Moscow: Russia officially introduced on September 01, 2023 the Islamic Banking System in the country, in a move widely believed as a counter to the sanctions it is facing by the United States and its western allies in the wake of Ukraine war.
The system has been currently launched in Tatarstan, Bashkortostan, Chechnya and Dagestan – four Muslim dominated areas of Russia that already have the most experience in Islamic finance.
The State Duma, the Russian Parliament's Lower Chamber, had on July 19 approved in its final reading a bill allowing an experiment to introduce the Islamic banking system in the country's four regions on trial basis for two years. The law was then signed by Russian President Vladimir Putin on August 04, 2023.
The Islamic Banking System, also known as Shari'a-compliant finance or interest-free banking, will be supervised by Russia’s central bank, and can be extended and launched in entire Russia depending on the results, the legislation said.
Islamic banking operates under Shariah, the Islamic legal system that forbids transactions involving riba, usury, or charging of interest - considered an unjust exchange in Islam.
Whereas conventional finance is debt-based and the client bears all the risk and liability in transactions, Islamic banking is asset-based, with profit and risks as well as loss shared between the financial institution and the client as part of a partnership.
For its operation, Islamic banks give loans without interest, and borrowers pay back the money in fixed amounts over time, become partners in businesses, sharing profits and losses, and rent out assets to customers instead of lending money.
Unlike the general perception, Islamic banking is popular in the countries like UK, USA and Singapore besides the Muslim countries. 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.
The immediate reason behind adopting the Islamic Banking is to cater to the needs of Russia’s Muslim population – 25 million, according to a rough estimates. But, speculations are also rife that another reason behind Russia’s decision is the Western sanctions it is facing because of the Ukraine war, and Russia hopes to attract investments from Muslim countries as an alternative to Western funding by introducing Islamic banking.
This idea could open doors for investors from Muslim-majority nations, who have shown interest in Russia but haven’t invested due to religious reasons, to invest in Russia which can be a game-changer.
Russia is not unfamiliar with the Islamic Banking System. In fact, the system is a topic of discussion in the country since the financial crisis of 2008, when banks faced a shortage of liquidity and began to look for alternative sources of cash, according to Diana Galeeva, an academic visitor at Oxford University in the United Kingdom.
"Following the annexation of Crimea from Ukraine in 2014, with Russian banks feeling the squeeze of Western sanctions, the Association of Russian Banks proposed allowing Islamic banking in the Russian Federation and establishing a committee within the Central Bank to regulate the activities of Sharia banks”, Galeeva told Al Jazeera.
The war in Ukraine and Western pressure on Russia’s economic sector are just the latest developments that have sped up the process of turning to Islamic banking.
“Every new wave crisis in recent years has prompted Russia to turn further away from the West and toward the East, which in many cases means greater links with economies of Muslim-majority countries,” Galeeva said.
[With inputs from news agencies.]
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