* Russian banking sector seeks to offset Western sanctions
* Islamic finance still in infancy in Russia
* Lobby group says it could boost economy, investment
A lobby group for Russian banks has written to Moscow’s central bank seeking measures to promote Islamic finance at a time when the banking sector is facing a squeeze on foreign financing due to economic sanctions imposed over the Ukraine crisis.
The Association of Russian Banks (ARB) said in a letter sent to the central bank late last week that promoting Islamic finance could give a boost to the economy and draw significant investment from the Middle East and Southeast Asia, regions where Islamic finance is flourishing.
Its appeal has risen as Russia’s $2 trillion economy teeters on the brink of recession with several top Russian banks effectively shut out of Western capital markets due to Western sanctions over Moscow’s perceived backing for a pro-Russian separatist uprising in eastern Ukraine.
Central among the lobby group’s concerns is the absence of Russian legislation regulating Islamic finance. This means banks are unable to offer clients certain Islamic financial instruments that comply with sharia (Islamic law), as well as a lack of Islamic banks and the expertise needed to run them.
“It’s not spelled out anywhere in Russian legal documents what an Islamic financial institution, or sukuk (Islamic bonds) or a mudaraba (a common Islamic financial contract) are,” read the letter, published on the ARB website. “To solve this problem, we suggest adopting a special federal law.”
Elsewhere in the letter, the ARB suggests setting up a working group with input from Russia’s Islamic clerics to draft the necessary legal amendments and creating a central bank department to supervise Islamic financial institutions.
Russia’s central bank declined to comment when asked how it would respond to the ARB initiatives.
Russia’s Islamic banking sector is still in its infancy, despite some 20 million Muslims living in the country, but experts say the market has potential.
In September 2011, AK BARS Bank, based in Russia’s mainly Muslim Tatarstan republic, obtained a $60 million, one-year loan using the Islamic murabaha structure – the first international Islamic deal arranged for a Russian institution.
In its second such deal, AK BARS Bank secured $100 million from a syndicate of 11 banks in January.
Aznan Hasan, a sharia scholar and former member of Malaysia’s Central Sharia Advisory Council at the central bank, said overseas Islamic banks were ready to invest in Russia if officials were to adapt local legislation.
“I think we have enough capability to do this. Russia and Central Asia are very good areas for Islamic finance,” Hasan said. “Malaysian banks are willing to consider going into Russia, but there needs to be the initiative to change the regulatory framework and the government needs to be willing to accommodate these banks.”
Such investors could provide a much-needed source of additional financing given that many foreign banks are now loath to lend to Russian corporates for fear of falling foul of U.S. and European Union sanctions.
Commercial banks were estimated to hold Islamic banking assets worth over $1.7 trillion in 2013, according to a study by Ernst & Young, roughly a third of which came from Gulf-based Islamic banks.
Russia’s banking sector had about 60 trillion roubles ($1.7 trillion) worth of assets as of the end of June, according to data from Fitch Ratings.
Should Russia’s central bank respond positively to the ARB’s lobbying effort, it could draw on the experience of former Soviet republics Azerbaijan, Kyrgyzstan and Kazakhstan, all of which are drafting new laws to regulate Islamic banking.
Behnam Gurbanzada, director of Islamic banking at International Bank of Azerbaijan, called Russia a “promising” platform to further the development of Islamic finance.
“It is obvious there is a lack of capital in Russia at the present time,” he said. “The Russian economy needs investment and stable financing sources. Islamic banking is an alternative source of funding for Russia.”
*This article was originally published on Reuters on 14 August 2014. Read the original article here.