The State Duma adopted the law on Islamic banking in the second reading

The Law on Islamic Banking, adopted in the second reading by the Duma, was substantially revised in comparison with the document adopted in the first reading. New wording has appeared in the text, allowing banks to offer customers more complex products within the framework of Sharia law. However, according to market participants, the authors of the bill sacrificed clarity of wording for the sake of approaching the spirit of Islamic banking, which is why some provisions of the document began to allow different interpretations.

On Tuesday, July 18, the State Duma adopted in the second reading bill about an experiment on the introduction in four regions of Russia (Bashkiria, Dagestan, Tatarstan and Chechnya) of partner financing (Islamic banking). In the new version of the bill, in addition to technical amendments, such as the postponement of the start of the experiment from February 1, 2023 to September 1, 2023, a number of conceptual changes have also appeared.

Attempts to adopt a law on Islamic banking in Russia have been made repeatedly, and each time the stumbling block has been the fact that the law on banks and banking activity prohibits credit institutions from entering into contracts for the sale of goods. The first version of this version of the Islamic banking law appeared a year ago and solved this problem – non-bank financial institutions of a new type were allowed to engage in partner financing: partner financing organizations (see. “Kommersant” dated July 13, 2022). However, in September last year, a completely different document was submitted to the Duma, according to which credit organizations could engage in Islamic banking. And despite the indication of the legal department of the State Duma that this provision is contrary to the relevant law for banks, the bill was adopted in the first reading.

However, by the second reading, the wording disappeared from the document, according to which banks were charged with providing cash loans “without charging interest in the form of interest.”

Instead, banks are allowed to “finance individuals and legal entities through the purchase and sale of goods under installment payment for goods with a fee” for providing this installment plan. Also, in the text of the law, it became possible to establish remuneration “in the form of a variable value, the value of which changes depending on the results of the said transactions”.

Experts note that the new wording is rather vague and allows for different interpretations. Andrey Yemelin, head of the National Council of the Financial Market, believes that legislators sacrificed the standard wording of the Civil Code for the sake of a more accurate expression of the essence of Islamic banking. “Now they offer installment plans with an interest rate embedded in it – in fact, this is a classic version of BNPL, which is only possible in Islamic banking,” he notes. According to him, partnership financing involves a joint investment in a certain asset, with the subsequent division of profits depending on the share of each partner’s investment.

Lawyers suggest that with the help of new wording, the authors of the document tried to smooth out the contradictions between Russian law and Islamic law.

According to the founder of the Linnikov and Partners law firm Alexander Linnikov, lending without charging interest contradicts the very foundations of banking legislation, and the principle of payment for a loan is contrary to Islamic law, which prohibits lending money on interest. “The clause on the provision of loans without charging interest was excluded in an attempt to mitigate the conflict between Russian law and the norms of Islamic law, instead offering a “reward for installments,” he says. In this way, in his opinion, in the experimental version of Islamic banking, the increase in the value of property acquired by the bank as part of partnership financing and subsequently purchased by the client from the bank in installments is legalized – a surrogate for an interest-bearing loan.

The founder of the vvCube consulting group, Vadim Tkachenko, draws attention to the fact that variable remuneration is a form of remuneration that depends on the terms of the transaction, operation or certain amounts. “It can be expressed in the form of a monetary equivalent, or in the form of the sum of some privileges or preferences – they may not be expressed in monetary form,” the lawyer says. This type of remuneration, according to him, is provided for by the Civil Code in contracts for onerous transactions and when transferring licenses or copyrights.

However, there can be no confidence in such an interpretation, according to Alexander Linnikov, since the wording of the bill in its current form is so vague that it allows for many conflicting interpretations.

Maxim Buylov