Russia is introducing an Islamic banking system in its mostly Muslim regions in a bid to build economic links with Muslim countries and attract financing and investments. This move comes as Russia seeks new economic partners amidst ongoing Western sanctions. The market potential, existing practice in Islamic finance in some regions, and the rapid growth of the global Islamic banking sector are some of the reasons behind this decision.
Russia's lower house of parliament passed a bill in July to introduce an experimental Islamic banking system in the country's mostly Muslim regions. The pilot project will start on September 1st and last for two years. The move is aimed at building new economic links with Muslim countries across the Gulf and Asia. Islamic banking practices do not allow the charging of interest on loans and instead offer partnerships and participation in both profits and losses on certain investments. The system is gaining global popularity in financial hubs like London, Kuala Lumpur, Riyadh, and Dubai. This decision comes as Russia seeks new economic partners amidst ongoing Western sanctions caused by the war in Ukraine. The Russian Association of Experts in Islamic Finance believes the new regulation will attract financing and investment and create trust in the market.
But Why the Islamic banking system?
One reason is the market potential that arises from Russians with money who have traveled abroad and want to do business in Russia. Another reason is that the predominantly Muslim regions of Chechnya, Dagestan, Tatarstan, and Bashkortostan already have some practice in Islamic finance. Additionally, the global Islamic banking sector is growing annually at 14% and is estimated to be worth around $1.99 trillion, indicating the potential for further growth. This move is also part of Russia's efforts to develop relations with Middle Eastern and Islamic countries. The Islamic Development Bank and the Bank of Russia have already signed an MOU, and Russia's main trade partners are Middle Eastern and Islamic countries.
