What is Islamic banking and why is it different?
Islamic banking is a form of financial system that operates under the principles of Shariah, the Islamic legal system that forbids transactions involving usury, or charging of interest as it is considered an unjust exchange. Islamic banking also does not finance sectors harmful to society such as alcohol, tobacco and gambling. Another key difference is that Islamic banking does not allow financing speculation, financial derivatives, or “deals with no real asset”, which had previously triggered the global financial crisis.
Islamic banking is asset-based, with profit and risks shared between the financial institution and the client as part of a partnership. “No bank can benefit from the client’s financial problems and insolvency that often happens in conventional finance,” Madina Kalimullina, the executive secretary of the Russian Association of Experts in Islamic Finance, told Al Jazeera. “Islamic finance promotes partnership-based relations, which is rarely the case in conventional finance,” she said.
How and when did Russia introduce Islamic banking?
Russia introduced Islamic banking for the first time as part of a two-year pilot programme on September 1, 2023. With a sizeable Muslim population estimated to be up to 25 million, Islamic financial institutions have existed in Russia until now, but this is the first time the country’s legislation has officially endorsed its launch.
On August 4, 2023, Russian President Vladimir Putin signed a law introducing Islamic banking to assess its “feasibility”. The pilot programme will take place in four Muslim-majority republics – Tatarstan, Bashkortostan, Chechnya and Dagestan, areas that already have the most experience in Islamic finance. If the programme proves to be successful, the plan is to introduce the new regulation to the rest of the country.
What are the benefits and challenges of Islamic banking in Russia?
According to the senior vice president, Oleg Ganeev, of Sberbank, Russia’s largest lender, the Islamic banking sector has an annual growth rate of 40 percent and is reportedly expected to reach a value of $7.7 trillion by 2025. Ganeev said that Islamic banking could attract new customers and investors from Muslim countries, especially in the Middle East and Southeast Asia. He also said that Islamic banking could help diversify Russia’s economy and reduce its dependence on oil and gas revenues.
However, there are also some challenges and obstacles that Islamic banking faces in Russia. One of them is the lack of awareness and understanding of Islamic finance among the general public and the regulators. Another challenge is the compatibility of Islamic banking with the existing Russian legal framework, which is based on conventional finance. For example, some experts have raised questions about how to tax Islamic financial products and how to resolve disputes involving them.
What are some examples of Islamic financial products and services?
Islamic financial products and services are designed to comply with Shariah principles and cater to the needs and preferences of Muslim customers. Some of them are:
- Mudarabah: A profit-sharing contract between an investor (rabb al-mal) who provides capital and an entrepreneur (mudarib) who manages the business. The profit is shared according to a pre-agreed ratio, while the loss is borne by the investor only.
- Musharakah: A joint venture contract between two or more parties who contribute capital and expertise to a business. The profit and loss are shared according to their respective contributions.
- Murabahah: A cost-plus-markup contract where a seller purchases an asset from a third party and sells it to a buyer at a higher price that includes a profit margin. The payment can be made in instalments or deferred.
- Ijarah: A leasing contract where a lessor rents out an asset to a lessee for a fixed period and fee. The ownership of the asset remains with the lessor.
- Sukuk: An Islamic bond that represents a proportional ownership in an underlying asset or project. The sukuk holders receive periodic payments based on the income generated by the asset or project.
