Islamic Finance in Russia

From about 30+ Islamic finance project initiatives launched in Russia in the period 2010–2018, about twenty projects are active, demonstrating growth and expansion, albeit moderate. The main part of the growth throughout 2017–2019 is due to the commence of its Islamic finance operations by Sberbank, which had allocated certain limits to the partnership and trade based operations, and also due to the new projects in mortgage financing through cooperative mechanisms. All these stand for the low base effect. Sberbank’s intention to create a separate partnership finance department confirms its long-lasting strategic vision of the emerging market.

The market size exceeded 5 billion RUR / 78.4 million USD by the end of 2019 and is expected to grow further by 3–4 bln rubles annually, at least. This amount does not include several tawarruq deals, direct investment deals, including those with the involvement of the foreign capital. As well, it should be noted that during the last ten years ruble depreciated by half, and in case of a more stable situation the figures in USD could have been at least twice higher. The total number of employees of the Islamic finance companies and projects is estimated at 150 people and the number of clients is estimated at about 40,000. More clients from the investment and finance sides get involved in the market year on year. The growing number of courses and events related to Islamic finance along with the continuation of the expert discussion on various platforms both in Russia and abroad will certainly contribute to the market’s maturity.

The range of Islamic finance institutions and products show the wide scope of opportunities for the market: there are banking ‘windows’ (with limited range of operations and no special license, though), investment companies, asset managers, housing cooperatives and microfinance organizations working in the market and providing both investment opportunities and various scopes of financing: musharaka (including diminishing musharaka for home financing), mudaraba, murabaha, and ijara h. The product range is also diverse: there are all main types of Islamic finance instruments implemented in practice, except for salam, istisna’, Islamic insurance, and sukuk. Murabaha is by far one of the most popular Islamic finance products, which is used in almost all existing Islamic finance companies. Personal car financing is provided by 7 market players. All these provide the newcomers with the opportunities to start the operations based on the existing experience.

Nevertheless, the Islamic finance market in Russia is still not mature enough. The Islamic finance operators are geographically distorted and have very different business scopes. Hence, there is a lack of internal competition. Each company has its own policy related to the geography of financing, range of products, economic sectors to finance, and type of client. The main regions with a relatively diverse range of Islamic finance products available are Tatarstan, Dagestan, Bashkortostan, and Chechnya.

The lack of market regulation is a negative side that holds back the potential newcomers and clients, and, on the contrary, the same relative market freedom allows the existing companies to experiment and make use of the emerging niche segment. Not all the market participants are willing to be regulated by a so-called potential Islamic banking law or to work under a special license. That said, the market players are confirming the necessity of a tax-friendly regime for Islamic finance, providing mechanisms of state subsidies to the Islamic finance institutions so that the level playing field was secured. Among potential solutions that could contribute to the market development is the creation of a self-regulatory organization that could be a platform for adoption of internal standards, and any kind of market players’ association to create and implement liquidity management tools, develop proper mediation and arbitrage systems, and introduce takaful models.

The market is driven by a number of personal initiatives and its future is very much dependent on the novel projects that would cover new segments, such as takaful, and create fair competition to the existing market players. A number of international initiatives, led by the research institutions and think tanks, such as the Agro inmost Project, aimed at the expansion of the Russian grain exports through Islamic finance mechanisms, could be a good driving factor for pilot projects, particularly, in the sukuk market. All these factors would drive the market to higher figures and financial stability. Further research could focus on certain mechanisms that have potential to facilitate Islamic finance market development for the benefit of the country’ economy, and bring confidence to the local and international investors about the market and its opportunities. Whatever it be, according to Russian CB’s governor, the pivotal improvement of the investment climate is the main task to grow the economy