Tatarstan to become Russia's test case for Islamic finance
MOSCOW - bne | 4/1/2011 12:00:00 AM |
Kazan in Russia's Tatarstan region aims to be the first place in Russia to launch an Islamic bond, with a planned $100m-200m sukuk issue planned for July.
Officials meeting in the shadow of the snowy towers of Kazan's 16th century white Kremlin are in an unlikely site for hatching groundbreaking financial plans. But Kazan in Russia's Tatarstan region aims to be the first place in Russia to launch an Islamic bond, with a test case in July that will test the appetite for Islamic financial products in Russia, bne has reported.
Countries ranging from France to the United Kingdom, and Thailand to Brazil are all exploring how to use Islamic financial investment to draw gulf petrodollars into their economies. The Islamic finance industry has boomed in recent years, growing at a rate of over 14 percent per annum from around $150 billion during the 1990s to a total of $14.1 trillion in 2009, according to Jamelah Jamaluddin, chief executive officer of Kuwait Finance House in Malaysia.
Tatarstan officials hope to forge ahead with a $100 million-200 million sukuk issue.
The growth is to "serve over a billion people who have previously been underserviced" by the financial industry, she said.
Russia is well placed in many ways to attract Islamic investment, according to experts.
"We strongly believe it is just a matter of time for Russia to catch up with the global market for Islamic finance," says Zaid Maleh, director of Investment Banking for Middle East and Africa at the Russian bank VTB Group.
Russia is rich in themes that are sharia compliant, such as infrastructure and agriculture, Maleh said, adding that there was an estimated $800 billion pool of Islamic cash waiting to be tapped, according to estimates from Bloomberg and Moody's Investors Service.
Linar Yakupov, chairman of the committee for small- and medium-sized business in Tatarstan, said the region was trying to diversify its economy away from its traditional reliance on natural resources and attract more foreign investment.
"Islamic finance is one of the alternatives to natural resources. It's an extra option us because we have a big Muslim population," Yakupov said.
But a Muslim population is not the only prerequisite for countries aiming to launch Islamic financial products to attract petrodollars from the Gulf states.
Tatarstan's bond issue, which was earlier slated to be issued in March, was delayed by the legal and financial complexities of launching an Islamic financial product in Russia, highlighting the hurdles that will have to be vaulted for a local Islamic finance industry to emerge.
The biggest challenge for Russia is to educate customers about shariah law, said Mohammad Farrukh Raza, managing director of the U.K.-based Islamic Finance Advisory and Assurance Service, or IFAAS.
Under Islamic law, banks are not allowed to charge interest, so bonds must pay investors using profit-sharing payments similar to dividends or use leasing transactions with purchase options. They must also be seen to fund investments with a social good beyond pure, unfettered return.