''The attempt to implement Islamic finance in the CIS on the basis of current law has failed''

KazanSummit discussed the link between Islamic finance and the May Decrees and argued how to incorporate the Arabic terms in secular constitution

''The attempt to implement Islamic finance in the CIS on the basis of current law has failed'' Photo: Oleg Tikhonov

On May 10, participants of a plenary session of KazanSummit forum discussed how to develop Islamic finance in a secular state without coming to constitutional court. In the course of this discussion, foreign experts stated that the CIS's attempts to integrate partnership banking into the existing legal framework failed, the State Duma deputies discussed whether financiers should abandon the word ''Islamic'', and the deputy chairman of the Central Bank stated that even the presence of Islamic banking as such does not guarantee an inflow of Islamic money. The correspondent of Realnoe Vremya watched the course of the discussion.

''There are much less adventurers in Islamic banking''

One of the moderators of the session, State Duma Deputy Ayrat Farrakhov, approached the issue of legal regulation of Islamic finance from a seemingly extraneous topic — new ''May decrees'', which President Vladimir Putin signed on the day of inauguration. The implementation of the decrees in 2018-2024 will cost about 25 trillion rubles, and the achievement of the strategic goals set by Putin (read more about them here) — additional 8 trillion rubles.

''Where to get money from? Farrakhov asked the question. Traditional tools — tax increases, the elimination of the budget rules, redistribution [of expenses] – it is short-term tools, and I don't think they will be applied.'' According to the deputy, ''economic growth is our only hope''. At the same time, even in their optimistic forecasts, the ministry of economic development of the Russian Federation does not expect a growth of more than 3% a year, while 8 trillion rubles — ''it means a trillion each year, it is at least a 5-6% growth.'' Therefore, particularly Islamic finance, perhaps, could be an additional help, Farrakhov reasoned.

He proposed to develop this idea to Deputy Chairman of the Central Bank, former First Vice Speaker of the Federation Council Alexander Torshin. ''The first words just filled me with dread,'' he joked. ''Now I will be responsible for all 'May decrees.''

Torshin said that the problems of partnership banking in the Central Bank have long been addressed. Three years ago, a working group was created there, which was to work out this issue in detail. Over this time, there appeared a road map, however, Torshin continued, there appears one problem, ''to which they continue to return again and again.'' He formulated this problem as follows: whether it is necessary to change the current Russian legislation to give way to the mechanisms of Islamic banking. There is still no clear answer to this question; according to Torshin, the Central Bank is open to various proposals, but there are no legislative acts in this direction so far.

Torshin said that the problems of partnership banking in the Central Bank have long been addressed. Three years ago, a working group was created there, which was to work out this issue in detail. Photo: m24.ru

In the end, the representative of the Central Bank responded, albeit not directly, to Farrakhov's question: 'For about 20 years, as if not more, we have been living in captivity of illusions that as soon as partnership banking appears in the Russian Federation, investments will pour here. But partnership banking is very objective, very thorough, very serious, and there are much less adventurers.'' Even if there are clear rules for everything to make everything work out, it takes time, the representative of the Central Bank said. The key word here is ''trust'' and trust is growing. ''The main our resource is patience,'' said Torshin.

Earlier Torshin proceeded from the fact that the mechanisms of Islamic banking can be applied in Russia without coming into conflict with the law, they can work in accordance with the instructions of the Central Bank. It is easier to change the user manual than legislation, he explained.

''90% of Muslims do not know what Islamic banking is''

Then Farrakhov addressed to the second moderator of the session — his colleague in the State Duma Rasul Botashev. By this time, the conversation went about the correctness of the concepts of ''Islamic finance'' and ''Islamic banking''. This issue was raised earlier in another session of KazanSummit. Its participants were asked to vote, and 35% voted to reject the definition ''Islamic''.

Let us note that the idea of ''rebranding'' did not arise that day. A number of authoritative experts on Islamic finance stated that in an environment of undefeated xenophobia the presence of the word ''Islamic'' is rather a deterrent. Especially when you consider that in recent years Islamic finance and Islamic banking as phenomena have gone far beyond the Muslim world. Proposals for a new title were different. In particular, several years ago there were expressed views that the word ''Islamic'' could be replaced by ''ethical'' or ''sustainable''.

Botashev admitted: he voted for the preservation of the current name, ''It should probably remain under the name ''Islamic banking''. Photo: zampolit.com

Farrakhov asked Botashev what he personally thought about ''rebranding'' and what he voted for. Botashev admitted: he voted for the preservation of the current name, ''It should probably remain under the name 'Islamic banking' because it is not a religious component, it is not worship, we should not treat it as a religious rite.'' Islamic banking is just a tool, the moderator explained. ''Another thing is that, probably, if we ask this question among the Muslims themselves, 90%, if not more, do not know what Islamic banking is,'' Botashev added (at the same session it was said that, according to recent studies, only 12% of Muslims use the mechanisms of Islamic finance).

At the same time, Botashev suggested his own option: in brackets to attribute to the traditional name the word ''partnership'', ''It does not contradict that Christians, Jews, Buddhists and the others could use this economic tool — as well as a Muslim can freely eat kosher food.''

''There is also constitutional court''

Advisor to Minister of Investment and Development of Kazakhstan Yerlan Baydaulet — by his own definition, ''the first Islamic banker in Kazakhstan'' — told about the experience of his country and the CIS countries as a whole. Baydaulet explained that, by and large, it is possible to build mechanisms for Islamic finance on two legal platforms. The first of them (on which the system is based in the Commonwealth) is based on the letter of the law, that is, on civil law. In this case, everything turns out ''abstractly'' because in the law it is objectively impossible to prescribe an algorithm of actions for all possible cases. The second option is to build Islamic finance on the principles of English case law. According to Baydaulet, the practice has shown that when it comes to resolving a dispute in court, the courts very often stand on the side of the investor.

Then the adviser made a frank recognition, ''The attempt to implement [in the CIS] Islamic finance on the basis of current law, to be honest, failed.'' For example, the authorities of Kazakhstan have long decided to promote the development of Islamic finance. Everybody was inspired — but it's been years, but the industry as such has not formed, said Baydaulet.

This suggests that it is necessary to look for other opportunities, he reasoned, ''I fundamentally support Alexander Porfiryevich [Torshin]: we are the countries of secular arrangement, so the secular constitution should not prescribe confessional, especially Arab terms. There are analogues — and analogues should be used by financiers. From the fact that the name changes, the essence of Islamic financing will not change,'' Baydaulet believes.

''From the fact that the name changes, the essence of Islamic financing will not change,'' Baydaulet believes. Photo: lsm.kz

Torshin himself to a question from the audience what exactly was the contradiction between Islamic finance and Russian legislation said that ''the state is secular''. In favour of Islamic Finance there are a number of arguments, he said — ''and there is also the constitutional court, where it will necessarily lead.''

Madina Kalimullina, managing partner of Alif Consult and member of the working group on partnership banking at the Central Bank, told what risks under the current legislation the experiments of ordinary banks with Islamic finance are fraught with.

''The main risk is due to problems with the head bank,'' she said. Then she remembered a real example: in 2017, due to the banking crisis that broke out in Tatarstan, the centre of Islamic banking was forced to stop its work — it was a branch of Tatagroprombank, which in turn was controlled by co-owner of Tatfondbank Robert Musin.

''Islamic finance is completely dependent on the problems in the existing banking sector. If the license is revoked [of the head bank], it will affect the development of the new, young industry,'' Kalimullina said.

By Artyom Malyutin
Tatarstan