Bank of Russia and Finance Ministry Study Amendments To A Law Governing Islamic Finance

An expert discussion – “Islamic Finance: Problems in the Formation of the Industry” – was held at a Guidar Forum. The topic has proved relevant because it was discussed for two consecutive years.

The 2015 list of discussants was even more representative than a year earlier. The main question to be answered when discussing Islamic finance is whether the Russian economy can benefit from this new type of financial relations? The answer is simple and resides in the fact that the development of Islamic finance will allow the Russian economy to attract, first, the savings of the population who previously had no opportunities to save, and, second, foreign investment by issuing Islamic securities by Russian companies. More specifically, both arrangements require changes to the legislation.

Dmitry Saveliev, Deputy Chairman of the State Duma Committee on Financial Markets, noted in his report that this trend should be followed by making selective changes to various legal acts, and he told that last year he submitted six draft laws aimed at creating Islamic financial instruments to the State Duma for consideration, two of which relate to the Civil Code and the Law on Banks and aim to revoke the existing rule of lending out money at interest. This is a key aspect, because the Islamic finance principles require that monies be provided (be it retail and corporate bank deposits held at financial institutions or any other way of lending) on the profit sharing basis rather than on fixed-income terms. The rest of the draft laws cover insurance, leasing, trading in real assets, and trust management by banks.

Sergey Platonov, Deputy Director of the Finance Ministry’s Department of Financial Policy, agreed on the need to make selective changes to the legislation, and he noted that such changes should be applied to operating financial market participants in such a manner as to avoid higher risks for the economy of the county. As an example he laid out the reason why the Russian government provided a negative review on Saveliev’s draft law which allows banks to trade. The main reason was risks of loosening of control over banks and infringements of depositors rights.

Linar Yakupov, the President of the IBFD Fund (non-profit fund for the development of Islamic business and finance) made a report on a feasibility study (FS) of the development of Islamic finance in the Republic of Tatarstan (RT), which was prepared in conjunction with Malaysian specialists on commission from the Tatarstan government and adopted in December 2015. Mr Yakurov noted that the FS is the first official document (400 pages) containing all the measures to be taken to create an Islamic financial sector both in the RT and across Russia, including all the changes to be made to the legislation. The main conclusion of the FS is that creation of an Islamic financial sector is in demand in the RT.

Mr. Yakurov called public authorities, businesses and the expert community to study the FS in order to provide a common view on the effectiveness of the measures proposed in the FS. A special part is to be assigned to Russia’s central bank and Finance Ministry as the key financial market regulators.

Central Bank Deputy Governor Alexander Torshin mentioned in his report that the Bank of Russia established a working group to study the practice of Islamic financial institutions and their development in Russia. He noted that the working group needs time to study all the issues and the Russia’s central bank is not ready yet to say whether it is expedient to introduce major changes to the financial market regulation. The Bank of Russia doesn’t mind seeing Islamic financial products in the financial market, added Mr Troshin, and his personal view was that such products would develop successfully.

Mr. Khamzan Asabaev, a lawyer from global law firm Linklaters, made a report on supporting the issuance of Islamic securities (sukuk) and the prospects for Russian companies to enter this market. He pointed to an essential common link between major foreign borrowing transactions of Russian companies (through IPOs or Eurobonds) and major transactions of Islamic securities issued by foreign companies – these transactions were closed within the UK’s jurisdiction. This implies that since Russian companies are experienced in fundraising within the UK’s law, they may use the same practice for fundraising by issuing sukuk.

Sukuk may be issued subject to Shariah board expertise which certifies Islamic financial products as being compliant (according to Shariah) with the Islamic finance principles. However, the entire process is anyway governed by the the UK’s law which is well known in detail to Russian companies. Mr Asabaev therefore concluded that there are no fundamental reasons whatsoever that could prevent Russian companies from entering the sukuk market. The main obstacle is the lack of well-targeted, consistent work on studying the practice of issuing Islamic securities and cooperating with key players engaged in such transactions (including those who provide Shariah expertise). Any entrance of Russian companies to IPO and Eurobonds markets as early as 25 years ago could be regarded as great courage, but at one point Russian companies overcame this barrier by studying the market and cooperating with market players, and now there is nothing unusual in doing it.

Summarizing the reports made at this section, the following may be said. The legislative changes to be made to create an Islamic financial sector within the Russian financial system have been identified to date, and some of the changes have been submitted to the State Suma for consideration. However, the Bank of Russia and the Finance Ministry are in the process of considering these measures and are not ready yet to provide their assessment. Legal restraints to the development of Islamic financial services in the Russian economy are therefore maintained, which is not the case with Russian companies entering the Islamic securities market. Russian companies may issue Islamic securities within the UK’s law in the same manner they issue Eurobonds, but what they have to do is to overcome the “psychological” barrier.

Thus, only one of the two arrangements – stimulating domestic savings and attracting external investments – can be applied for now to help the Russian economy benefit from the development of Islamic finance.

Bekkhan Chokaev, senior researcher