Roadmap - a hope for the development of Islamic finance in Russia

Dr. Alexei Kovalenko

 

Head of Task Force

Alternative (Islamic) financial institutions and products

Association of regional banks of Russia

 

 

 

Roadmap - a hope for the development of Islamic finance in Russia

 

Probably, starting from the very beginning the idea of Islamic Finance introduction in Russia requires a multistep approach.

"A Roadmap for Islamic Finance in Russia" should be designed as a document, which will become a visual presentation of the step by step development scenario of the Islamic finance in Russia. It should include preparation of legislative and regulatory framework as the main component of the Roadmap, a plan how to best develop and built up over time the basic stages of this process, as well as outlook for the whole industry over the long prospective. Vision and strategy here should be consolidated. 

The most appropriate approach could be "intergovernmental " (within a block of financial and economic ministries, agencies and regulators) discussion of this document, making decisions  on the stated objectives, identification tools, formation and appointment a coordinating body and identifying the Executive Coordinator at the government level.

The first phase of the multistep scenario started some years ago and is increasingly gaining momentum - it has been a period of forums, conferences, roundtables and discussions, formation of initiative groups and Task forces under financial associations, public and religion organisations and other. The process looks nonsystematic, somewhat scattered, ineffectual and vain..

 

Although, there are some results - all the participants of this process are convinced - that Russian legislation needs certain changes for Islamic financial services establishment.. 
Everyone knows what should be changed. The question is – how to start this process? 
At present, one of the main tasks is to change the mentality and attitude towards the emergence of Islamic financial institutions. It is crucial to overcome the barriers of mistrust of not only political establishment, but also the economic and financial officials, regulators of financial industry and market.

 

It should be clear that no one calls for full replacement of an existing financial system to the Islamic economic model, even if the existing system has albeit discredited itself in recent years. Initiating the research and analysis of Islamic finance phenomena at regulators level would be the right timely work. 
 
Now it is necessary to ascertain whether it is possible within the existing legal and regulatory framework, to incorporate some of the mechanisms and instruments of Islamic finance in the Russian legislation. Review of the existing regulatory documents could be started at regulators level, and could lead to preparation of a draft bill with additions and changes that hopefully create a possibility for the functioning of Islamic financial institutions.

 

Identification of laws and regulations that hinder or complicate the use of Islamic financial instruments in Russia, determination of the necessary changes/ additions and understanding the cost of their elaboration will be the starting point for drafting laws with additions or changes to Islamic financial instruments. 
 
At this stage it is necessary to focus on: 
- Identification of  regulating documents for possible use some of them for Islamic finance without modification; 
- Identification of regulating documents for the possibility of partial changes or additions to the Islamic finance; 
- Development of regulating instruments for Islamic finance; 
- Identification of laws for possible use some of them  for Islamic finance without modification; 
- Prepare changes / additions to the relevant laws and legislation to enable the functioning of financial instruments in the banking, insurance industries, investments and securities that do not violate Shariah compliance. 
 
According to some experts, modification may affect over fourteen Federal laws, such as:

 

- Civil Code

-Tax Code 
- Banks and Banking Activity Law 
- Securities Market Law 
- Investment Funds Law 
- Law about State registration of immovable property and transactions 
- Law about the compulsory insurance of the deposits  placed in banks 
- Law on the organization of insurance business in the Russian Federation 
- Law about Mutual Insurance 
- law about the compulsory civil liability insurance of vehicle owners 
- Law about Non-profit Organizations 
- Law about Consumer Protection 
- Mortgage law 
- Law about cooperation

 

It will be important to analyze an experience of Kazakhstan, Kyrgyzstan, the United Kingdom, Canada, USA, Luxembourg in regard of preparation of legislation on Islamic finance, as well as the approaches and activities to changing the legislation in Germany and France. 
 
It is a need to prepare recommendations to the Government of the Russian Federation on the possible activities related to necessary changes, including a broad discussion of amendments to the legislation at all those involved in the process agencies and organizations. The involvement in the process and contribution of the Russian and international experts and practitioners will considerably improve the efficiency. Work on the regulatory and legislative framework must be combined with "education" of State authorities, federal and regional financial and economic ministries, agencies and regulating institutions in the Islamic finance.

 

Education and training for specialists in the Islamic finance area remains a key process in the development. If "suddenly" the legislation will be ready tomorrow and interested investors or financial institutions will open businesses – who will work there? Professor Leonid Syukiyaynen talked more than two years ago about the need to develop a training system for all units. 
 
The practical phase of this process can begin only after a political decision on the preparation of legislative and regulatory framework for Islamic finance. In order to move forward, a legislative initiative should be proposed by one of the ministries of the finance and economic aria of the Government of Russia, or the legislature of one of the regions of the Russian Federation.

 

It is important to find an effective organizational form for the preparation of the bill on Islamic finance, to organize and run this operation, to define executives, experts, develop a work plan, etc. This project seems to be a serious long term initiative. 
Simultaneously with the preparation of the bill - an implementation of business projects - creation of Islamic bank, insurance company or other institution could begin.

 

The purpose of the Roadmap can be faster and more efficiently achieved with the involvement of strategic partners ready for the funding investment projects in the Russian Federation. Since 2005 Russia is an observer in the Organization of Islamic Conference. Therefore we can expect methodological and other assistance of the Islamic Development Bank and its affiliated institutions and organizations. 
 
Obviously, first time the role of Government in creating conditions for the Islamic finance in the Russian legislation will be high. After all, with their help and involvement of public institutions, public sector enterprises the prompt development of the industry can move in a practical way. And not just one year will be needed for the full integration of Islamic financial institutions into country’s market and adaptation of these institutions to the created conditions of functioning in accordance with the monetary and fiscal policy.

 

But it will be a new page in the development of the financial system of Russia. 
Cooperation between Russia and OIC member countries will become deeper and more fruitful. Russia could expect investment by established Islamic financial institutions and participation of the OIC countries in the philanthropic and social investment projects in Russia. Creation and growth of the Islamic economic segment in Russia will open new opportunities for the development of mutually beneficial interregional and international relations of Russia with the Islamic countries. The process of the implementation of the Roadmap can take from 3 to 10 - years.

 

Dr. Alexei G. Kovalenko

 

Head of Task Force

Alternative (Islamic) financial institutions and products

Association of regional banks of Russia