MOSCOW – In a surprising turn of events, Russia is working to bring Islamic Banking into the country.
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This banking is decided to be introduced in four regions Chechnya, Dagestan, Tatarstan, and Russian Bashkiria which are Muslim-majority areas. Russia’s decision to bring Islamic banking will have a big impact on the financial system.
Islamic banking follows rules based on Islamic law or Sharia. One of the key rules is that it doesn’t allow the paying or charging of interest, which is called “Riba” in Arabic. Instead, Islamic banks use different methods:
- Installment Plans: They give loans without interest, and borrowers pay back the money in fixed amounts over time.
- Equity Financing: Islamic banks become partners in businesses, sharing profits and losses.
- Leasing: Instead of lending money, they rent out assets, and customers pay to use them.
Russia’s Plan for Islamic Banking
The State Duma, Russia’s parliament, is creating a law to make Islamic banking official in the country. This new law will not only make it legal but also regulate how it works. It will begin in the four regions mentioned earlier.
This change is significant because it’s different from how regular banking works in Russia. The goal is to cater to the needs of Russia’s Muslim population and attract investors from countries in the Middle East and Asia. These investors have shown interest in Russia but haven’t invested due to religious reasons.
The chairman of the State Duma Committee on Financial Market, Anatoly Aksakov thinks this plan if successful can spread to the whole country. This idea could open doors for investors from Muslim-majority nations to invest in Russia which can be a game-changer
One big reason behind Russia’s decision is the Western sanctions it’s facing because of its actions in Ukraine. By introducing Islamic banking, Russia hopes to attract investments from Muslim countries as an alternative to Western funding.
Islamic banking is growing worldwide, with an annual growth rate of about 14 percent. It’s estimated to be worth $1.99 trillion, making up about six percent of the global banking industry.
Islamic banks operate differently from traditional banks. They follow religious and ethical rules that forbid interest payments and risky financial activities.
In Russia, these Islamic banks, called Financing Partnership Organizations (FPOs), will offer various services. They’ll give loans without charging interest, finance trade through special contracts, and support businesses by becoming partners and providing guarantees.
This aligns with Islamic law, which doesn’t allow traditional lending with interest. Instead, it offers alternatives like installment plans, equity financing, and leasing.
The Central Bank of Russia will oversee these FPOs to ensure they follow the rules. However, there’s a need for deep discussions before this new system goes fully into effect. So, it’ll start in a few regions over two years, and certain FPO operations will be exempt from certain taxes.
Why Islamic Banking Matters
Islamic banking is gaining attention worldwide, not only in Muslim-majority countries but also in Western nations. This is because it’s seen as a stable and ethical way of banking. Unlike traditional banks that aim to maximize profits through interest-based loans, Islamic banks focus on partnerships and sharing risks. Many doubted it at first, but Islamic banking has grown rapidly and become a crucial part of the world’s financial system.
Russia’s step into Islamic banking is significant and strategic. It shows Russia’s willingness to diversify its financial system and attract investments from Muslim-majority countries. While it’s still in the early stages, this move could have a big impact on Russia’s economy and its ties with the Muslim world.
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