With over 70m Muslims, the Commonwealth of Independent States might yet be the next frontier for Islamic finance. At present, six Muslim republics of the former Soviet Union, Azerbaijan, Kazakhstan, Uzbekistan, Turkmenistan, Kirgizstan and Tajikistan are members of the CIS. There are also 20m indigenous Muslims in Russia, mostly concentrated in the semi-autonomous Caucasus provinces of Chechnya, Ingushetia, Dagestan, Tatarstan and Bashkortostan.
The relationship between Moscow and its Muslim subjects has not always been warm, and even now the Russian republic and its allies are involved in a squalid low-intensity internal conflict in the Caucasus. However, Russia has begun to thaw its relationships with its Muslim-majority CIS partners and undertake a charm offensive with the wider Muslim world, making concerted efforts to reach out to Turkey, Iran and the Arab nations to the south and Pakistan, Malaysia and the Islamic democracies of South East Asia.
As Russia withdraws from the Caucasus it is replacing military hardware with offers of economic and social development and one of the organs that it hopes to deliver this through is Islamic finance.
Elena Zheleznova, managing partner of UFS Investment Company in Moscow, a consultancy charged with developing Islamic finance in Russia and the CIS told The Islamic Globe: "Russia is trying to develop its relations with Muslim world, and Islamic finance can foster this process. There is a strong economic rationale for this as given the current turmoil in global financial markets access to capital has become limited and diversifying to capital-rich areas of the world is sensible. There's also strong internal pressure from Muslims living in the CIS and Russia for a Shari'ah compliant alternative to conventional finance."
Russia is energetically pushing the Islamic finance envelope, and although some of its CIS partners are further down the path, Zheleznova did point out that: "Although Russia is not yet as active in Islamic finance as some other CIS countries, Russia was the first in the CIS region to finalize a [$60m] Murabahah [syndication financing provided] to AK Bars Bank and we at UFS are working hard to create awareness about Islamic finance opportunities and educate the market."
In this UFS is being enthusiastically supported by its CIS partner Azerbaijan, which is rapidly becoming one of the worst kept secrets in Islamic finance as the country looks to embrace new opportunities for development. As the largest country in the Caucasus region, Azerbaijan's 9m population is almost 95% Muslim and consequently ripe for retail Islamic finance to take hold.
Although there is no Islamic banking law yet in the country, there has been a long Islamic microfinance tradition at a community level for many years and there is a huge demand for housing finance in particular, with analysts saying Islamic mortgages based on Murabahah and Ijarah contracts could take off in the country. However, the country still doesn't have any standalone wholesale Islamic banks. Kauthar Bank, also known as Kovsar Bank positions itself as an Islamic bank and uses Mudarabah and Musharakah contracts and instruments similar to Sukuk.
However, it's unclear how Kauthar does this, given the lack of regulations. It also doesn't deal with the public and releases little information. The bank did not respond to requests for information from The Islamic Globe.
Azerbaijan still remains the most fertile ground in the CIS for the sector. Behnam Gurbanzada, deputy director of the strategy development department of the International Bank of Azerbaijan, told The Islamic Globe: "The development of Islamic banking in Azerbaijan depends on the intentions of the regulators to create opportunity for Islamic banking. Definitely there is huge demand and potential for the development of Islamic banking services and products in the local market".
The Islamic Development Bank and the Islamic Corporation for the Development of Private Sector have been active in Azerbaijan and Caspian International Investment Corporation was set up in June 2008 with 75% ICD ownership and 25% ownership by Azerbaijan Investment Company (AIC). Kuwait Finance subsidiary, Turk Capital has also set up a joint venture with AIC. In the banking sector, Bahrain International Investment Bank bought 49% ownership in a private commercial bank with the intention of converting it into a fully Islamic bank, but has not made progress due to legal and regulatory constraints.
Mahir Humbatov, a member of the working commission for the application of Islamic finance in Russia and the former CIS countries, said: "Islamic finance is getting more interest from Azerbaijanis these days. There is a desire to understand Islamic finance and how to introduce the system in the country. But the biggest impediment is a lack of understanding from bankers, politicians and economists who make the decisions in Azerbaijan, as they are still fixated on the 'religious' aspects of IF, as opposed to the economic benefits it can bring."
Idriss Ghodbane, CEO of Dubai-based Quantum Investment Bank, which was one of the first foreign Islamic finance institutions involved in Azerbaijan explained: "From a purely macroeconomic point of view the country is ready and we have seen an enormous appetite, especially from retail investors looking for investment products because they got to know about Islamic funding and Islamic products. With the opening up of the country's mineral resources they now have the money and the projects and are simply looking for a solution. Now is the right time to go there and do Islamic finance."
Humbatov explained that in the rest of the CIS progress was slower than in Azerbaijan. Kazakhstan had made some public statements about offering an open invitation to the global Islamic finance community, but progress had hit the buffers at the regulatory and political level. In Kirgizstan there was some initial enthusiasm, but this evaporated. Uzbekistan established an Ijarah company, and the government is making moves to create a regulatory regime for Islamic finance, but the sector is still battling with 'secularist' opponents in the political and academic communities.
However, Zheleznova is taking a different approach to the development of Islamic finance in Russia and approaching the subject from a corporate, as opposed to a financial angle - an approach that Kauthar Bank in Azerbaijan might also be applying - to circumvent the lack of specific Islamic finance regulation in the CIS. She said: "Since UFS is primarily involved in investment banking we are just trying to create provision for a range of Islamic finance services such as Sukuk and Islamic wealth management, for our clients. In the current environment we do not see any regulatory barriers to the implementation and offer of these types of financial services. However to launch a standalone, fully-fledged Islamic bank, there would have to be some changes made to the regulatory regimes in CIS states, to allow for the specific governance of Islamic finance."
The CIS has huge potential for the growth of Islamic finance, but the regulators and politicians have to catch up with the latent demand. Executives at the coal face such as Gurbanzada and Humbatov both see the potential for Islamic finance in the CIS, with Azerbaijan in the vanguard, but believe that progress will be slow and at first through the adoption of Islamic windows by local banks. Gurbanzada said: "Given the absence of laws, rules and regulations supporting Islamic banking in Azerbaijan, the only way to offer Islamic banking products and services to clients in Azerbaijan is through the creation of Islamic window within the conventional banking structure".
© The Islamic Globe 2011
