Russia launched Islamic banking for the first time as part of a two-year pilot program on September 1, 2023.
With a sizable Muslim population estimated at around 25 million and growing, Islamic financial institutions have existed in Russia until now. However, this marks the first time the country’s legislation officially supports the establishment of such institutions. On August 4, 2023, Russian President Vladimir Putin signed a law introducing Islamic banking to assess its “feasibility.”
The pilot program will take place in four predominantly Muslim republics: Tatarstan, Bashkortostan, Chechnya, and Dagestan, regions that have the most experience in Islamic finance. If successful, the plan is to introduce these new regulations nationwide.
What is Islamic Banking?
Islamic banking operates based on Shariah, the Islamic legal system that prohibits transactions involving interest, as it is considered an unfair exchange. Unlike conventional debt-based financing where customers bear all the risks and liabilities in transactions, Islamic banking is asset-based, with profits and risks shared between financial institutions and customers as part of a partnership.
“No bank profits from clients’ financial troubles and bankruptcies, which are common in conventional finance,” said Madina Kalimullina, the executive secretary of the Russian Association of Islamic Finance, on Friday, September 1, 2023. “Islamic finance promotes partnership-based relationships, which are rarely seen in conventional finance,” she added. Shariah-compliant banking also does not finance sectors detrimental to society such as alcohol, tobacco, and gambling. According to Oleg Ganeev, Senior Vice President of Sberbank, Russia’s largest lender, the Shariah banking sector has an annual growth rate of 40 percent and is projected to reach $7.7 trillion by 2025.
He noted that the burgeoning market requires regulation and investor and client protection. Still, the Islamic finance market cannot benefit from state-supported programs for mortgage and small and medium-sized business financing because they are all based on interest-bearing loans, which are against Shariah. “Some of these obstacles are partially solved for mortgage financing in the adopted law. This experiment is expected to create further conditions for the development of Islamic finance,” he said.
How will the move help the Russian economy or economic relations?
The key explanation as to why Russia’s economy has remained resistant to Western sanctions is due to its energy revenues and “Islamic banking will, by comparison, have a very small direct impact”, said Galeeva, an academic visitor at Oxford University in the United Kingdom. But with the new two-year experiment, the “Russian economy will be increasingly East-facing, since the main aim is to make Russia, and these regions in particular, more attractive to foreign investment from the Middle East and other countries with Shariah finance frameworks”.
Kalimullina said she hopes the new programme will develop “assets-based financing and risk-sharing partnership relations. The first group to benefit from the new market are the small and midsize enterprises, which are very often under-financed. Islamic finance, as it is well known, is more oriented at financing the real economy with real economic products.”
iBantu Perspective
From the perspective of iBantu, an organization dedicated to Islamic Finance, the introduction of Islamic banking in Russia is viewed as a strategic step aimed at broadening the nation’s financial sector and luring foreign investments, especially from areas with well-established Shariah finance systems such as the Middle East. While it may not immediately impact Russia’s economy at a large scale due to its energy revenue dominance, the focus on asset-based financing and risk-sharing partnerships has the potential to benefit small and medium-sized enterprises (SMEs) and stimulate economic growth. This initiative aligns with Russia’s broader economic diversification goals, but its success depends on effective implementation and building trust within the global Islamic finance community.
Reference: Aljazera
