Experts have calculated that Islamic Banking will be a $2.1 trillion industry by the end of 2014. Governments across the former Soviet Union are increasingly turning toward Islamic Finance as a legitimate banking system.
The Russian Banking Association (RBA) has begun lobbying for the adoption of a federal law to regulate the growing field within the Russian Federation. These banking services will be banned from obtaining income from the sale of items forbidden by Islam, such as swine poultry, alcohol, and weapons, as well as charging interest rates on loans. The RBA is also lobbying for the formation of a Central Sharia Committee to develop guidelines for Islamic banking and licensing procedures.
The approval of national legislation on the subject is needed, as Russian banks have already expanded into the rapidly growing banking sector. In January 2014, the bank AK Bars in the autonomous republic of Tatarstan attracted $100 million in investment from the Middle East and Persian Gulf.
Russia’s Muslims will constitute up to 20% of the total population by 2030, mirroring trends in Western Europe. Furthermore, the Russian Federation’s increasing isolation from western financial institutions, as a result of sanctions, capital flight, and lower credit ratings, has led the country to look for alternative sources of credit, and the Gulf states may prove equally as attractive as East Asia for a source of funds.
The interest in Russia for the regulation of Islamic Banking reflects an even greater interest in the sector across the post-Soviet space. The Post-Soviet states of Azerbaijan, Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan, and Turkmenistan have joined the Organization of Islamic Cooperation and the Islamic Development Bank since gaining independence, which has facilitated the growth of Islamic finance in the Caucasus and Central Asia.
These organizations have also become important sources of development money for the region, with the IDB recently lending Uzbekistan $100 million for housing projects, along with an earlier $100 million loan for the modernization of several Soviet-era hydroelectric stations.
The President of Malaysia visited Kazakhstan’s President Nursultan Nazarbayev in late May 2014 to discuss the potential for transforming Kazakhstan’s former capital of Almaty into a center of Islamic Banking for Central Asia, drawing on Malaysia’s pioneering experience in the field. Nazarbayev hopes to transform the former Kazakh capital of Almaty into an Islamic Banking hub by 2020.
Al Hilal Bank, which is an Abu Dubai state bank, has already opened three branches in Kazakhstan since 2010, and the Islamic Bank for the Development of the Private Sector (ICD) has partnered with Kazakhstan’s Zaman Bank to establish the first Islamic Finance Leasing Company in the country with $36 million in authorized capital.
Other Central Asian states have followed the trend; Kyrgyzstan approved new regulations and laws expanding access to Islamic Banking services for its citizens in 2013, while Tajikistan passed similar legislation in May 2014. Uzbekistan last year began to import specialists from Pakistan’s Islamic Banking Development center to streamline the development of the sector in Central Asia’s most populous country. In the Caucasus, Azerbaijan’s state bank formed an Islamic Banking Department and has carried out $180 million worth of financing. Legislation regulating Islamic Banking for the Shia-majority country of 9 million is expected to be completed next spring.