue interest is the most obvious Islamic product, but it will not take a large share in the liabilities of banks. “Over the next few years, he is quite capable of reaching 5% of all deposits of individuals,” Olga Ulyanova estimates. The sources of Kommersant also estimate the share of Islamic loans at about 3–5%. Thus, according to market participants, it would be overly optimistic to consider Islamic banking as a tool that can significantly affect the Russian banking system in the coming years.

Maxim Buylov