Tatarstan, Bashkiria, Chechnya and Dagestan are pilot regions where a new experimental legal regime will be tested in 2023
A new bill designed to develop Islamic finance in Russia has already been received in the Russian State Duma. The so-called organisations of partnership financing will develop this area. The Bank of Russia that will have a registry of companies and exercise control will regulate the market. The new experimental legal regime is planned to be tested in four pilot regions from February 2023 – Tatarstan, Bashkiria, Chechnya and Dagestan. According to reports, head of the Chechen Republic Ramzan Kadyrov personally lobbied it.
Tatarstan started to push the idea of creating a special zone to develop Islamic banking more than 10 years ago. Housing Traditions cooperative, operating in the republic since 2018, granted a deferment of payment to buy a house. Ak Bars Bank has been issuing an “Islamic mortgage” since 2019, and it has been possible to buy a car and special machinery according to Shari’ah norms since 2020. However, due to the absence of regulation and support of the federal centre, it hasn’t been possible to create many companies working according to Shari’ah laws in the republic. Their total turnover, by experts’ estimate, doesn’t surpass a billion rubles today.
TRADITIONS OF HALAL MORTGAGE
Housing Traditions housing savings cooperative was one of the first to enter the Tatarstan market with an Islamic financial product. Since 2018, it has been granting a deferment of payment to buy a house in Halal programme.
“Everything began in 2017, the concept of halal lifestyle appeared then,” remembers Director of the cooperative Rustam Shafigullin. Tatarstan President Rustam Minnikhanov ordered to elaborate a mechanism to finance a purchase of real estate property according to Shari’ah, and a task force was created. A new investment and financial product was developed – to buy flats and pay by instalments following Shari’ah norms, and a housing savings cooperative was created.
The flats bought through this cooperative aren’t collateral in loan agreements, shareholders aren’t imposed late fees, penalties and fines for an overdue payment. At the same time, there are other mechanisms to “encourage meeting the liabilities.” As Rustam Shafigullin explained, everything is quite simple: “If a shareholder doesn’t pay monthly instalments for three months, the flat can be exchanged for a less expensive real estate property or the share can be sold for a market price.” Lastly, the flat can be up for sale.
The cooperative collaborates with Unistroy providing a deferment of payment in all the regions this company has offices in. Since 2018, the cooperative has signed more than 600 deals in the Halal programme for 2.3 billion rubles. To buy a flat to pay in instalments today via the cooperative, it is necessary to pay the first instalment of at least 50% of the flat value. The term will be up to five years.
Rustam Shafigullin thinks that nothing will change in the market of housing non-profit cooperative with the adoption of the new law from 2023: “The new bill is about partnership financing and has just started to be considered in the State Duma. A lot of unregulated issues have left,” he says. It will take as few as several years after the adoption of the law and it comes into force to talk about the first results of the activity.
The mode of operations of new organisations of partnership financing, according to him, will be similar to the model of an open-end fund. In fact, it is a model of discretionary management that will help to attract additional money into the economy, which is topical in the current situation when the links with Western financial markets turned out to be broken.
He thinks the most difficult thing will be to find legally and financially intelligent specialists that can found an organisation, prepare agreements and a financial model complying with Shari’ah norms: “We created it all and went through expert discussions for more than a year. The physical realisation of the new financial instrument can take several years,” he is convinced.
ISLAMIC DEBIT CARD AND INVESTMENTS IN HALAL SHARES
Ak Bars Bank has been offering two programmes of housing financing according to Shari’ah norms since 2019: Megapolis – Islamic Mortgage programme to buy flats in blocs of flats, and Comfort – Islamic Mortgage to buy houses and land parcels. In fact, an Islamic Mortgage is a sale of real estate to pay by instalments with some surcharge that depends on the term of the agreement and the amount of the first instalment.
This year, the bank has launched an Islamic debit card designed together with the Council of Religious Centres of the Muslim Religious Directorate of Tatarstan. Money is kept in such card without interest, clients’ money records are on other accounts of the bank, while invested money isn’t used to finance an activity banned by Shari’ah, the press service of the bank explained.
Besides these financial tools, Ak Bars Capital offers Muslims Lale open-end mutual fund that allows investing in securities in a halal way. The financial instrument was engineered based on an investment method certified by the Council of Religious Centres of the Muslim Religious Directorate of Tatarstan.
The press service doesn’t reveal the amount of issued Islamic products but report on positive dynamics in the growth of applications. According to the bank, there is demand in all the regions of the country where Muslims live, but especially in Northern Caucasus regions.
Today the company is actively working on the creation of new products for both retail and corporate businesses. Some of them are scheduled to be launched in 2023. Tatarstan’s involvement in the pilot project, by the bank’s press service’s estimate, will permit Islamic banking to develop further, which will lead to a rise in the number and quality of banking products meeting Shari’ah norms.
The bank doesn’t yet see rivals because Russia almost doesn’t have banks working according to Shari’ah norms, however, new big market players are expected to appear by the end of the year. Sberbanks perhaps is the case, it already announced its intention to open the first Islamic office in Kazan. It will offer products of partnership financing: mudarabah (an analogue of discretionary management), halal investment instruments, trade financing, banking guarantee, payment and running accounts and payment and cash services, Sber’s press service specified.
In the first quarter of 2023, Islamic Financing educational programme will be launched at SberUniversity that will cover Islamic commercial law, banking activity and insurance, capital markets and investment tools, accounting for Islamic financial institutions.
The programme will include more than 100 academic hours. Russian and foreign specialists will teach its students. After the programme ends, students will get a certificate issued by Global Islamic Financial Services international educational organisation in Islamic financing and a retraining diploma.
As soon as the programme is over, its students will be able to understand the basics, practice and procedure of the Islamic financing activity. The bank thinks that thanks to the diversification of the Russian economy and expansion of the cooperation between businesses and Near Eastern countries, the demand for such specialists will just grow.