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Islamic Banking Could Be Coming to the North Caucasus

A newly launched business association will try to navigate between Islamic law and Russian legislation. 

20 March 2017 The recently established International Islamic Business Association (IAIB) has announced plans to develop halal businesses (permissible under Islamic law) and open offices throughout the region. However, changes in Russian legislation are needed to attract investment from Muslim countries, IAIB members have said.


The IAIB was launched in the assembly hall of the Golden Ring hotel in Moscow on 16 February, with an official ceremony that started with a prayer and reading from the Koran, and ended with songs and dances performed by the popular Russian singer Renat Ibragimov.

The long-felt need to establish an Islamic business association stemmed from Muslim investors interested in funding businesses in Russia, Marat Kabayev, a former soccer player who co-founded the IAIB and serves as its head, explained to journalists before the opening ceremony.  Crucial, however, to these investors is that any business opportunities excluded activities prohibited by Islam.


According to Kabayev, non-Muslims can use IAIB’s services too if “they adhere to the Islamic economic principles of not lending and borrowing money with interest, and not producing and selling haram products and services, which are prohibited by Sharia [Islamic] law." He explained that such products and services include, for example, the sale of alcohol, non-halal meat, and running gambling and night clubs.


Kabayev said the IAIB launch had coincided with a visit from Islamic Development Bank representative Alabodi Khaled Mohammed from the United Arab Emirates, and that IAIB planned to pursue with the bank the idea of developing Islamic finance in Russia.


“Investors, including the Islamic Development Bank, want to invest in ‘clean’ businesses that do not charge interest,” Kabayev said. “At the same time, many Muslim entrepreneurs, including small and medium-sized ones, would love to use development funds without resorting to interest-bearing loans.”


The head of the association says that businessmen in the Caucasus fully support IAIB. “We are planning a trip around the regions very soon. Our branches are almost ready in Dagestan and Ingushetia; Kabardino-Balkaria and Karachayevo-Cherkessia are next,” he said. However, Kabayev declined to say if the association had its sights set on Chechnya, as well.


Legal Challenges


Murad Yandiev – a member and co-founder of IAIB, CEO of Tatarstan’s International Investment Company, and a native of Ingushetia – thinks that Islamic banking has a lot of potential in Russia. “However, it is absolutely necessary to make the appropriate changes in the legislation,” he said.


According to the financial website, Russian legislation does not encourage Islamic banking, seeing interest-free loans as gifts, and charging additional taxes on the recipients of such gifts. In 2002, a committee composed of representatives from the Central Bank, parliament, and Ministry of Finance was set up to study potential legal amendments addressing the specifics of Islamic banking. But the same problems remain.


Yandiev explains that mudaraba is the main type of transaction in Islamic banks. "This is a special partnership when one partner offers money to another to invest in a business. The first partner provides funds while the second is responsible for project management. At the same time, the second partner must pay back the money he borrowed as well as an agreed share of the profit,” he says.


"For example, an entrepreneur needs funds to buy production equipment,” Yandiev continues. “An Islamic financial institution will buy the products and services the entrepreneur needs and then sell them to him in installments with a premium. The businessman will pay for them from his profits. So, in the current financial situation [in Russia], the government imposes value-added tax on the difference, and it applies the highest rate without taking into consideration your premium,” he says. “In this case, Islamic banking services are not profitable, especially for the investor."


Image via the Caucasian Knot


Yandiev notes that, under Russian law, when a person takes a bank loan, the bank's profit is not subject to fees and taxes, as it is not considered a trade deal. "So we need tax changes to accommodate such financial institutions. It all depends on the law,” the businessman says.


Yandiev says that the new association should be similar to an existing one of Muslim entrepreneurs in Turkey. "Their main task is to maintain relations among members – including businessmen, commercial groups, and public organizations – as well as with the state in order to create halal business conditions. In our case, we want to first open Russia to businessmen from mainly Muslim countries – attract them with predictable risks and good profits,” he says.


"Obviously, halal products – their consumption, production, and sale – will be available to everyone regardless of their beliefs. Non-Muslims businessmen can freely enter into partnerships with Muslims and work together,” Yandiev adds.


No Islamic Banks in Russia, For Now


In reality, Islamic banks do not exist in Russia, but there are a limited number of organizations that offer Islamic financial products, says Murad Aliskerov, the general director of LyaRiba-Finance, a limited partnership company.


“We set up partnerships based on trust. This type of organization allows us to accept deposits from our customers and then to buy products and sell them in installments. We do not need to report to the Central Bank, which is reassuring,” Aliskerov says. At the moment, the company has more than 5,000 clients, he says.


"I joke that we are not even microfinance, but nanofinance. Basically, we deal with consumer finance and help buy sofas, washing machines, television sets, and other transactions up to 200,000-300,000 rubles [between $3,300 and $5,000]. We have business leaders among our customers. However, we do not fund huge projects to build production facilities or things like that. We work with individual clients, and we have bank employees and a good number of non-Muslims among them,” Aliskerov says.


In Dagestan, there are a few financial institutions that operate on Islamic principles: the Masraf trading house, the limited partnership Saad, and the Islamic Investment Center. Saad opened in Makhachkala, the capital of Dagestan, in 2016. It acquired more than 20 individual and organizational clients during the first two weeks of activity.


"Of course, it would be easier to manage Islamic finance as part of the banking system. We do not ask for preferential treatment or special conditions. It would be enough to have the same state guarantees as Russian commercial banks: subsidies for car loans and mortgages. While we offer similar services, we do not get any state support,” Aliskerov says.


So far the business community, as well as members of parliament and state officials, have not strongly lobbied for Islamic banking, says Aliskerov. "But Russia needs sustainable funding sources,” he says. “Investors from the Gulf area are willing to invest but we need to create the right conditions: their transactions should not bear interest as their religion does not allow it. Therefore, it is necessary to make amendments to the civil and tax codes, and laws on the Central Bank and financial markets.”


Kabayev, the IAIB head, says that he would be happy to keep his money in an Islamic bank, but there are none in Russia. Yandiev does not keep his money in an Islamic bank either. He says if such a bank existed in Russia, its position would be precarious.


“In Tatarstan, there was a financial structure that tried to work on Islamic principles but then it was reorganized along with Tatfondbank [one of the leading banks in Tatarstan, currently in crisis]. It was too risky to keep money there and I took it out,” the businessman says.


Musa Malsagov – an entrepreneur, deputy head of the Russian Red Cross and the Red Crescent Society, and IAIB member – says that Muslim businessmen are forced to use existing banks since there are no Islamic ones.


"We need to somehow make transfers and payments. But our beliefs do not allow borrowing money with interest,” he said. “We would be happy to have partnerships with Muslim investors,” he said.


Islamic banks are all talk, businessman Derbent Kamaluddin countered. "It is an attempt to carve out a window in standard banking, but we do not think that is halal,” he said.


Patimat Rasulova, a journalist from Dagestan, said that the general public is unlikely to benefit from any potential services of Islamic banks. “It is difficult to find investment funds or get a loan in Dagestan. If there was an Islamic financial institution, it would serve a very small group," she said.


Giving a Nudge for Change


One of the founders of IAIB, Samir Huseynov, an Azerbaijan businessman and head of the Rumman financial group, said that lobbying to change Russian legislation and to create favorable conditions for Islamic banks is one of the main goals of IAIB.


"Islamic banking is well-developed in the UK and in other European countries, and many companies that use its services have no connection with Muslims,” he said. "Although the association is designed to cater to Islamic businesses, it does not mean that only Muslims will reap the benefits. IAIB is a non-profit organization. Its main objective is to foster economic ties between Russia and Muslim countries. The goal is to create investment opportunities for Islamic business in Russia. There is potential for investment not only in the oil sector but also in tourism and agriculture. We hope that IAIB could act as a bridge between investors and entrepreneurs,” Huseynov said.


In contrast, former Russian Vice President Alexander Rutskoy, who took part in the launch event, said that he does not believe laws need to be changed to enable the operation of Islamic banks in Russia.


"It is a fruitless conversation. We have ideal conditions for any business in Russia. Well, of course, there are difficulties. But one should know the law and how to run this or that project. Set up a management company, hire lawyers, and go ahead," Rutskoy said.


In his opinion, profit is the essence of any business, while simultaneously bringing together people of various nationalities and religions better than any political association could. Rutskoy could not confirm whether he would be involved in the association’s work.


"Marat [Kabaev] invited me here. I will see. I have always welcomed business investment – it can only be good for Russia. We have a ton of work [to do] in Russia," he said.


Mufti Hadji-Murat Gatsalov, chairman of North Ossetia’s Muslim Spiritual Board, believes that there are still obstacles in developing Islamic banking in Russia.


"The fixation of the financial system on lending with interest is the main hurdle for halal business. That represents a great sin in Islam," he said.


The Mufti believes that some financial institutions explicitly or tacitly resist new Islamic banking projects. At the same time, he noted that the interest-free nature of businesses, and respecting contracts and charitable causes are very important in Islam.


"Remember, what value the ‘word of a merchant’ carried in Russia before the revolution?” he asked. “In addition, Russian businesses actively supported charitable and social programs. These principles are consistent with Islam: respect of contracts, helping the weak and the needy. Islamic businesses can mark a turning point in the shifting of Russian businesses toward the people,” Gatsalov said.

The author of this article, a correspondent of the Caucasian Knot, chose to remain anonymous. Its editor, Rustam Djalilov, is a contributor to the Caucasian Knot, an online news site that covers the Caucasus region in English and Russian, where this article was originally published. TOL has done some editing to fit our style. Reprinted with permission. 

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