Islamic banking in Russia: specifics and differences

The launch of Islamic banking products by Sberbank has attracted a lot of attention of the professional community and consumers. In this article SberSova discussed how Islamic banking operates.

Contents

1. History of Islamic banking
2. Differences from conventional banking
3. How Islamic banking is regulated
4. Who can receive what services

History of Islamic banking

Islamic banking is part of the Islamic ecosystem, it operates under Shariah, the Islamic legal system, therefore the operating principles differ from those adopted in traditional financial institutions. In recent decades, Islamic economy demonstrated rapid growth in the global market, and Islamic banking products have found a place even in the global transnational companies.

In 2023, Russia adopted the law that initiates the development of partnership financing, and Sberbank is Russia’s leader in this market segment. The Islamic banking products offered by Sberbank were certified by the Shariah Advisory Council and received a fatwa - official confirmation of compliance with the Islamic law.

Differences from conventional banking

Compliance with Shariah determines the specifics of Islamic finance. Banks act as investors or partners rather than lenders. A bank becomes part of business, shares its risks, and earns a return on investments. This model is usually called a partnership financing model. In a conventional banking, a bank benefits from lending money to businesses, while risk and responsibility lie with a business owner.

In contrast, in Islamic banking charging interest on money is prohibited. This means that depositing money at a fixed interest rate or receiving a loan with a fixed interest rate is not possible.

Any transactions with incomplete information or uncertainty are prohibited:

• futures contracts;
• options;
• conventional insurance.

Also, Islamic banking does not allow financing of prohibited activities, such as

• gambling;
• pari-mutuel betting;
• production of pork products;
• production of alcohol, tobacco products.

Another feature of Islamic financing is that money is not considered an asset. They are a measure of value, a settlement or exchange instrument, but cannot be traded. Financial transactions or commercial transactions are based on the tangible assets or provided services.

How Islamic banking is regulated

The Muslim lifestyle is based on Shariah principles. This is a set of prescriptions that is formed from two sources:

• the primary sources are Quran and Sunnah;
• and additional sources are Qiyas and Ijma.

The Islamic finance products were created based on these religious documents.

The activities of financial institutions within the framework of Islamic financing are controlled by a wide range of organizations globally. They include the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the International Islamic Financial Market, the Islamic Financial Services Board (IFSB) and the International Accounting Standards Committee (IASC).

Who can receive what services

In Islamic banking you can find products and services similar to almost all products and services offered by conventional banks. A distinguishing feature is that loans and their derivatives are replaced by financial instruments based on purchase and sale contracts, leases, equity or trust management. Investment accounts are used instead of deposits. Their yield is determined based on the earned profit and is paid as a dividend rather than a fixed interest.

Products in this area have their own names. For example, an Islamic bond is called sukuk. Sukuk are based on tangible assets (i.e. real objects like commodities, real estate, etc.) and profit-sharing, while conventional bonds are interest-bearing debt obligations. Sukuk holders are the owners of underlying assets and are entitled to a share of the profit.

The main points in brief

• Islamic banking is based on Shariah principles.
• Activity is consistent with ethical and social values.
• A bank acts as a partner and shares risks with a client.
• Islamic banking services and products are available not only to Muslims.
• Investing in prohibited industries is not allowed.
• Money is not considered an asset and cannot be traded.

Islamic finance products offered by Sberbank are available in the following regions: Moscow, Republic of Bashkortostan, Republic of Chechnya, Republic of Tatarstan, Republic of Adygea, Kabardino-Balkaria, Karachaevo-Cherkesia, Ingushetia.