DUBAI, Aug 13:
Sanctions on Russia over the crisis with Ukraine are leading banks to call for the development of Islamic finance as they seek alternatives to European and US pools of funding.
The expansion of the syariah-compliant industry would let the country attract fresh capital from the Middle East and Asia, the Association of Russian Banks said this week in response to an inquiry from the state bank. The Bank of Russia should develop rules for Islamic banking, the association said.
Global Islamic financial assets are growing at 17% a year and are set to reach US$2.7 trillion (RM8.63 trillion) by 2017, according to PricewaterhouseCoopers LLP.
Expansion of the industry in Russia could help lenders such as state-backed OAO Sberbank and VTB Group manage being mostly shut out of US and European capital markets amid penalties over Russia’s role in supporting separatists in eastern Ukraine.
“Necessity will create innovation,” Rizwan Kanji, a Dubai-based partner at King & Spalding LLP, said by phone on Aug 7.
The law firm has advised on some syariah-compliant transactions in Russia since 2012. “Russia may be at the cusp of transition. The opportunity for Islamic finance is mouth-watering.”
The average yield on Russian dollar-denominated debt climbed to 6.03% yesterday, 126 basis points higher than Feb 28, the day before the country’s incursion into Ukraine’s Crimea, according to data compiled by Bloomberg.
That compares with a 21 basis-point decline to 4.16% in the average yield of Middle East sukuk, according to JPMorgan Chase & Co indices.
The European Union added Russia’s three largest lenders, including Sberbank and VTB, to a sanctions list over President Vladimir Putin’s stance on Ukraine on July 31. The measures, which followed US penalties, restrict the lenders from selling bonds or shares in the EU.
“The Kremlin should move quickly into the Islamic finance market as a way forward,” Theodore Karasik, director of research and consultancy at the Institute for Near East and Gulf Military Analysis in Dubai, said by phone on Monday.
“Centres of Islamic finance in the Middle East and Asia” have a good relationship with Moscow, he said.
Islamic financial transactions in Russia are rare. Tatarstan, an oil-rich predominantly Muslim federal republic in south-eastern Russia, has led Islamic finance development in the country.
Kazan-based AK Bars Bank, in which the government of Tatarstan is a shareholder, closed Russia’s first Murabahah transaction in 2011.
In a Murabahah contract, goods are bought and then resold with a pre-agreed mark-up to allow lenders to cater for customers that want to lock in payments in the future.
Tatarstan plans to sell a sukuk have been delayed by technical difficulties, said Linar Yakupov, head of the Tatarstan Investment Development Agency.
The absence of legal infrastructure and a lack of high-level government backing have been a key barrier to the growth of Islamic finance in Russia.
Sergey Shvetsov, the first deputy chairman of Bank of Russia, said last month he didn’t see a huge demand for Islamic banking products in Russia, and was “tolerant” of it, according to state news agency, Interfax.
“The lack of specialised regulation of Islamic finance in Russia makes full-fledged development of the industry through banking institutions impossible,” Madina Kalimullina, Moscow-based director of the economics department at the Mufti Council of Russia, said by email on Monday.
When sukuk and other Islamic instruments are regulated and become competitive they’ll be a good platform to attract investments, she said.
The Association of Russian Banks, a non-governmental organisation, proposed introducing a draft law that would spur the full development of Islamic banking in Russia, spelling out legislative and tax frameworks and introducing a syariah board to oversee issuance.
Tatarstan still plans to sell a US$200 million sukuk, said TIDA’s Yakupov.
Attracting Arab and Muslim capital should be on Russia’s agenda, he said by phone yesterday. “It makes sense to examine these instruments more seriously as an alternative.”