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Every year, Islamic banking attracts more and more attention, while Islamic banks spread their operations far beyond the Gulf. The Islamic finance sector is the fastest growing in the world, growing by 15-20 per cent annually. It is no secret that today banks operating on Shariah principles can compete with major Western banks in their diversity of services. According to experts of the Islamic Financial Services Board in Kuala Lumpur (Malaysia), the Islamic financial industry may increase its assets to $2.8 trillion by 2015.

Financial instruments and an Islamic bank operating under Shariah may appear in our country in the foreseeable future.

Profitable business

Currently, there are 500 major Islamic financial institutions whose assets are estimated at $800 billion. The leaders of Islamic investment banking are Kuala Lumpur, Bahrain and London. Europe's first Islamic bank - the Islamic Bank of Britain - opened in London in 2002. During discussions on the budget of the United Kingdom in 2008, willingness was expressed to work with Islamic financing to ensure London's status as a leading financial centre which is, by the way, home to about two million Muslims.

Many Western banks have opened "Islamic desks" - a structure at the bank engaged in activities according to the norms of Islam, and its financial statements are separate from the rest of the bank. Even such major financial institutions as Citibank or Societe Generale offer a similar service. The well-known Swiss banks, UBS and Credit Suisse, have whole Islamic banking departments.

Islamic banking is also continuously developing in the former Soviet Union. These financial institutions are opening in Kyrgyzstan, Kazakhstan and Uzbekistan. In Russia, the Islamic Bank Badr-Forte has been working for 15 years.

According to the IMF, small Islamic banks, whose assets do not exceed $1 billion, are 30 per cent more effective than such Western financial institutions and 25 per cent more effective than those whose assets exceed $1 billion. The IMF believes that the secret of success is the individual approach to client companies, which allows for a more qualitative risk assessment. In addition, Muslim banks are interested not in receiving proper payments on loans, but in debtors making a profit, which is why they pick their borrowers more carefully than in the West.

Today, many Azerbaijani banks are already considering the possibility of introducing a similar system, because for them it means, first of all, access to new sources of funding, the creation of a new broad client base, and benefits not available to banks that do not use such a system.

With regard to investment potential, Islamic banks have long shown their capabilities to the world and, therefore, attracting such investments in Azerbaijan's banking sector and their subsequent injection into the economy is one of the most important incentives for both the government and for the banks.

In anticipation of a "global context"

Azerbaijan is a country with a majority Muslim population, so the presence of banks, which will coordinate the norms existing in the country with Shariah law, will result in the part of the population who have not entrusted their money to the usual commercial banks, entrusting it to Islamic banks.

Moreover, international financial institutions have expressed interest in establishing an Islamic bank in Azerbaijan. In particular, at the investment conference for Arab institutions held in Baku in November 2006, the Islamic Development Bank offered to open a bank operating under Shariah law in Azerbaijan. The government of Azerbaijan and the IDB signed a communiqu? on the establishment of an investment fund (it was established together with the Azerbaijan Investment Company), while it was recommended that the Central Bank of Azerbaijan should prepare a legal framework to regulate the activities of Islamic banking in Azerbaijan. The IDB is ready to establish a bank in conjunction with the government and other private structures of Azerbaijan.

It should be noted that our country has already had a bank operating under the terms of Islamic banking: Kauthar Bank, established in 2001, was the first Islamic bank in Azerbaijan and second in the CIS (previously it was called Universal Bank). However, due to its failure to follow the requirements of the Central Bank, in December 2010 Kauthar Bank's licence was revoked.

Now that the world's largest banks open "Islamic desks", which, in essence, is proof of the growing interest in Islamic banking, its introduction in a Muslim country like Azerbaijan is becoming increasingly important and relevant.

In addition, the country's chief banker Elman Rustamov last year acknowledged that "using Islamic methodology in the banking sector, we could achieve new successes in the economic development of Azerbaijan. Without a doubt, this methodology should be developed based on sound principles of Islamic banking. Azerbaijan is closely monitoring these processes, and when a global context in this regard is achieved, we will also use non-traditional mechanisms of banking in our country."

So it seems that the empty niche of Islamic banking in the country will be filled in the near future.

Banks take the offensive

Today, the country's largest bank - the International Bank of Azerbaijan - has begun to actively prepare to provide Islamic banking services and products. Realizing that general operating activities require legislative regulation, the IBA suggested developing a bill regulating the activities of Islamic banking in Azerbaijan. IBA Chairman Cahangir Haciyev believes that the legislation in place in Azerbaijan on the one hand does not prohibit and, on the other, does not regulate the sphere of Islamic banking.

Meanwhile, by autumn, the IBA intends to launch a specialized structure to provide Islamic banking services and products. Although the structure is being created primarily for the introduction of Islamic banking in Azerbaijan, it is also planned to enter the financial markets of Arab countries.

The IBA became the first foreign bank to open its representative office not in the Dubai free trade zone, but on the general market in the UAE. At present, work is under way to transform the representation in the UAE into a subsidiary of the bank. The IBA is also engaged in preparatory work to open a subsidiary bank in the international financial zone of Qatar. Accordingly, after obtaining permission, the International Bank will be able to start active work on the financial markets of Arab countries and to provide, along with a universal range of banking services, services inherent in Islamic banking.

Meanwhile, Nikoil Bank - a bank with Russian capital - has already begun to implement certain services on the principles of Shariah, and today it is the only Azerbaijani bank working in this area. During the first month (March 2011) of providing services for the Islamic banking product "Wadia yad Daman", the bank managed to raise about 150,000 manats. This product is a savings deposit, in which interest does not accrue and funds from the account may be withdrawn at any time. According to the senior manager for the development of Islamic banking products at the bank's business development department, Anar Yusufzada, in one month after launching the first product that meets the requirements of Islamic banking and is not contrary to the norms of Azerbaijani legislation, about 100 accounts were opened at the bank.

Three more Islamic banking products are being developed at the moment, and they represent another deposit, but profitable, and two loan products. The bank sends the products for an external audit conducted by a Shariah panel, which verifies their compliance with Islamic principles. "To date, Azerbaijani legislation does not make it possible to use all the products of Islamic banking; however, without violating the provisions of the law, it is possible to provide a number of products in the country," Yusufzada believes.

He also considers it necessary to create appropriate legislation in this area, because today Azerbaijan has a significant stratum of the population who follow the requirements of Islam. Some of the faithful want to invest their savings, while others want to take advantage of resources in accordance with the principles of Islamic banking. In society there is a large segment of people who turn to local banks with interesting suggestions. They want to open a current account, but do not want to receive interest, because according to Shariah law, it is forbidden to pay interest in repayment of loans and on one's own money. Such appeals have been received by UniBank, which is why they are thinking of introducing a new type of deposit for those who wish to be served according to Shariah principles.

Previously, Amrahbank, Turanbank and Texnikabank also announced their intention to begin providing Islamic banking services. The latter, for example, is seeking the opportunity to provide these services through a separate subsidiary company in a limited way, without violating the law. According to the chairman of the bank, Samir Huseynov, an investment company to be established will offer Texnikabank customers services to manage their assets. "Plans to establish an investment company pursue the objective of providing Islamic products, including investing in projects. The bank is currently studying the legislation of the country, and if possible, it is willing to develop the principles of 'Islamic banking' in a more extended form," Huseynov said.

Thus, there are all prerequisites for the successful development of Islamic banking in Azerbaijan: the demand on the market, ready ideas from banks wishing to meet this demand, support from international financial institutions and the commitment of state institutions. The only thing that is missing is the required legislative framework, but this is easily remedied, as mentioned above. So in the coming years, we can expect a rapid growth in this segment of the banking market in the country.