Islamic Banking

Herman Gref, the head of Russia’s largest bank Sberbank, welcomed the introduction of Islamic banking in the country’s traditionally Muslim regions, saying it would help attract capital from Arab countries. Tatarstan is a key Russian region where the idea of Islamic banking is being actively developed. Investors from the Gulf States are ready to inject huge funds in the development of such an alternative financial system in Russia, given a significant demand from the Muslim population.

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari'ah (Islamic rulings) and its practical application through the development of Islamic economics. Shari'ah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles.

While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims. The Islamic financial system has the same tools as the conventional one, but the percentage basis is replaced with the provision of shares in the company, and, hence, income. This means the bank shares all the risks with its borrower. Therefore, lending under Islamic banking is purpose-oriented.

Usury or any other activity that involves receiving interest income is unacceptable in Islam. Financial transactions should be based on a real trade or business and should not be connected with activities prohibited by Sharia law, such as gambling or alcohol. The Russian government has to elaborate a legal framework that will integrate Islamic banking into Russia's financial system. If this is done, the volume of Islamic financial assets not only in Russia, but also the countries of Central Asia, could reach $24 billion as early as 2018, according to Vesti Finance.