HALAL LOAN

Islamic banking will soon be legally established in Azerbaijan despite long resistance and mild rejection by regulators and the "traditional" banking community of the country. So, next year work will begin on a legal basis for the significant expansion of the opportunities of Islamic finance in Azerbaijan. Moreover, the benefits provided by this type of banking have already been appreciated in other CIS countries, including Russia. And against this background and taking into account the financial and banking development and sustainability of Azerbaijan, the country could well become a centre for Islamic finance in the Commonwealth.

As is known, the development of Islamic banking is currently restricted by the law of the Azerbaijan Republic "On Banks", but nevertheless, a number of local banks actively offer products that do not come into conflict with legislation governing banking activities. And next year, the necessary legal framework may already be approved to enable and expand the product line on Islamic banking and even legalize the operation of a separate specialized bank. Thus, according to the director of the Department of Islamic Banking at the International Bank of Azerbaijan (IBA), Behnam Qurbanzada, until the end of the first quarter of 2015, a package of draft laws for the operation of Islamic banking in Azerbaijan will be submitted to the country's Central Bank (CBA). The documents will include points relating not only to banking legislation, but also taxes, customs and other fields. "We hope that these legal documents will be reflected in the Banking Code, which is currently being developed by the CBA," Qurbanzada added.

"Four of the six ministries have already given the written go-ahead for a grant in the amount of 200,000 dollars from the Islamic Development Bank (IDB) for the development of legislation in the field of Islamic banking. We expect to obtain consent from the other two ministries in the near future and approval of the grant agreement from the Cabinet," said the representative of the IBA. According to him, using the grant, which is expected to be obtained by the end of 2014, and the IBA's own funds (total expenses will be 300,000 dollars), it is planned to set up a working group with experts in the field of Islamic banking, which will start its work from 2015.

Incidentally, the IDB has always been ready to assist Azerbaijan in implementing the principles of Islamic banking - at the investment conference for Arab institutions held in Baku in November 2006, they were asked to open a bank operating under the terms of Shari'ah. Moreover, Azerbaijan and the IDB signed a communique on the establishment of an investment fund (it was established together with the Azerbaijan Investment Company), and it was recommended that the Central Bank of Azerbaijan must prepare a legal framework for the regulation of Islamic banking in Azerbaijan. But this initiative remained on paper for some reason, while the licence of the only bank operating under the terms of Islamic banking, Kauthar Bank, was revoked in December 2010 as it failed to follow the instructions of the Central Bank. However, this year the bank restored its activity, but with a limited licence, without the right to accept deposits.

In any case, time and the changes that occurred over the years showed that the development of Islamic banking will benefit the country's banking system. After all, it is undeniable that financial institutions operating on the principles of Shari'ah, which may act as investors in big projects under favourable conditions, are gradually growing stronger in the world, and they need such partners in the country. Besides that, the growth in the population that follows the norms of Shari'ah in everyday life also contributes to the rapid increase in domestic demand for retail products of Islamic banking.

We must say that the country's largest International Bank of Azerbaijan announced the launch of an "Islamic window" created within the framework of the project to introduce Islamic banking in the country in September 2012, and later a relevant department was established. And over time, the portfolio of the bank in this sphere exceeded 180m dollars, and the IBA intends to develop Islamic banking in regions of the country. "Today, retail customers in Baku are funded within the framework of Islamic banking. In regions, the main focus will be the microfinancing of private households and businesses," Qurbanzada said.

Moreover, the interest in this type of financing outside of Azerbaijan is growing so much that it is proposed to establish an Islamic financial centre in the CIS countries. "If we compare the potential of the CIS with the potential of Malaysia and Dubai, which are major centres of Islamic finance in the world, it will not be too inferior," Qurbanzada believes.

In his view, Dubai was able to become the largest centre of Islamic finance in the region in just 10-12 years. And Azerbaijan has all the prerequisites to become the same kind of centre in the CIS: geographic location, history, economic and financial development, stability and implementation of all its obligations under international agreements.

The development of Islamic banking would also diversify the sources of investment and enable market players to enter new markets of capital. "First of all, this will ensure economic security. No country or institution will be tied to one source of financing. Islamic finance could be one of the possible corridors into new markets, and the CIS countries will be able to receive a new financial flow of funds to help develop the economy of the entire region," Qurbanzada said.

He also noted that countries of the region need to coordinate their efforts to create an Islamic Development Bank of the CIS. "We have been discussing the possibility of creating such a bank for two years. It is an institution that will be able to develop relations with the Arab world and countries that have liquid funds today and are willing to invest in the economy, yielding real profits. Today, we are ready for dialogue. It is necessary to join the efforts of CIS countries on one large platform and set up a working group, and the result of this will obvious," the head of the department said.

However, Azerbaijan could help Russia to attract investment from the Islamic Development Bank, because Russia is not a member of the bank and acts as an observer, which limits the ability of the IDB to invest and enter the Russian market. "Given that Azerbaijan is a member of the Islamic Development Bank, through the IBA and our subsidiary bank in Russia, we can attract those same investments in the Russian Federation," Qurbanzada said. By the way, the portfolio of the Islamic Development Bank in Azerbaijan exceeds 1bn dollars, 60 per cent of which have already been developed within the framework of the implementation of major infrastructure projects. These loans were funnelled into water supplies in regions, construction of road junctions and establishment of logistical hubs that can connect and already connect Azerbaijan to its regions.

In short, if we can energize the legislative framework in the country and implement plans in the CIS, it is Azerbaijan as a Muslim country with the most stable banking system in the region that could take the profitable empty niche of Islamic banking services and become a leader in this segment.

FYI 

Currently, there are about 500 large Islamic financial institutions whose assets are estimated at 800bn dollars. And the leaders of the Islamic banking investment are Kuala Lumpur, Bahrain and London. The first Islamic bank in Europe, the Islamic Bank of Britain, was opened in London in 2002. Even such major financial institutions as Citibank or Societe Generale offer such a service. The well-known Swiss banks UBS and Credit Suisse have entire Islamic banking departments.