Islamic finance as an alternative to the traditional financial system

A panel discussion, Islamic Finance: Prospects, Opportunities, Risks, was held as part of the Gaidar Forum 2015, at which the issues of Islamic finance as a source of new opportunities and prospects for development of the financial system and economy as a whole were discussed.

Islamic finance is one of the world's fastest growing industries with an annual growth in assets of 15–20% over the past decade. This sector is still relatively small because of its immaturity: the volume of Islamic financial assets amounted to about $1,7 trillion in 2013, and it will get past $2 trillion as early as 2014, according to the estimates of world consulting companies.

Islamic finance are being represented by more than 600 Islamic financial organizations in more than 75 countries worldwide, including many Western countries. This industry underwent different degrees of liberalization in the United States, Great Britain, France, Germany, Japan, Australia and other countries. For example, more than 20 banks with $19bn of Islamic financial assets are operating in the world, and 50 Islamic investment securities at a total of $35bn are listed in the London Stock Exchange. Unlike the Islamic countries case in which the key driving force of the development in the Islamic finance industry is the demand by religious groups of the population, in the Western and other states with a small Muslim population a key reason for their development is countries' interest in investment from the Middle East.

The Islamic financial system is distinguished by the fact that financial transaction within this system are based on transactions with real assets and quantitatively bound to them. This implies that the volumes of Islamic financial transactions will not exceed or at least will correspond to the gross value added created in the economy, unlike the traditional financial system whose volumes are known to be ten times the global GDP.

Hence there is a question of looking for the best way to combine the two different financial systems within a single one, i.e. to create an Islamic financial sector within the framework of the existing financial system of the Russian Federation, and what kind of benefits and costs it might lead to. These questions require a study involving a wide range of specialists, namely scientists, representatives of government agencies, business community, expert community, because a big variety of aspects is to be considered, namely organization of the Sharia monitoring of Islamic financial institutions, and the development of Islamic financial agreements within the Russian legal framework.

On the one hand, the agreements must comply with the Sharia principles, otherwise they will not be regarded as Islamic financial agreements, on the other hand such agreements must comply with the financial/fiscal legislation. The practice shows that this might be a challenge.

Additionally, there are more critical issues such as regulation of the Islamic finance industry by monetary authorities and related aspects of consumer right protection, transparency of Islamic financial institutions, disclosure of information by such institutions, their ranking, etc.

Bekhan Chokayev, a senior researcher of the Foreign Trade Department