CHALLENGES OF ISLAMIC BANKING ESTABLISHMENT IN RUSSIA
CHALLENGES OF ISLAMIC BANKING ESTABLISHMENT IN RUSSIA
Artur Gubaydullin
Penerbit YPM
Judul buku : CHALLENGES OF ISLAMIC BANKING ESTABLISHMENT IN RUSSIA
Penulis Artur Gubaydullin
Layout Juna Excel
ISBN 978-602-5576-11-9 xiv+ 170 hlm .; ukuran buku 20,5 x 14,5 cm
© Hak Cipta Artur Gubaydullin, Maret 2018 Hak penerbitan dimiliki Young Progressive Muslim. Dilarang mengkopi sebagian atau seluruh isi buku ini dengan cara apapun, termasuk dengan cara penggunaan mesin fotokopi, tanpa izin sah dari penerbit.
Young Progressive Muslim Jl. Talas II Pondok Cabe Ilir Pamulang Rt.05 Rw.01 Tangerang Selatan 15418 Acknowledgement Firstly, I would like to express my sincere gratitude to my supervisor Dr. Rodoni for the continuous support of my Master study, for his patience, motivation, and immense knowledge. His guidance helped me in all the time of research and writing of this thesis. Besides my supervisor, I would like to thank Prof. Suwito and Prof. Yusuf Rahman with whom I started my first steps in my Master study for always be there to listen and give advice. I am deeply grateful to them for the discussions that helped me sort out the technical details of my work. I am also thankful to them for encouraging the use of correct grammar and consistent notation in my writings and for carefully reading and commenting on revisions of this manuscript. I wish to express my sincere thanks to Prof. Dr. Masykuri Abdillah,MA. Director of Graduate School, for providing me with all the necessary facilities for the research. My sincere thanks also goes to Pak. J.M. Muslimin, for his wise advices and guidance which is helped me to safe a time and keep right direction in my thesis. I must also acknowledge the administration of Graduate School Vhemmy, Imma, Adam, Arief and other staff for their kind support and helping me for settle in this university. I would like to thank my family: my parents, my brother and relatives for supporting me spiritually throughout writing this thesis and my life in general. I thank my friends Magomed Tazhdinow, Abubakar Ibragimov and Shamil Nutsalov with whom we went through all difficulties and gain a lot of knowledge and experience during our study in
i Indonesia. I would like to express my sincere gratitude to my friend Any Widayatsari for her assistance and support in writing this thesis. In conclusion, I would also like to thank the Ministry of Religion of Indonesia for providing me scholarship particularly Pak Agus and Pak Sigit for their support and help.
ii PEDOMAN TRANSLITERASI ARAB LATIN
Pedoman transliterasi Arab-Latin yang digunakan dalam karya ilmiah ini adalah sebagai berikut:
A. Konsonan
f = ؼ ز = z ب = b
q = ؽ س = s ت = t
k = ؾ ش = sh ث = th
l = ؿ ص = }s ج = j
ـ = m ض = }d ح = }h
ف = n ط = }t خ = kh
ق = h ظ = }z د = d
ك = w ع = ‘ ذ = dh
م = y غ = gh ر = r
iii B. Vokal
1. Vokal Tunggal Tanda Nama Huruf Nama Latin Fath}ah A A َ
Kasrah I I َ ِِ D}ammah U U ُ
2. Vokal Rangkap
Tanda Nama Gabungan Huruf Nama
Fath}ah dan Ai a dan i ...َ ل ya
Fath}ah dan Au a dan w ...َ ك wau
Contoh: : H}usain : h}aul َحْول ُح َسني C. Maddah Tanda Nama Huruf Nama Latin Fathah dan alif a> a dan garis di ػػػػَا atas ػػػػ Kasrah dan ya i> i dan garis di atasِي ػػػػ D}ammah dan u> u dan garis diو wau atas ُ
iv (ة) D. Ta’ Marbu>t}ah
Transliterasi ta’ marbu>t}ah ditulis dengan ‚h‛ baik dirangkai dengan kata sesudahnya maupun tidak contoh )مدرسة) madrasah (مرأة) mar’ah Contoh:
al-Madi>nat al-Munawwarah : املدينة املنورة
E . Shaddah
Shaddah/tashdi>d pada transliterasi ini dilambangkan dengan huruf, yaitu huruf yang sama dengan huruf yang bershaddah itu. Contoh: : nazzala نّزل
F. Kata Sandang
dilambangkan berdasarkan huruf yang ‛الـ‚ Kata sandang mengikutinya, jika diikuti huruf shamsiyah maka ditulis sesuai huruf yang bersangkutan, dan ditulis ‚al‛ jika diikuti dengan ditulis lengkap baik ا ل huruf qamariyah. Selanjutnya (القمر) menghadapi al-Qamariyah, contoh kata al-Qamar (الرجل) maupun al-Shamsiyah seperti kata al-Rajulu
Contoh: al-Qalam : القلم al-Shams : الشمس
G. Pengecualian Transliterasi
Pedoman transliterasi ini tidak digunakan untuk kata- kata bahasa arab yang telah lazim digunakan di dalam bahasa
v Indonesia dan menjadi bagian dalam bahasa Indonesia, seperti asma>’ al-h}usna> dan Ibn, Al-Quran, Hadis, kecuali ,هللا lafal menghadirkannya dalam konteks aslinya dan dengan pertimbangan konsistensi dalam penulisan.
vi TABLE OF CONTENT
Acknoledgment ...... i Arabic Transliteration ...... iii Table of Content ...... vii List of Tables and Figures...... ix
Chapter. I Introduction A. Background of Study ...... 1 B. Research Problem ...... 16 1. Statement of the Problem ...... 16 2. Research Questions ...... 17 3. Scope and limitation of the study ...... 17 4. Objective of the study ...... 18 5. Significance of study ...... 18 C. Literature Review ...... 19 D. Research Methodology ...... 23 1. Type of Research ...... 23 2. Data ...... 23 E. Systematic of Writing ...... 24
Chapter II THE DEVELOPMENT OF ISLAMIC BANKING IN MUSLIM AND NON MUSLIM COUNTRIES A. Factors Affecting the Emergence of Islamic Banking...... 25 B. Religion Factor in Development of Islamic Banking ...... 28 C. The Development of Islamic Banking in Muslim Countries ...... 32 D. Islamic Banking in Non Muslim Countries ...... 43
vii
Chapter III RUSSIAN MUSLIMS AND SOCIO- POLITICAL CONDITION IN RUSSIA A. Ethnic Muslims in the Regions of Russia ...... 59 B. The Government Attitude Toward Islam and Muslims ...... 71 C. Banking Demand and Financial Literacy in Russia ...... 76 D. Recent Economic Condition in Russia ...... 83 E. Russian Households Saving Behaviour ...... 92
CHAPTER IV THE DEVELOPMENT OF ISLAMIC BANKING IN RUSSIA A. The Demand for Islamic Banking ...... 105 B. Regulation and Political Condition ...... 118 C. Challenge for Islamic Banking and Finance in Russia ...... 129
CHAPTER V CONCLUSION AND SUGGESTIONS A. Conclusion ...... 141 B. Suggestion ...... 143
BIBLIOGRAPHY ...... 145 GLOSSARY ...... 159 INDEKS ...... 163
viii
LIST OF TABLE AND FIGURES
Table Description Page
Tabel 1.1. Russian Muslim Population 2002 by Provinces ...... 9 Tabel 1.2. Projected Growth of Muslim in Europe ...... 11 Tabel 1.3. Russian Muslim Population 2002 by Provinces with Muslim Minority ...... 12 Tabel 3.1. Muslims in Russia ...... 61 Tabel 3.2. Russian Population Projection ...... 62 Tabel 3.3. The Ethnic Muslim Population of Russia ...... 69 Tabel 4.1. GDP (Constant Price) and Gross Domestic Savings Russia 1990-2013 GDP (Constant Price) and Gross Domestic Savings Russia 1990-2013 ...... 115 Tabel 4.2. Regression Output ...... 116
ix
Figure Grafik 2.1. Total Islamic Banking Assets 2012 …… ...... 40 Grafik 3.1. The Map Russia’s Ethnics Group ...... 66 Grafik 3.2. Russian Population 1990-2030 ...... 67 Grafik 3.3. Russian GDP Percapita 2007-2014 ...... 85 Grafik 3.4. Russian GDP Growth, Oil Prices, Foreign Borrowing, Funds (2007-2016) ...... 88 Grafik 3.5. Salary Index in Russia...... 98 Grafik 3.6 Russia and U.S Debt Burden 2009-2014 ...... 99 Grafik 4.1 Saving and Income Growth in Russia 2002- 2012...... 112
x
CHAPTER. I INTRODUCTION
A. Background Of The Study
Everyone in the modern world deals with banking institutions: some are paid on a plastic card, transfer money to other relatives, others open accounts at work. Most conventional banking is hardly halal under Islamic law, because they involve the use of interest1 which is prohibited for Muslim. Therefore for several decades Muslim countries are trying to create a completely interest free Islamic banks. Riba is a term equal to interest used in conventional banking operations. Riba is charging of predetermined additional amount on a loan extended based on length of credit period. Imam Abubakr Al Jassas (D.380 AH) defined riba as a loan given for stipulated period with a stipulated increase on the principal payable by the loanee.2 Charging of interest on loans had never got support in any ethics.3 In the
1In Islam interest (riba) means an increase in things, this particular definition being that of the Hanbali School. Riba is defined in the Hanafi work as a surplus of commodity without counter-value in a commutative transaction of property for property. The intent of such a transaction is a surplus of commodities, even if only legally; thus, the definition includes both credit riba and invalid sales, since postponement in either of the indemnities is a legal surplus without perceivable material recompense, the delay usually being given an increase in compensation. Sh. Wahba Al Zuhayli, “The Juridical Meaning of Riba.” in Abdulkader Thomas (ed), Interest in Islamic Economics Understanding Riba,(New York: Routledge,2006), 25 2T.S Usmani.,SAB-SCP (Sharia Appellant Bench. Supreme court of Pakistan). (1999). www.albalagh.net/Islamic_economics/riba_judgement html, (accessed March 18, 2014). 3 Islam is not the only religion that prohibits interest, all major religious and ethical systems have prohibited interest. In Christianity, 1 2 Qur’an the prohibition of riba can be found in Surah Al-Ru>m (30:39) displeasure of Allah is disclosed for interest based practices. 4 Surah An-Nisa>’ (4:161) where interest charging was disclosed as sinful act of Jews,5 and also in Surah Al- 'Imra>n (3:130 ) 6. In macro economic point of view, interest based Financial intermediation can not guarantee economic welfare and equity. In the contrary, tends to promote living beyond means by both the private and public sectors. Financial resources become available to borrowers on the criteria of their ability to provide collateral to guarantee the repayment of principal, and sufficient cash flow to service the debt. Hence, financial resources go to the rich whom do not borrow only for investment but also for excessive consumption and speculation, while governments borrow not only for
Judaism, Buddhism, and Hinduism, interest was originally forbidden. Similarly all medieval thinkers and theologians – Confucuis, Socrates, Plato, Aristotle – stood against interest and regarded it as a form of exploitation. It was only during the last 200 years, in the wake of moral relativism, that the legitimization of interest has taken place. Saidat Adeola Otiti , ‚Islamic Banking– Interest-Free Banking‛, Moslem Public Affairs Centre (17 August 2011). http://www.mpac-ng.org/archived- article/635-islamic-banking-interest-free-banking.pdf (accessed April 11, 2015) 4Q.S: Ru>m (30:39) َ َو َما آ َت ْي ُتم مِّن ِّربا لِّ َي ْر ُب َو ِفي أ ْم َوا ِل ال َّنا ِس َف َل َي ْر ُبو ِعن َد َّ ِ ّللا َو َما آ َت ْي ُتم مِّن َز َكا ة ُت ِري ُدو َن َو ْج َه َّ ِّللا َفأُ ْو َل ِئ َك ُه ُم ا ْل ُم ْض ِع ُفو َن And whatever you give for interest to increase within the wealth of people will not increase with Allah . But what you give in zakah, desiring the countenance of Allah - those are the multipliers. 5 Q.S:An-Nisa>’ (4:161) َ َ َ َ َ َوأ ْخ ِذ ِه ُم ال ِّر َبا َو َق ْد ُن ُهوا َع ْن ُه َوأ ْكلِ ِه ْم أ ْم َوا َل ال َّنا ِس ِبا ْل َبا ِط ِل َوأ ْع َت ْد َنا ِل ْل َكا ِف ِري َن ِم ْن ُه ْم َع َذا با أ ِلي ما And [for] their taking of usury while they had been forbidden from it, and their consuming of the people's wealth unjustly. And we have prepared for the disbelievers among them a painful punishment. 6 Q.S: Al-'Imra>n (3:130) ْ َيا أَ ُّي َها الَّ ِذي َن آ َم ُنوا ََل َتأ ُكلُوا ال ِّر َبا أَ ْض َعا فا ُم َضا َع َف ة َوا َّت ُقوا َّّللاَ َل َعلَّ ُك ْم ُت ْفلِ ُحو َن
3 development and public well-being, but also for chauvinistic defence build-up and white-elephant projects. The availability of borrowed funds contributes to a rapid expansion in claims on resources and, besides accentuating macroeconomic and external imbalances, squeezes resources available for need fulfillment and development.7 In the second half of 20th century liberation of Muslim world from colonial almost completed and widespread renaissance of Islamic ideology took its path in Muslim societies whereby the masses started looking at the existing social systems through Islamic lenses and proposed modifications and developments. The Muslim thinkers and philosophers challenged the world’s ruling economic and social systems and uncovered their weaknesses. 8 In the economic field, it was the biggest challenge to reform conventioanl financial institutions to bring them in harmony with the dictates of Shari‘ah. In an environment where the entire financial system was based on interest, it was a formidable task to structure the financial institutions on an interest free basis.9 In mid 1980s that Islamic finance started to grow exponentially, the first financial company based on Shari’a principles was the Mit Ghamr savings project in Egypt. Mit Ghamr was a co-operative organization in which the depositors also had a right to take out small loans for
O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful. 7M.Umer Chapra, ‚Why has Islam prohibited interest? Rationale behind the prohibition of interest‛ in Abdulkader Thomas (ed). Interest in Islamic Economics Understanding Riba,( New York: Routledge, 2006), 95 8Muhammad Hanif, ‚Differences and Similarities in Islamic and Conventional Banking.‛ International Journal of Business and Social Science Vol. 2 No. 2 (February 2011), 2. 9 Muhammad Taqi Usman, An Introduction to Islamic Finance (Dordrecht:Kluwer Law International, 2002), 2-4.
4 productive purposes. In addition, the project attracted funds to invest in projects on a profit-sharing basis.10 Bank lasted only 4 years old, but it was first Islamic bank in the modern history.11 From a handful of banks in the late 1970s, including the Islamic Development Bank and Dubai Islamic Bank, the Islamic banking industry has grown significantly. Since the late 1990s the industry has been growing at a rate of 10 – 15% per year.12 In 2011 Islamic banking assets globally grew to $1.3 trillion, suggesting an average annual growth of 19% over past four years and the Islamic banking system growth story continues to be positive, growing 50% faster than the classic banking sector. Acording to Agha the Islamic market is about 1.8 billion consumers and worth more than 2 trillion dollars until April 2013. Currently, Islamic banking as the only form of Islamic finance is practiced in more than 105 countries worldwide.There are now more than 300 Islamic financial institutions worldwide including banks, mutual funds, mortgage companies and insurance firms in 2011. 13
10 N. Schoon, ‚Islamic Finance- a History‛ Financial Services Review (August 2008). http://www.assaif.org/content/download/ 5961/34413/file/Islamic %20Finance %20History.pdf (accessed February 25, 2015) 11 Mikhail Nefedov, ‚On The Islamic Banking ‚ Almanac of Modern Science and Education, № 4 -71 (2013) http://scjournal.ru/articles/issn_1993-5552_2013_4_37.pdf, (accessed February 25, 2015) 12Ahmet Sekreter, et al. ‚Parallelism between Interest Rate and Profit Rate: Comparison of Islamic Banking and Conventional Banking‛ Journal of Business, 1(2):15-24, (2012), 15. 13Ghada Ben Zeineb & Sami Mensi, ‚Does the PLS Paradigm Spur the Islamic Banks Vs Conventional Banks Soundness: Case of the Global Financial Crisis‛ Journal of Economics and Development Studies, Vol. 2, No. 3 (September 2014), 177-192
5 Meanwhile some Muslim scholars were very skeptical about Islamic banks. They thought it is impossible to conduct interest free operational system when the entire banking system in the country using traditional banks. Islamic bank is not a lender but investor of the project. It shares profits and losses with the customer. This is what called Musharakah contract. Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. Under Islamic banking, it is an agreement under which the Islamic bank provides funds which are mixed with the funds of the business enterprise and others. All providers of capital are entitled to participate in management but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. 14 Another contract called Mudaraba.15 Instead of interest contribution Islamic banks offers to open investment deposits, the depositor is not charged interest but share of profit from participation in investment projects. But investors should be willing to incur losses in the event of failure of the project. Islamic alternative of mortgage or car loan are contracts Ijara and Murabaha. Ijara - lease agreement with subsequent transfer of ownership to the lessee.16 Murabaha
14 Imran Ahmad and Ghulam Shabbir, ‚Frequently Asked Questions (faqs) on Islamic Banking‛ Islamic Banking Department State Bank of Pakistan, Karachi (t.t) .http://www.sbp.org.pk/departments/ibd/faqs.pdf, (accessed March 6, 2015) 15 Muhammad Taqi Usmani ‚Mudaraba one of the forms of investment in Islam‛, Islam.ru (9 Oktober 2013) http://www.islam.ru/content/economica/mudaraba-odna-iz-form- investirovaniya-islam, (accessed March 6, 2015) 16 Islam Today, ‚Principles of operation of Islamic Banks: the Principle of Ijarah‛(19 Oktober 2012) http://islam-today.ru/ekonomika/prin
6 involves the sale of goods by installments, but the price of goods will be higher than if you pay without installments.17 Waiver of fines and penalties. In the case of insolvency of the client or the inability to repay on time, an Islamic bank is not entitled to increase the size of the debt. But it may require bail to guarantee the payment of the debt. Next principle is Refusal to participate in uncertain suspicious transactions. The Islamic bank has no right to participate in financial speculation which is certainly makes it more reliable and resistant to external crises. Money can’t be invested in forbidden in Islam business. Banks should conduct a careful analysis and selection of investment projects. Thus, their leadership is unable to approve the insertion of money, for example, in the construction distillery. Islamic financial institution was established base on the religious factor, which is to develop a financial system . This religious reason explains why based on history, Islamic finance at the begining developed in Islamic countries before adapted in non muslim countries with fast growing muslim population such as United Kingdom. Beside United Kingdom, Russian Muslim minority is second fastest growing population in the Europe and one of the largest in the world. It is hard to find the most actual number of muslim in Russia, since the last census which counted ethnic Muslim citizens in Russia was held on 2002. There are various different numbers of muslims announced by diffrent schoolars and politicians According to the population census that was taken in 2002 in Russia there are around 14.5 million Muslims or 10% of Russian population. After Soviet Union collapse and cipy_raboty_ islamskix_ bankov_ princip_idzhara/, (accessed March 6, 2015) 17 Barakat Islamika, ‚Murabaha transaction‛(t.t) http://www.barakat.kg/islamskie-modeli-finansirovanija/sdelka- murabaha.html, (accessed 6 March 2015)
7 atheistic ideology disappeared Russia experienced revival of public participation in religious rite and practices. However the number of Muslims who obey the Sharia rules related to economic even among those who goes to mosque is not large. Roman Silantyev, a Russian Islamologist has estimated that there are only between 7 and 9 million people who practise Islam in Russia, and that the rest are only Muslims by ethnicity. 18 Islam first entered Russia through Dagestan from the mid 7th century it started to spread to the Northern Caucasus. By the year 21 AH (Muslim calendar) (641 CE), the Muslim army under the leadership of 'Abd Rahman ibn Rabiah reached the Southern Caucasus northward after taking control of Persia and Al-Quds (Jerusalem).19 Nowaday, Muslim communities are concentrated among minority nationalities residing between the Black Sea and the Caspian Sea.20 The nineteen million Muslims, the second largest religious community in Russia, have over 800 parishes and mosques, mostly in Bashkortostan, Daghestan, Kabarda-Balkaria, North Ossetia, Tatarstan, Ingushetia, and Chechnya.21The most populous Muslim nationality group in Russia is the Tatars, numbering over 5.5 million. Other dominant Muslim nationality groups include the Bashkirs, the
18 Interfax, ‚20Mln Muslims in Russia and mass conversion of ethnic Russians are myths‛ (10 April 2007), http://www.interfax- religion.com/?act=news&div=2869(accessed April 17, 2015) 19Elmira Akhmetova, ‚Islam in Russia‛, Islam RU, http://islam.ru/en/content/story/islam-russia (accessed April 17, 2015) 20Pravda.ru, ‚Islam to become Russia’s predominant religion by 2050?‛ (21.07.2008 ) http://english.pravda.ru/history/21-07-2008/105837- russiaislam-0/ (accessed April 17, 2015) 21http://www.newzealand.mid.ru/religion-in-russia.html (accessed April 17, 2015)
8 Chechens, the Avars, the Kazakhs, the Azeris, the Kabardians, and the Darghinians. The Tatars are sufficiently spread geographically throughout Russia that Tatarstan is not the region with the highest absolute number of Muslims. That distinction belongs to Dagestan, followed by (in descending order of Muslim population and including only those regions with at least 500,000 Muslims) Bashkortostan, Tatarstan, Chechnya, and Kabardino-Balkaria. Similarly, the regions with the highest percentage of their populations of Muslim nationality are Ingushetia (97.38 percent), followed by (in descending order of percentage of Muslim population and including only those with at least 25 percent Muslims) Dagestan, Chechnya, Kabardino-Balkaria, Karachai- Cherkessia, Bashkortostan, Tatarstan, and North Ossetia.22 Table 1.1 shows Muslim population in Russian by provinces in 2002.23
22 Judyth Twigg, ‚Differential Demographics Russia’s Muslim and Slavic Populations ‚PONARS Policy Memo No. 388 (2005).137-138 http://www.gwu.edu/~ieresgwu/assets/docs/ponars/pm_0388.pdf 23 http://www.perepis2002.ru/index.html?id=11 (accessed April 17, 2015)
9 Tabel 1.1 . Russian Muslim Population 2002 by Provinces
Province Muslim Population (%)
Ingushetia 98%
Chechnya 96%
Dagestan 94%
Kabardino-Balkaria 70%
Karachayevo-Cherkessiya 63%
Bashkortostan 54,5%
Tatarstan 54%
Source:Russian Census 2002
While Russia's overall population is dropping, 24 the number of Muslims in the country is rising. The Muslim population growth rate since 1989 is between 40 and 50 percent, depending on ethnic groups.25 Data in table 1.2 shows that the growth rate of muslim population in Russia was the second fastest after United
24 Russia’s population will most likely decline in the coming decades, perhaps reaching an eventual size similar to 1950’s level of around 100 million. This declaine of poppulatio causes by high mortality, low fertility and emigration of well-educated professionals. Joseph Chamie and Barry Mirkin, ‚Russian Demographics: The Perfect Storm‛ YaleGlobal, (11 December 2014), http://yaleglobal.yale.edu/content/russian-demographics-perfect-storm. (accessed April 17, 2015) 25 Salah Uddin Shoaib Choudhury, ‚Russia becoming a Muslim state!.‛, Asian Tribune, Vol. 12 No. 1128, (2006) http://www.asiantribune.com/index. php?q= node /211 (accessed April 17, 2015)
10 Kingdom, and in total Russia has the largest Muslim population in all of Europe. The number of Muslims in Russia is projected to increase from about 16.4 million in 2010 to about 18.6 million in 2030. The muslim share of the country’s population is expected to increase from 11.7 percent in 2010 to 14.4 percent in 2030. The growth rate for the Muslim population in the Russian Federation is projected to be 0.6 percent annually over the next two decades. By contrast, Russia’s non-Muslim population is expected to shrink by an average of 0.6 percent annually over the same 20-year period.26 PEW research centre predicted that by 2050 Islam will become the largest religion in Europe. Muslims will grow more than twice as fast as the overall world population between 2010 and 2050 and, in the second half of this century, will likely surpass Christians as the world’s largest religious group.27
26 Brian J. Grim, and Mehtab S. Karim, “The Future of the Global Muslim Population.” Report Pew Research Center’s Forum on Religion & Public Life (January 2011), 128 http://www.euro- muslims.eu/future_global.pdf (accessed april 17, 2015) 27 Michael Lipka and Conrad Hackett, “Why Muslims are the world’s fastest-growing religious group”, Pewresrach entre, April 23, 2015 Http://www.pewresearch.org/fact-tank/2015/04/23/why- muslims-are-the-worlds-fastest-growing-religious-group/ (accessed February 22, 2016)
11 Table 1.2. Projected Growth of Muslim in Europe
Estimated Projected Projected Musim Musim Numerical Countries Pupulation Pupulation Increase 2010 2030 2010-2030
United Kingdom 2.869.000 5.567.000 2.698.000
Russia 16.379.000 18.556.000 2.177.000
France 4.704.000 6.860.000 2.156.000 Italy 1.583.000 3.199.000 1.617.000
Germany 4.119.000 5.545.000 1.426.000
Spain 1.021.000 1.859.000 838.000
Sweden 451.000 993.000 542.000
Belgium 638.000 1.149.000 511.000
Netherlands 914.000 1.365.000 451.000
Austria 475.000 799.000 324.000 Source: Pew Research Center’s Forum on Religion & Public Life The Future of the Global Muslim Population, January 2011
Several factors contribute to the projected growth of Russia’s Muslim population, some of them are higher Muslim fertility and Muslim age structure.28
28Several factors contribute to the projected growth of Russia’s Muslim population, some of them are Muslim women generally have more children
12 The high growth of muslim in Russia can be seen at table 1.3. In this table shown that among the ex-Soviet countries the fertility rate are higher in the countries which is muslim majority.
Table 1.3.Fertility Rate at Ex-USSR Countries (average childreen per woman 15-49 years old}
Country 1990 2010 Muslim Majority Tajikistan 5.2 2.9 M Kyrgyzstan 3.9 2.6 M Turkmenistan 4.2 2.2 M Azerbaijan 3.3 2.0 M Kazakhstan 2.8 1.9 M Uzbekistan 4.2 1.9 M Armenia 2.8 1.4 Estonia 2.1 1.4 1.4 Georgia 2.2 1.4 Russia 1.9 1.4 than other women in Russia (an estimated 2.3 children per woman, compared with a national average of fewer than 1.5 children per woman). Higher Muslim fertility is directly related to the fact that Muslim women marry in larger numbers and divorce less often than other women in Russia. This means they spend longer periods of their lives in unions where childbearing is more likely. And although the abortion rate in Russia is still among the highest in the world, research suggests that Muslim women have fewer abortions on average than other women in Russia. Another reason the Muslim population in Russia is expected to increase is that nearly half of the country’s Muslims are under age 30, according to an analysis of data from Russia’s 2002 census. By comparison, about 40% of ethnic Russians are in this age group. Mark Adomanis, ‚Is Russia Turning Muslim?.‛ Forbes (10/23/13) http://www.forbes.com/sites/markadomanis/2013/10/23/is-russia-turning- muslim/ (accessed April 17, 2015)
13 Belarus 1.9 1.3 Latvia 2.0 1.3 Moldova 2.3 1.3 Ukraine 1.8 1.3 Lithunia 2.0 1.2 Source: Routledge Handbook of Russian Politics and Society data
Although Islam is the second largest religion in Russia it is impossible to provide official statistics of practicing adherents of Islam or any other religion in Russia because there is no country-wide census or statistics done on this matter by any governmental organization. Estimated that there are only between 7 and 9 million people who practise Islam in Russia, and that the rest are only Muslims by ethnic.29 Despite high growth rate of the Muslim population, until now the attempts to establish Islamic financial system that can serve the needs of Russian Muslim community has not succeeded. The attempt to establish Islamic financial institutions in Russia began in 1992, there was an attempt to establish ‚United Islamic Joint-Stock Commercial Bank‛ in Kemerovo. However, the bank never opens doors for customers; the project was remained on papers.30 In 1997 Russian Forte Bank31 begun to utilizing Islamic Financial
29 “Islam to become Russia’s predominant religion by 2050?” http://www.pravdareport.com/history/21-07-2008/105837-russiaislam-0/ (accessed April 17, 2015)
30 Renat Bekkin, “Islamic Finance in Former Soviet Union.” Discussion paper of the Institute of Developing Economies, Japan. (March 2009).180-181. 31 The Badr-Forte Bank, is Russian name for International Commercial Bank, is the only structure in the banking sphere guided by Islamic business rules. Licensed by the RF Central Bank in 1991, it has been using Islamic funding methods since 1997. A.Iu. Zhuravlev, ‚Printsipy funktsionirovania islamskikh bankov‛, in: Islamskie finansy v
14 tools in its operations. Later Forte Bank establishes Badr Forte Bank and it’s become the only bank in Russia that works according to Sharia compliance. Bank focus it activity on foreign trade operations it has successfully provided services to support export-import operations and had an extensive network of correspondents in nearly 70 countries. In 1998 Badr Forte acquires the banking license from Central Bank of Russia. From the side of Russian Low Badr-Forte Bank was an ordinary commercial bank. In 2006 during the audit Central Bank revealed violations which are might cause a license revocation from Badr Bank. After long negotiations and letters to the Russian President and Director of the Central Bank by some Muslim leaders they come to a compromise. It was decided to fine the bank, but not to revoke the license. In September 2006 was committed a murder of Deputy Chairman of the Central Bank Andrei Kozlov. New Chairman began inspection again and Badr Bank stop it activity. Badr-Forte Bank is truly unique for Russia and for the world. To develop bank services Badr Forte used help of foreign experts. The reason is lack of appropriate staff in Russia. Despite this, Badr-Forte Bank was a unique Russian bank with original products, tailored to the specifics of the Russian legislation, such as the Islamic mortgage products designed to help the Muslims of Moscow and the Moscow region in solving the housing problem in accordance with Shariah. In December 2006 the Bank of Russia has deprived license of the Badr-Forte Bank.32 Before the financial crisis despite the license withdraw of the Badr-Forte Bank interest to Islamic Banking in Russia sovremennom mire: ekonomicheskie i pravovye aspekty, ed. by R.I. Bekkin, (Moskva: UMMA, 2004), 91 32 http://www.globalislamicfinancemagazine.com/?com=news_list& nid=1021, (accessed March 8, 2015)
15 increased. In 2008 was held a variety of activities dedicated to the issues of Islamic finance including two international seminars on Islamic Banking and Insurance (Kazan), in April 2008, the International Banking Club ‚Unlimited Analytics‛ and the National Currency Association organized a roundtable discussion on ‚Islamic Banking : the nature and possibilities for the Russian financial market‛, in December 2008, the International Union of Economists was held a roundtable discussion on Islamic Economics. On March 2009 Moscow hosted the International Conference "Islamic Banking: specifics and prospects", which brought together government officials, businessmen and academic circles. In 2011 was established Islamic Financial House ‚Amal‛. Financial House ‚Amal‛ is an analogue of Islamic Bank. They offer consumer financing, such as car and house financing, business financing and other services. Beside it customers can invest their money and obtain income permitted by Shariah Legislation. ‚Amal‛ has internal and external Shariah Committees. Internal reports to the Head of the Financial House and performs continuous monitoring of all his operations, including the expertise of each contract. External does not report to the head of the Financial House and carries an external independent monitoring of his activities. Financial House ‚Amal‛ has branches in Kazan, Nizhnekamsk and representatives in Izhevsk and Moscow.33 On December 2011 was established ‚LaRiba-Finance‛ Islamic financial company in republic of Dagestan. Company offers business financing, car, house and consumer goods financing as well. Customers can invest their money in 3 kind of deposit: 1)Standartnyi- provides an opportunity to replenish the deposit amount over the term of the contract, minimum period is 6 months. 2) Letniy marafon- deposit without an
33 http://iamal.ru/ (accessed April 16 , 2015)
16 opportunity to replenish investments. 3) Insan- is charitable deposit that allows transfer accrued income on a monthly basis as a donation (sadaqah or zakat) to the charity fund to help all needy Muslims.34 Financial House ‚Masraf‛ was established in 2013 in republic of Dagestan. Main activity of ‚Masraf‛ is consumer goods financing but customers can get car or house financing as well or invest their money according to Sharia rules.35 The introduction of Islamic bank and finance is very important as a step stone for further development in CIS region. Despite the economic problems the growing interest of foreign investors in Russia is logical since Russia is the third trade partner of the European Union and the main energy provider for this area. The Financial sector is one of the most dinamayc sector, as Russia economy continues to diverse it sectoral structure and try to lesses it dependency on raw material sector.36
B. Research Problem 1. Statements of the Problem (1). The government of Russia has a goal to open Islamic Banking by the year 2015. In this regard Russia is developing legislative amendment that should eliminate barriers for the establishment of Islamic Banking. (2). However, the legislation is just one of the challenges to establish an Islamic banking in Russia. Equally
34 http://www.lariba.ru/ (accessed April 20, 2015) 35 http://www.masraf.ru/ (accessed April 20, 2015) 36Maas Miyas Malik, ‚The Potentials and Challange of Introducing Islamic Finance Services in non Muslim Countries (CIS, China, African and Australian)‛, INCEIF (July 10,2010). http://www.assaif.org/content/download/33129/174190/file/ IF%20in%20Non-Muslim%20countries.pdf (accessed April 16 , 2015)
17 important is the awareness of the population about the methods, mechanisms, advantages of Islamic banking operations and the demand for such services. Another obstacle is a lack of a sufficient number of competent experts in this field and this is only the part of the problems that must be resolved to establish Islamic banking. (3). In response to these problems this study proposes to carry out activities for improving financial literacy of population and organize special courses for bank employees and develop appropriate academic disciplines in large financial universities of Russia.
2. Research Questions The central research question that this study aimed to answer is, what are the reasons for the lack of Islamic banks in the region with a Muslim majority? This study will also address the following research sub-questions: 1. How important to develop Islamic banking in Russia? 2. What are the major obstacles standing on the way of active development of Islamic banking? 3. What should be done to achieve better development of Islamic banking in the country?
3. Scope and limitation of the study: Variables that cause the failure of establishing Islamic Banks in Russia has an extremely broad aspects ranging from political, economic to social and cultural. This research will limit it focus on some strongest aspects that influance the establishment of Russia Islamic Banking. The problem cause by distance, time and limited fund makes it impossible to visit Islamic Banks and Financial Centers in Russia to collect
18 data and interviews with schoolars and monetary autorities. To resolve these problem, this research will use online data from trusted sources, published data, and data been used by other Russian Islamic Bank researcher such as Renat Bekkin, Madina Kalimullina, Andrei Juravliov also articles and books that content needed data. Primary data such us questionaire will be gathered by email and interview will be done by video call, skype, or any feasible electronic communications device.
4. Objective of the study The main objective of this study are: (1). To investigate the trends and prospects of implementation of Islamic banking in the modern Russian economic system.
(2).To Identificate the role and potential contribution of Islamic Syariah Law in the economy and financial systems of Russia.
5. Significance of study The research study could provide information on the issues of implementation Islamic Finance Institutions in Russia. Further, this study would also be a review of the experience of opening Islamic Banking in other countries such as United Kingdom and CIS. This study would be beneficial to the Central Bank of Russia to formulate laws on Islamic Banking. Furthermore, this study would be beneficial to those Conventional Banks that would open Islamic windows on their base. Moreover, this study will be useful for students and will increase their knowledge in the field of Islamic Banking and Finance in non Muslim countries.
19 C. Literature review Max Weber, the German social scientist writing in the early 20th century, offered insights into how cultural or even religious values could impact on economic output. He argued that the Protestant work ethic, supported by Reformation teachings that the pursuit of wealth was a duty, inculcated the virtues needed for maximum economic productivity. For this reason, Protestants were more productive than Catholics throughout Europe-just think of Germany and Great Britain, for instance, compared to Ireland, Spain, Portugal and Italy in his day.37 In general, religion is considered as the main reason for the the development of Islamic banks and financial institutions. This statement supported by Maali and Napier (2008). In their reserach they concluded that religion is a dominant factor of the background for the establishment of Islamic banking.38 The religious factor is also the main reason the choosing of Islamic finance services by costumers in Malaysia, according to Idris et.al (2011). In a research in Pakistan, Manzoor, Aqeel and Sattar (2010) found that religious factor has been proven to contributing to the growth of Islamic bank in Pakistan.39 However, religious consideration is not the only factor that influence the establishment of Islamic finance. The economic and political factors involved in the history of establishment of modern Islamic bank. Some scholars believe that political aspect and government involvment have a dominant role in
37 Max Weber, The Protestant Ethic and the Spirit of Capitalism, (London & Boston : Unwin Hyman, 1930), 3-13. 38Bassam Maali and Christopher Napier “Accounting, Religion and Organisational Culture: the Creation of Jordan Islamic Bank” paper Accounting, Business and Financial History Conference, Cardiff,( 2004) 39 Muhammad Mazhar Manzoor, Muhammad Aqeel and Abdul Sattar, “Factors Paving the Way towards Islamic Banking in Pakistan” World Academy of Science, Engineering and Technology Vol:4 (2010)
20 the development of Islamic finance and banking, Ilyas Zaripov’s (2014) state that the government's role in developing Islamic banking in Russia is very important. Government need to reduced banking rules that have become obstacles for developmentof Islamic Bank, and to increase the literacy on Islamic Bank and Finance. In line with Zaripov, Rodney Willson (2011) state that government stance influenced greatly in the development of Islamic banking. As shown in Malaysia and Bahrain, where Islamic banking is fully supported by the government and developed rapidly40. Based on history Al-Jarhi (2001), state that Islamic banks and financial institutions can emerge without government intervention.41 At first periode of Islamic Finance in Indonesia, where government’s banking regulations were not in favor to Islamic Institutions, Dawam Rahardjo (1988) state that Islamic Finance can be stablished without government intervention. It can be established through co operative institution owned by community.42 Islamic Bank can grow from private or commnity base, but in it further development government have an important role. An un favored politics and government regulation can reduce the potential Islamic bank to grow. El-Naggar (1978) ,
40Rodney Wilson, ‚The Determinants of Islamic Financial Development and the Constraints on its Growth‛, IFSB 4th Public Lecture on Financial Policy and Stability (Amman, Jordan, 2011),5. 41 Mabid Al-Jarhi, ‚Islamic Finance: An Efficient and Equitable Option‛, World Faith Development Dialogue, Berkley Center for religion, Peace and World Affairs (Oct. 2001) 10, http://repository.berkleycenter.georgetown.edu/20011010islamicfinance.pd f 42Dawam Raharjo, ‚ The Question on Islamic Banking in Indonesia‛ in Mohamed Ariff (ed), Islamic banking in Southeast Asia (Singapore: Institute of Sout East Asian Studies, 1992)138-162
21 the founder of Mit Ghamr project in Egypt reported that it has been its success, rather than the reverse, which has created problems for the bank. As soon as the social role of the bank began to make itself evident in the successful development of the local area, conflicts started with the local social authorities who saw it as interfering in their own area of authority and regarded it as simply reduplicating their own efforts unnecessarily. 43 The Mit Ghamr project was successful, as deposits increased from 1963 to 1966. The bank was cautious, rejecting about 60% of loan applications and the default ratio was zero in economically good times. But project was eventually abandoned for political reasons.44 That social and political athmosphere played a major role in the development of Islamic Bank according also pointed by Naughton and Shanmugan (1994).45 The constant public pressure to allow operation of Islamic Bank in Malaysia, associate with favorable political climate as the government found establishing an Islamic Banking sector is a way to steal the thunder from the Islamic Opposition.46Ali (2012) argue that socioeconomic characteristics such as
43Abdelkader Chachi, ‚Origin and Development of Commercial and Islamic Banking Operations‛, J.KAU: Islamic Econ., Vol. 18, No. 2 (2005 A.D/1426 A.H)\ 3-25 44Saidat.A.Otiti, ‚Evolution of Islamic Banking & Finance‛ Muslim Public Affairs Center (MPAC), http://www.mpac-ng.org/archived- article/636-evolution-of-islamic-banking-a-finance.html (accessed April 16 , 2015) 45 Sheraz Naughton and Bala Shanmugan, ‚Interest Free Banking A Case Study of Malaysia, Journal of Islamic Banking and Finance 7,3 (1994), 46 46 Mohammed Afiff, ‚Islamic Banking in Malaysia:Fraework, Performance and Lessons‛ Journal of Islamic Economics 2,3 (1989) 67-68
22 fertility,income and education are important determinants of financial performance.47 There are several opinions about the ever fails efforts to establish Islamic banking and financial institutions in Russia. According to Bekkin (2009), the failure was caused by the obstacle that Russian authorities put in Islamic banking development and the weak demand for Islamic financial services. The majority of Muslims in Russia are either not aware of Shari’ah prohibitions applying to trade and business, or explain non-compliance with such prohibitions by lack of possibilities. 48 Leonid Sukiyainen (2010) observe that the obstacles in developing Islamic Finance in Russia is more of political issue. Major obstacles to develop Islamic finance in Russia are lack of banking legislation that meets Islamic rules and the suspicion towards anything that is labeled Islam.49La Bella and Malyaev (2014), support the opinion that it is the lack of legislation is the main obstacle of Islamic bank establishment in Russia. According to La Bella and Malyaev,
47Mohammed Abu Ali, ‚The Impact of Socioeconomic Factors and Financial Access on Microfinance Institutions‛ International Journal of Economics and Finance , Vol. 4, No. 4 (April 2012), 76 48For the majority of so-called practicing Muslims of Russia their Islamic affiliation is limited to a fivefold salah, attending mosques on Fridays, fasting during Ramadan and if there is money performing a hajj. The fifth pillar of Islam, zakah, is often ignored. Absence of a centralised body, which would collect this purificatory tax, is a weak excuse for ignoring this pillar of Islam. Moreover, most faithful do not consider themselves to be bound by Islamic prohibition of dealing with interest at all. Bekkin, Renat ‚Islamic Finance in Former Soviet Union.‛ Discussion paper of the Institute of Developing Economies, Japan. (March 2009).179- 209. http://www.bekkin.ru/downloads / rb1391505491 .pdf 180-183 (accessed April 27 , 2015) 49 Anna Sulimina, ‚Russia looking at banking the Islamic way‛ Kompass (08 Sep 2010) http://www.telegraph.co.uk/sponsored/rbth/business/7989199/Russia- looking-at-banking-the-Islamic-way.html (accessed April 16 , 2015)
23 one of the most serious and formidable obstacles are absence of legislation, regulating the relations arising while working with Ilamic Financial isntruments.50
D. Research Methodology
This study will be written based on the following methodology
1. Type of Research. This research is a qualitative. Qualitative research is a study that seeks to understand the uniqueness of a situation as part of the context and the interaction therein. This study is not trying to predict what will happen in the future, but trying to understand the conditions that existed at that time.51 The approach used is economics approach combined with social phenomenology approach. By using these approaches, this research will seek explained about the conditions encountered in setting up Islamic bank in Russia. 2. Data The research data is divided into (1). Primary Data Primary data obtained from interviews with prominent figures in the Russian banking and response data and the response from the public about their knowledge on Islamic banking.
50 Simone la Bella and Vladimir Malyaev, “Development of Technologies of Application of Islamic Financial Product in The Russian Federations” FORMENTE, Anno IX, N.1-2 (2014), 204. http://www. bccpompianofranciacorta.it/DocDownload.asp?DocId=1305 (accessed April 27 , 2015) 51Patton, M.Q. ‚Quality in qulitative research:Methodological principles and recent developments‛, dalam Sharan B. Merriam, ‚Qualitative Research ‚ (San Fransisco,John Wiley &Sons.2009).14
24 (2). Secondary Data Secondary data will be obtained from literature review, data published online, and other sources 3. Data Analyze Data from interview analyzed qualitatively, statistics approach will also be use to describe the finding of research.
E. Systematic of writing
Chapter One: This chapter will explain the background of the problems that will addressed in this study, the research questions and methodology that is used. Chapter Two: This chapter will explain about, Debates on the prohibition of interest in Islamic law, as well as the analysis of the factors that influence the success of Islamic banks development, the history of development of Islamic Bank and the theory of Islamic Bank. Chapter Three: Explain the socio-political and economic conditions in Russia after the Soviet Union, including macro- economic conditions in general, religious life of society, government politics, and economic policies. Chapter Four: Will explain the growth of Banking in Russia, also prospects and Challenges of establishing Islamic Banking in Russia
Chapter Five: Conclusion and Suggestions.
CHAPTER II THE DEVELOPMENT OF ISLAMIC BANKING IN MUSLIM AND NON MUSLIM COUNTRIES
This chapter discusses the debate about Riba, which is the core of the Islamic financial system. Perspective on Riba affect the shape of the financial system in countries where Islamic finance system is enforced, to understand why some countries have Islamic bank and some countries do not, will be discussed about the factors that affect the establishment of Islamic banks in Moslem and non Moslem Countries, and the Modern History of Islamic Bank. Also in this chapter will be discussed theories about Islamic Banking.
A. Factors Affecting the Emergence of Islamic Banking Islamic banking has became a distinctive and fast growing segment of the international banking and capital markets around the world. There are over 200 Islamic banks operating in 70 countries comprising most of the Muslim world and many Western countries, 50 Islamic insurance (takaful) companies operating in 22 countries, Islamic investment houses, mutual funds, leasing companies and commodity trading companies, 1also hundreds of small Islamic financial institutions such as rural and urban cooperative credit societies, Islamic welfare societies and financial associations which operate at a local level and dealing with rural entities, small business firms and individual households.2
1M. Kabir Hassan and Mervyn K. Lewis (ed) , ‚Islamic banking: an introduction and overview‛ in Handbook of Islamic Banking, (Massachusetts:Edward Elgar Publishing, Inc, 2011).1 2The Economist, GCC Trade and Investment Flows, The Economist Intelligence Unit , (2014), 4 http://www.economistinsights.com/sites/ default/files / 25 26 The emergence of Islamic banking, happened in Muslim and Gulf countries in particuar, is a result of different factors. These elements combined together over a long period of time to mobilize Islamic banking principles from the theoretical level to the practical level. These factors are religious, political, and economic. 3 The political factor is integrated with the religious factor, which makes it difficult to discuss them separately.4 According to Bhat (2005), Some of the factors that led to the emergence of Islamic banks are. (1). Factor arised by groups that consider interest as usury. The presents of conventional banks in Islamic countries has led a movement againts this interest based banks .5Assume that conventional banks have become a trigger poverty Muslims. This movement also known as neo-revivalist groups. This movement has spread to Pakistan and other Arab countries. (2). Oil wealth in the Gulf States. Almost all Islamic banks were established
GCC%20Trade%20and%20investment%20flows.pdf (acessed at 1 May 2015). 3 Abdul Karim Aldohni, ‚The Emergence of Islamic Banking in the UK: A Comparative Study with Muslim Countries‛, (New York: Routledge,2011),11. 4Ibrahim Warde, Islamic Finance in the Global Economy, (Edinburgh :Edinburgh University Press,2002), 215-218 5 The formation of Islamic economics was a reaction to Western penetration of the Islamic world in the modern era. Beginning in the middle of the nineteenth century, several Western countries established their own banks in order to support their commercial activities. For example, the British Empire established the Imperial Ottoman Bank (1856) in the territory of the Ottoman dynasty and the Imperial Bank of Persia (1889) in the territory of the Qajar dynasty. The establishment of such Western banks, which charged interest, was a grave problem for Muslim intellectuals. Nasir Nabi Bhat, ‚The Western Economic Thought and its Response‛ International Journal of Science and Research (IJSR), Volume 4 Issue 3, (March 2015),245. 27 around 1970 in the Middle East financed by oil wealth.6 Dubai Islamic Bank, Kuwait Finance Department, Faisal Islamic Bank in Bharain, Nigeria and Senegal, banks Al-Shaykh Saleh Kamil Baaraka Group and Dar Al-Maal Al-Islami (DMI) Saudi prince Faisal Muhammad as a whole was established by the results of the oil wealth. Of course, not all Islamic banks established in the world comes from oil wealth. Examples establishment of Islamic banks in Malaysia mid 1940s, Jam'iyat Islamiyah in India, the bank Mit Ghamr Egypt (1963- 1967) and Nasser Social Bank (1971). 7 (3). The political decisions, which are (i) prohibition against interest as a form of legal policy taken by some Islamic countries; 8 (ii) the decision to establish the International Islamic Bank; (iii). the participation of the Muslim government in setting up an Islamic bank. In the case of Malaysia, Aziz (2007) states that the establishment and development of Islamic Bank in Malaysia was triggered by Malaysian government’s vision to develop a progressive and robust Islamic banking industry, rooted in the Islamic core values and principles that best serve the needs of the nation’s economy. It is the aspiration of the Malaysian government to have a strong Islamic banking industry capturing 20 percent of the market share of financing and deposits in the Malaysian financial industry by 2010.9
6 Iqbal Khan, ‚Managing Director Head of Global Islamic Finance‛, Issues and Relevance of Islamic finance in Britain , HSBC Amanah Finance, UK http://www.islamic-banking.com/iarticle_3.aspx (acessed at 1 May 2015) 7 Ibrahim Warde, ‚Islamic finance‛ Le Monde Diplomatique, http://mondediplo.com /2001/09/09islamicbanking, (acessed at 1 May 2015). 8 Abdullah Saeed ‚Islamic Banking and Interest: A Study of Prohibition of Interest and its Contemporary Interpretation"(Leiden: Koninklitje Brill, NV, 1996), 17-39. 9 Seethaletchumy Thambiah, Uchenna Cyril Eze, Khong Sin Tan, Robert Jeyakumar Nathan, and Kim Piew Lai, ‚Conceptual Framework for
28 Aldhoni (2011) states that, the emergence of Islamic banking, which happened in Muslim countries and Gulf countries in particular, is a result of different factors. These elements combined together over a long period of time to mobilize Islamic banking principles from the theoretical level to the practical level. These factors are religious, political, and economic. The political factor has not had a positive effect at some stages. But, in one sense or another, it has participated in the emergence of Islamic banking. The political factor is mainly integrated with the religious one, which makes it difficult to discuss them separately.10
B. Religion Factor in Development of Islamic Banking The foundation stone for emergence of Interest-free Banking was religion. Kirkpatrick (2005) sees religion as psychological attachment, a powerful emotional relationship to things. Religion is a cause, principle, or a system of beliefs, practices held to with ardor and faith.11Conventional banks can not meet the needs of Muslim community, who wants to exercise financial transactions in consonance of Islamic philosophy. Therefore, religion should have to be most dominant reason which induces Muslims to switch from conventional interest-based banking system. This statement is supported by Fazlan & Mohammad (2007) Religion is the
the Adoption of Islamic Retail Banking Services in Malaysia‛ Journal of Electronic Banking Systems, Volume 2010 (2010) http://www.ibimapublishing.com/ journals/JEBS/2010 /750059 /750059.html (accessed 4 Mei 2015). 10Abdul Karim Aldohni, ‚The Emergence of Islamic Banking in the UK: A Comparative Study with Muslim Countries‛, Arab Law Quarterly, Vol. 22, No. 2 (2008), 180-198 11 Lee A. Kirkpatrick , Attachment, Evolution, and the Psychology of Religion (New Yor : The Guilford Press, 2005). 5-7 29 main foundation of partition of banking sector into Islamic banks and conventional banks.12 Islamic bank has a spirit and philosophy of Islam, regarding interest-free transactions and risk sharing. Metawa and Almossawi (1998) found that religion is the main factor affect customer perception in the selection of Islamic banking system and not economic factor such as the yield on their investment.In addition he found religiosity is ranked highest factor affecting selection criteria followed by profitability.13 In UK, the volume of deposits of Muslims in Islamic financial institutions in primarily influenced by religious reasons. This finding finds by Othmen and Owen (2001)14, also Haron et al (1994), where religion is major influential factor of Islamic Bank adoption.15 Regarding the Islamic banking selection criteria, most of the customers have adopted Islamic banking due to the religious reasons. But suppraisiningly, religion is not the first factor influecing the establishment of Islamic Bank, as found
12S. Fazlan and A. Mohammad, ‘The efficiency of Islamic Banks: Empirical Evidence from the MENA and Asian Countries Islamic Banking Sectors’, paper presented at the Fifth International Islamic Finance Conference, 3-4th September, Kuala Lumpur. (2007) http://www.macrothink.org/journal /index.php/ jpag/article/ download/ 6677/_56 (accessed 4 Mei 2015). 13 Saad A. Metawa, Mohammed Almossawi, "Banking behavior of Islamic bank customers: perspectives and implications", International Journal of Bank Marketing, Vol. 16 Iss: 7, (1998), 299 - 313 14A. Othman & L.Owen, ” Adopting and Measuring Customer Service Quality (Sq) In Islamic Banks: A Case Study In Kuwait Finance House”. International Journal of Islamic Financial Services, 3(1),(2001), 1- 26. 15 S. Haron, N.Ahmad, & S.Planisek. Bank patronage factors of Muslim and non-Muslim customers.International Journal of Bank Marketing,, 12(1). (2002).
30 in the reseraches of Kareem and Afiff, (2006)16, Dusuki and Abdullah (2007)17 also Marimuthu et al., (2010) from their research in Malaysia finds that the main determinants of accepting Islamic Banking for Muslims or non-Muslims, are factors such as cost-benefit, service delivery, convenience and influence by friends . Ethnic background and religion do not really have a significant impact on the selection of Islamic banking. 18. Religion is the fourth most influencing construct in adoption to Islamic Bank as perceived by respondents under current study. Reason of not ranking religion high is lack of trust i.e., Islamic Banks are not providing 100% Halal financial services which in turn stimulate customers to join conventional Banking offering relatively better service quality.19 Khattak and Rehman ( 2010) finds that some other factors motivate the customers to adopt the Islamic banking system are bank efficiency in the transaction, their confidentiality to its customers, its working hours etc.20. Naser et al., (1999) from Jordan based study found that religion did not play significant role to adopt an Islamic bank, but profit driven
16A.A. Karim, A.Z.Affif,, ”Islamic banking consumer behavior in Indonesia: A qualitative approach”. Paper presented at the 7th International Conference on Islamic Economics, 1-3 April 2008, King Abdul Aziz University, Jeddah, Saudi Arabia, (2006) 17A. Dusuki and N. Abdullah,. ‚Why do Malaysian Customers Patronise Islamic Banks?‛ International Journal of Bank Marketing, 25(3), (2007),142-160. 18Marimuthu, C. W. Jing, L.P. Gie, L.P. Mun, T.Y.Ping. Islamic Banking: Selection criteria and implications. Global Journal of Human & Social Science, 10(4) (2010), 52-62. 19 Nain Tara, Madiha Irshad ‚Factors Influencing Adoption of Islamic Banking: A Study from Pakistan‛, Journal of Public Administration and Governance, Vol. 4, No. 3, (2014).352-367 20Khattak, & Rehman. Customer satisfaction and awareness of Islamic banking system in Pakistan. African Journal of Business Management. 4. (5) (2010 ), 662-671. 31 criteria was an important factor to chofaose a bank.21 Studies by Hegazy (1995) on Egypt, 22 Karim and Afiff (2006), 23 on Indonesia, Dusuki and Abdullah (2007) on Malaysia all are agree with the findings that religiosity is not the main reason for people to support Islamic Banks. Marimuthu et al., (2010) taking muslims and non-muslims as sample population concluded that cost-benefit, service quality, convenience and influenced by friends are more important variables than religion in selection criteria.24 Hasan et al. (2012), concluded that religious motives is the second most influencing construct when customer go for selecting Islamic Banks.25 The same conclusion drawn by Bashir (1984) in his research in Malaysia. He found that although the main reason for the successes of Islamic financial system is believed to be the Islamic beliefs of the people of the countries, an empirical study identifies other more important and entirely non-
21 Naser, K., A. Jamal and L. Al-Khatib. ‚Islamic Banking: A Study of Consumer Satisfaction and Preferences in Jordan‛. International Journal of Bank Marketing, 17(3). (1999),135-150. 22Ibrahim A. Hegazy, (1995) "an Empirical Comparative Study Between Islamic and Commercial Banks' Selection Criteria in Egypt", International Journal of Commerce and Management, Vol. 5 Iss: 3, 46 - 61 23A.A. Karim & A.A. Afiff. ‚Islamic banking consumer behavior in Indonesia: A Qualitative Approach‛. Paper is presented at the 6th International Conference on Islamic Economics and Finance, Jakarta, November 21-24. (2005). 24 C.W. Marimuthu,. Jing, L.P. Gie, L.P. Mun, T.Y.Ping. Islamic Banking: Selection criteria and implications. Global Journal of Human & Social Science, 10(4), (2010) 52-62. 25 Syed Akif Hasan and Muhammad Imtiaz Subhani and Ms. Amber Osman, ‚Consumer Criteria for the Selection of an Islamic Bank: Evidence from Pakistan‛ International Research Journal of Finance and Economics (IRJFE) No. 94, (2012) https://mpra.ub.uni- muenchen.de/40384/1/MPRA_paper_40384.pdf (accessed 4 September 2015)
32 religious factors26. Which is the system’s capability ro fulfill the expectations of people who support this system, these expectations fulfilled are identified to have four objectives; (1) high level of banking services, (2) less risky advances, (3) reasonably high returns on investments and (4) low risk of returns. Fulfilling these objectives is the most important way of ensuring the future success of the system (even in non- Muslim countries). Islamic banks are shown to be capable of fulfilling these objectives. Project financing, which seems to have become an integral feature of Western banking, enables Islamic banks to earn substantial profits and to acquire sufficient returns for its depositors. It is also shown that the Islamic participatory financing method provides relatively low-geared method of obtaining fund for risky projects.
C. The Development of Islamic Banking in Muslim Countries
According to Abdullah, Abidin and Sidek (2012), Islamic Bank was previously a small segmented market catering only to Muslims who wanted to avoid interest-based conventional Banking.27 Islamic Bank emerged as a competitor with traditional banking with the bundance of petrodollars in
26B. A. Bashir ,‛Successful Development of Islamic Banks‛, J. Res. Islamic Econ., Vol. 1, No. 2, pp. 59-66 (1404/1984) http://ierc.sbu.ac.ir/File/Article/Successful%20Development%20of%20Isla mic%20Banks_94428.pdf (accessed 4 September 2015)
27 Abdul Aziz Abdullah, Zainal Abidin,Rokiah Sidek ,‛ Perception of Non-Muslims Customers towards Islamic Banks in Malaysia‛ International Journal of Business and Social Science Vol. 3 No. 11; June 2012. 33 the mid 1970s.28 Recently the rapid grows of Islamic banking and finances, is triggered by their success in attracts wider circle of followers in recent years due to cash rich Gulf Muslim investors and rising demand for ethical investing. The participation on non muslim in various Islamic finance activities has increased, the sector constatly attracting non Muslim in many countries where the service is present.29Over the past decade Islamic finance has emerged as an effective tool for financing development worldwide, including in non-Muslim countries. Islamic Financial assets concentrated in Muslim countries of the Middle East and Southeast Asia, but the sector appears poised to enter Western markets and complement conventional financing, such as the United States, Singapore, and the United Kingdom. 30 The United Kingdom is determined to be the center of Islamic banking and finance in the world. As well as Singapore, which is determined to be the Islamic financial center in the world with ease related regulations that Islamic banking can thrive. In Malaysia, almost 15 percent customers of Islamic banks is non-Muslim. This indicates that Islamic banking instruments are also appealing to non-Muslim consumers. Islamic Finance expanded rapidly over the past decade, growing at 10-12
28 Donald Greenless. ‚Banking in Accordance with the Koran, Greenless, International Herald Tribune. 6/2/05. http://www.mafhoum.com/press8/241E17.htm (accessed 4 Mei 2015). 29 Mohammed Abbas , ‚Islamic banking - too Islamic for some?‛ Reuter (2008).http://www.reuters.com/article/2008/02/07/ us-islamic- summit-image-id US L0617831220080207 (accessed 27 June 2015) 30 David Cameron announced in 2013 that theUnited Kingdom will issue a £200 million ($327 million) Islamic bond, or sukuk, making it the first non-Muslim country to tap into Islamic financing. Companies in the United States are also considering Islamic finance to fund business ventures and infrastructure projects.
34 percent annually.31 Global Islamic financial assets have soared from less than 600 billion dollar in 2007 to more than 1.3 trillion dollar in 2012.32 There are many factors contributing to the current surge in the Islamic financial industry, among others is the innovative, competitive and risk-sharing nature of Islamic financial products, providing non-Muslims with attractive and viable alternatives to conventional Western banking instruments. According to Saudi Arabian General Investement Authority, rapid growth of Islamic Banking in non muslim countries is triggered among other by non-Muslim investors looking for less risky alternatives since the onset of the global credit crisis that has cast doubt on many Western risk management practices. 33 Solé (2007) states, that the growing interest of non Moslem to Islamic finance, is because non- Muslim investors see the potential for profit in Islamic banking. Islamic financial products, carry lower risk investments while enabling them to earn a profit and at the same time, provides portofolio diversify to further reduce risk.34 The low risk nature of Islamic Finance caused by risk exchange through mutually benefical transaction practises in
31 World Bank, ‚ Islamic Finance‛, (March 13, 2015) http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance (accessed 27 June 2015) 32Mohammed Aly Sergie, ‚The Rise of Islamic Finance‛ (January 30, 2014). http://www.cfr.org/economics/rise-islamic-finance/p32305 (accessed 27 June 2015) 33 Saudi Arabian General Investement Authority‛The Financial Services Sector in Saudi Arabia: Islamic Finance ‚,Saudi Arabian National Competitiveness Center , December 2011. http://www.sagia.gov.sa/Documents/Reports/ The%20 Competitiveness_Review_2011.pdf (accessed 2 May 2015) 34 Juan Solé, ‚Introducing Islamic Banks into Conventional Banking Systems‛ IMF Working Paper WP/07/175, (July 2007). httpfs://www. imf.org/external/ pubs/ ft/ wp/2013/wp13184.pdf (accessed 27 June 2015) 35 Islamic Finance. This kind of risk management allowed Islamic Financial instrunets to manage risk without falling into zero sum activities like conventional finance. 35 Another factor contributing to the current surge in the Islamic financial industry is the innovative, competitive and risk-sharing nature of Islamic financial products, providing non-Muslims with attractive and viable alternatives to conventional Western banking instruments. 36 Besides the finacial reasons, the increasing demand of Islamic Finance according to Siddiqi (2010) is causes by the increasing interest of ethical investment and the close concepts of Social Responsible. The morality factor as the back ground of choosing Islamic Bank is also in line with Boutayeba, Benhamida, and Guesmi (2004), that the expansion of Islamic Finance is caused by growing financial assets in Muslim-majority countries driven by consumer demand for products that comply with religious codes. 37 Investment, Coorporate Social Responsibility, and Social Business.38
35 Rifat Ahmed Abdul Karim, Simon Arcer, Islamic Finance: The New Regulatory Challange, (Singapore: Wiley, 2013),87-88. 36 Heiko Hesse, Andreas A. Jobst & Juan Solé, ‚Trends and Challenges in Islamic Finance‛ World Economics, Vol. 9 No. 2 ,(April– June 2008). http://www.researchgate.net/profile/Andreas_Jobst/publication/23725154_ Trends_and_Challenges_in_Islamic_Finance/links/54531f180cf2bccc49095 9e6.pdf. (accessed 27 July 2015) 37 Faiçal Boutayeba, Mohammed Benhamida, Souad Guesmi, ‚Ethics in Islamic Economics‛, Annales. Ethics in Economic Life , vol. 17, no. 4, (2004) pp. 111-121. http://repozytorium.uni.lodz.pl:8080/xmlui/bitstream/handle/11089/6029/2 014_4_boutayeba_111_121.pdf?sequence=1&isAllowed=y (accessed 27 June 2015) 38 Nejatullah Siddiqi. ‛Emergence of Ethical Investment‛ http://www.siddiqi.com/mns/Emergence_of_Ethical_Investme nt.html (accessed 27 June 2015)
36 In makro economic level, Islamic Finance contributes to economic growth, reducing poverty and fostering shared prosperity. Tabash and Dhankar (2014) in their research in Qatar find a long-term stable relationship between Islamic banks financing and economic growth.39 Islamic finance can significantly contribute to economic development, given its direct link to physical assets and the real economy. This finding is in line with, Sarwer, Ramzan and Ahmad (2013), who finds that in the long run, the financing of Islamic banking is positively and significantly associated with economic growth and accumulation of capital in Pakistan. In this country, Islamic financial system more stable than the traditional banking system due to the elimination of debt financing and reduces inflation. And has less risk compare to conventional banks.40 Islamic finance helps promote financial sector development and broadens financial inclusion, help meet the needs of those who don’t currently use conventional finance because of religious reasons. 41 In broader term Alawode (2015) addressing the need to develop Islamic Finance to promote savings mobilization and develop financial intermediation in
39 Mosab I. Tabash1, Raj S. Dhankar,‛ Islamic Banking and Economic Growth: an Empirical Evidence from Qatar‛, Journal of Applied Economics and Business, vol.2, issue 1, (March, 2014), pp. 51-67 40 M. Saleh Sarwer, Muhammad Ramzan & Waqar Ahmad , ‚Does Islamic Banking System Contributes to Economy Development‛, Global Journal of Management and Business Research, Volume 13 Issue 2 Version 1.0 , (2013). https://globaljournals.org/GJMBR_Volume13/7- Does-Islamic-Banking-System-Contributes.pdf. (accessed 27 June 2015) 41 Of the 1.6 billion Muslims in the world, only 14% use banks. The Muslim world accounts for 8% of nominal gross domestic product, yet Islamic finance represents just 1% of the global financial market. Raja Nazrin Shah, ‚Where Next for Islamic Finance?‛ Keynote Address, Islamic Financial Intelligence Summit (IFIS), (11 November 2013). http://www.isis.org.my/attachments/ 1554_Raja_Nazrin_Address _ 11Nov2013.pdf (accessed 2 June 2015). 37 markets where they are currently lacking, also this development can reduce the overall gap in access to finance including for non Muslim, since non Muslims aren’t prohibited from using Islamic financial services. 42 Researchs that had been done on the relation between Islamic Finance and Growth, do not always find a consistent findings. A reverse direction of relation between growth and Islamic Institutions is also finds in Malaysia by Furqany (2009). Furqany resumes that in the long run economic growth will causes Islamic Bank to develop and not vise versa.43 Another reason why Islamic finance attract not only moslem countries is that Islamic Bank strengthen financial stability. 44 As the 2008 global financial crisis destroyed financial systems around the world, Islamic financial institutions were relatively untouched, protected by their fundamental operating principles of risk-sharing and the avoidance of leverage and speculative financial products. 45 However, some researchers find that there is no strong evidance that Islamic Bank is more stable compare to conventional bank. Among others are Altaee, Talo and Adam (2013), from their research in Gulf Cooperation Council (GCC)
42Abayomifs A. Alawode, ‚Islamic Finance‛, World Bank Brief http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance (accessed 27 July 2015) 43 Hafas Furqani and Ratna Mulyany, ‚Islamic Banking and Economic Growth: Emperical Evidance from Malaysia‛, Journal of Economic Cooperation and Development 30,2 (2009), 59-74. 44Moazzam Farooq and Sajjad Zaheer,‛ Are Islamic Banks More Resilient during Financial Panics?‛, IMF Working Paper WP/15/41.(2015) http://www.dss.uniroma1.it/RePec/sas/wpaper/20131_Ghassan_Fachin_Gu endoz.pdf (accessed 27 July 2015). 45Abayomi A. Alawode, ‚Islamic Finance‛ The World Bank Brief, (March 31, 2015) http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance. (accessed 27 July 2015).
38 countries no evidence that there is a significant difference between the financial stability of Conventional and Islamic banks for the periods 2003-2010, 2003-2007, and 2008-2010.46 Martin Čihák & Hesse (2008), finds that stability of Islamic bank depends on the size of bank, from their research the finds that small Islamic banks tend to be financially stronger than small commercial banks, large commercial banks tend to be financially stronger than large Islamic banks; and small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks.47 The growth of Islamic finance has helped to diversify markets and institutional structures, particularly in oil-rich Muslim countries, but also in countries with large Muslim minorities. Aldakhni (2007) believes that the future of Islamic banking lies in the idea not to sell Islamic products to Muslims, but rather to sell them to anybody, on the basis of its advantages over other financial alternatives.48 The role of Islamic finance as an alternative finance have attract major global multinationals companies (MNC). According to Martin (2005), large contribution to Islamic banking’s global success which including in non moslem
46Hatem Hatef Abdulkadhim Altaee, Ibaa M. Anis Talo, Mustafa Hassan Mohammad Adam ‚ Testing the Financial Stability of Banks in GCC Countries: Pre and Post Financial Crisis‛ Internfsational Journal of Business and Social Research (IJBSR), Volume -3, No.-4, (April, 2013) http://thejournalofbusiness.org/ index.php/ site/ article/download/33/32. (accessed 27 July 2015) 47 Martin Čihák & Heiko Hesse,‛ Islamic Banks and Financial Stability:An Empirical Analysis‛ J Financ Service Research (2010) 38:95– 113. 48 Said M. Aldakhni, Imad J. Zbib and Zafar U.Ahmed, ‚ Marketing of Islamic Finacial Products‛ in M. Kabir Hassan, Mervyn K. Lewis (ed) Handbook of Islamic Banking, (Cheltenham: Edward Elgar Publishing Limited,2007), 125. 39 countries leds by MNCs who turn to Islamic financial products as an alternative source of funding for everything from trade finance to equipment leasing. 49 MNCs like IBM, General Motors and Xerox, have raised money through a US-based Islamic Leasing Fund set up by the United Bank of Kuwait, while international oil companies such as Enron and Shell have used Islamic banks to finance their global operations across the Arab Gulf region and Malaysia. Islamic financial institutions are marketing their products across 15 major non- Muslim countries, encompassing the US, Canada, Switzerland, the UK,Denmark and Australia. 50 The Islamic Finance asset been growing faster than conventional banking assets. 51 Loghod (2011) in his reasearch in Gulf Cooperation Council countries (GCC), finds that Islamic banks growing faster than conventional banks over the period 2000–2005.52 The growth of Islamic finance assets in 2010 can be seen at figure 2.1.
49 Martin, J. (2005), ‘Islamic banking goes global’, Middle East, 357, 50. 50 Said M. Elfakhani, Imad J. Zbib and Zafar U. Ahmed,‛ Marketing of Islamic Financial Products‛ in M. Kabir Hassan, Mervyn K. Lewis (ed), Handbook of Islamic Banking, (Northampton: Edward Elgar Publishing, Inc., 2007), 124. 51Islamic Financial Services Board (IFSB),‛Stability Report 2013‛ 51Islamic Financial Services Industry. http://www.ifsb.org/docs/IFSB%20- %20IFSI%20Stability% 20Report%202013%20.pdf (accessed 7 July 2015) 52Since in 2000 the total assets of conventional banks in GCC countries was 87.91%. It decreased to 85.84% in 2005 with 40.64% growth rate. Islamic banks increased from 12.09% in 2000 to 14.16% in 2005 with 50.53% growth rate. Market share, defined as total assets, of the financial data published over the period (2000-2005), shows that conventional banks are dominant in GCC countries. However, they are loosing their market share against Islamic banks. Hadeel Abu Loghod, ‚Do Islamic Banks Perform Better than Conventional Banks? Evidence fromGulf Cooperation Council countries‛ API Working Paper Series from Arab Planning
40
Figure: 2.1 Total Islamic Banking Assets 2012
US$ Million
Malaysia Iran Saudi Arabia Uni Emirate Arab Kuwait Qatar Bahrain Turkey Indonesia Bangladesh 0,00 100,00 200,00 300,00 400,00 500,00
As the sharia-compliant asset pool in the Middle East and Asia, a mismatch has emerged between available capital and supply of investments in the region, prompting many banks and investors to look outside the Islamic world for returns. 53 Paolo Curiel and Ibrahim Mardam-Bey, note that Islamic banks in the United Arab Emirates have deployed only 80 percent of their deposits.54
Institute, API/WPS 1011, Kuwait. (2011). http://www.arab- Api.org/images/publication/ pdfs/297/297_ wps1011.pdf (accessed 2 August 2015). 53 Mohammed Aly Sergie, ‚The Rise of Islamic Finance‛ (January 30, 2014). http://www.cfr.org/economics/rise-islamic-finance/p32305 (accessed 2 August 2015). 54 Paolo Curiel and Ibrahim Mardam-Bey, Taylor-DeJongh, ‚Sukuk: an Alternative Capital Structure for Some‛ Oil and Gas Financial Journal (March 1, 2013). http://www.ogfj.com/articles/print/volume- 41 According to Standard and Poor’s (2014) , despite more than a decade of heady growth, the Islamic Finance industry is still in a formative stage. It is only a matter of time before it achieves critical mass, as the pool of assets broadens and deepens, and enhances liquidity. The speed at which the industry matures and joins the mainstream comes down to how market participants address a classic imbalance between supply and demand. Islamic finance remains a demand-driven market, with scarce supply, still hampered by a limited range of Islamic financial centers and their variously regulated environments. Expansion and enhancement of existing centers, and a more transparent regulatory environment could build the momentum for the growth needed to break into the mainstream.55 According to Asian Development (ADB), Factors Contributing to the Robust Growth of Global Islamic Financial Assets are ;(1). Increasing Demand Growing demand from Muslim population for Shari’a compliant financial solutions, reinforced with a growing desire for ethical-based financing solutions; (2). Regulatory support from facilitative governments and regulatory bodies. Incentives are also introduced to accelerate the growth of the industry.;(3). Value propositions of Islamic finance. Different contractual modes in Islamic finance are able to cater for the wide spectrum of risk profiles, ranging from the low risk sales and lease-based modes to the higher risk equity-based modes of financing; Financing gap Islamic financial instruments can act as potential tools to reduce the financing gaps and act as alternative fund raising mechanisms to boost economic
10/issue-3/departments/capital-perspectives / suskuk-an-alternative- capital.html (accessed 2 August 2015). 55 Standard &Poor’s, ‚Islamic Financial Outlooks 2014‛, http://www.standardandpoors.com/spf/upload/Ratings_EMEA/IslamicFina nceOutlook_2014.pdf (accessed 19 September 2015)
42 activities; (4). Tap wider base of wealth, Abundant liquidity flows from the recycling of petrodollars generated by high oil prices over the years.56\ The ethical based financial reason which makes Islamic bank attactive is supported by Abdullah (2013), state that There are many reasons to anticipate that the industry will continue to rapidly grow. Islam is the fastest-growing religion today by both conversion and birth, and there has been an increase in oil wealth among Muslim nations. Beyond this, Islamic financial products and services have become increasingly competitive, and Muslims worldwide are starting to opt for sharia-compliant products. There is also increasing interest from non-Muslims who are looking for ethical financial product57
D. Islamic Banking in Non Muslim Countries
The rapid growing of Islamic Finance sector shows that this sector poised to serve larger market than it previous historical boundaries. Regions with predominantly Muslim populations thet were reluctant to open their borders to Islamic banks, now are showing intereset in Islamic Finance.58 Dudley (1998) believes that the future of Islamic banking lies in the idea not to sell Islamic products to Muslims, but rather to sell them to anybody, on the basis of its inherent
56Kuwait Finance House, Islamic Finance in Asia:Development, Growth and Opportunities, KFH Research Ltd (November 2013). 7 57 Jennifer Steffensen, ‚ Islamic Finance Sources of Growth and Prospects for Global Development‛, An Interview with Daud Vicary Abdullah, National Bureau of Asian Research (NBER) ( November 7, 2013). http://www.nbr.org/downloads/pdfs/eta/ Vicary_interview_110713.pdf (accessed 2 August 2015) 58 Standard &Poor’s, ‚Islamic Financial Outlooks 2008‛, http://pakqatar.com.pk/downloads/market/Islamic-Finance-Outlook- 2008.pdf (accessed 2 August 2015) 43 advantages over other financial alternatives.59 The increasing participation of non Muslims in various Islamic financial activities has made non Muslims to become a valuable part of client in many Islamic banks. Islamic finance attracs non- Muslims in many countries where Islamic banking is present. The attempt to transcend beyond historical boundaries would create endless opportunities for already popular Islamic banking model and its products. Regions with predominantly Muslim populations that were previously reluctant to open their borders to Islamic bank.60 Recently, Islamic Banking have started operating in Non Muslim Contries in the USA, Europe and Asia. Oman, Turkey, and Nigeria, for instance have started to trace the footsteps of fastgrowing pioneers, such as Malaysia and United Kingdom. And a long line of countries is aspiring to enter the market, with the continent of Africa in the forefront.61 According to Aldohni (2011), although the Islamic banking system has recently been applied in some Western countries, there are some differences between the experience of Western countries and that of Eastern countries, referring specifically to Muslim countries. The emergence and growth of Islamic banking in Muslim countries is a result of various elements. Such as elements are religious, economic and political. It can be argued, on the other hand, that in non-
59 N. Dudley., ‚Islamic Banks Aim for the Mainstream‛, Euromoney, 349. (1998).133-136 60 Maas Riyaz Malik, ‚The Potentials and Challenges of Introducing Islamic Finance Services in Non-Muslim Countries (CIS,China, African Countries &Australia)‛, International Center for Education in Islamic Finance (July 10,2010). http://www.assaif.org/content/download/33129/174190/file/IF%20in%20N on-Muslim%20countries.pdf (accessed 2 August 2015) 61 Standard &Poor’s, ‚Islamic Financial Outlooks 2014‛, http://www.standardandpoors.com/spf/upload/Ratings_EMEA/IslamicFina nceOutlook_2014.pdf (accessed 19 September 2015)
44 Muslim countries the economic factor is the only dominant element, which is relatively understandable as Islam is not the religion of the majority.
1. Islamic Banking in The Europe Europe and European banks have played a pivotal role in the development and evolution of contemporary Islamic finance because of the historical ties between major European powers, such as the United Kingdom, France and Germany, and the Middle East and North Africa (MENA) region, South and South East Asia and Sub-Saharan Africa. 62 Historically, Islamic finance has progressed gradually in Europe since early 1980s.63 Momentum was created after the global financial crisis that encourages sustainable growth of Islamic finance and improve global traction. The development of Islamic finance has been beneficial for multiple stakeholders, both within and outside of the region. As such the offering of Islamic banking products and services in Europe has made it possible for the Muslim population and the halal sector in the region to resort to Shariah compliant financial services.64 Although the overall magnitude of Islamic finance is still limited and fragmented, Islamic banking and Islamic funds sectors have made considerable progress in Europe.
62Ahmad Alharbi , ‚Development of the Islamic Banking System‛ Journal of Islamic Banking and Finance, Vol. 3, No. 1, (June 2015) 12-25 http://jibfnet.com/journals/jibf/Vol_3_No_1_June_2015/2.pdf (accessed 19 September 2015) 63 https://www.islamicfinance.com/2015/02/an-overview-of-the- history-of-islamic-finance/ (accessed 1 Decembet 2014) 64‚Europe: a Rising Opportunity for Islamic Finance ‚ MIFC Insigh Report, (March 2015) http://www.mifc.com/index.php?ch=28&pg=72&ac=117&bb=uploadpdf (accessed 1 September 2015) 45 Particularly, in recent years, Islamic fsunds have been gaining greater interest, and several European financial centres have taken a number of steps to facilitate the sector. Luxembourg and Denmark were two early European pioneers of the Islamic banking movement.65 Luxembourg was the incorporation domicile of the first Islamic Finance company in Europe in 1979, namely Islamic Banking System Holdings Limited Luxembourg. Denmark licensed the first Islamic bank in Europe and the first in a non-Muslim jurisdiction namely, the International Islamic Bank of Denmark, which was a subsidiary of the Luxembourg holding company.66 This trend continued all over Europe, as full-fledged Islamic banks or branches of established Islamic banks emerged in different countries. There are several reasons for the growing interest in Islamic banking across Europe. First, the number of Muslims in Europe is estimated to be 15 million. This number continues to grow and is already large enough to attract financial-service providers. Second, demand is growing for ethical products and socially responsible services. Islamic finance fits conveniently into this, as Islamic principles prohibit trade in debt and ensure that all financial activities are related to the real sector of the economy. Another reason is that some countries wish to attract investors from Islamic nations. Yet another reason is diversification: Many investors are looking for new instruments, products, and
65Mumtaz Hussain, Asghar Shahmoradi, and Rima Turk, ‚An Overview of Islamic Finance‛, IMF Working Paper WP/15/120 (June 2015 ) https://www.imf.org/ external/ pubs/ft/wp/ 2015/wp15120.pdf 66 Mushtak Parker,“The complementary paths of Islamic and conventifsonal finance” in Alan Spence , Changing World, New Relationships, 9th World Islamic Economic Forum (WIEF), ExCeL London, (29-31 October 2013), 40. http://www.newsdeskmedia.com/Images/Upload/PDFs/9th-WIEF-2013.pdf
46 asset classes that are unrelated to existing products and services to diversify their portfolios. Islamic finance provides this for those investors. 67 Finally, the current financial crisis has played a role by reducing the relative strength of the conventional banking system. Islamic banks have managed to avoid the effects of this crisis, which has strengthened their position and financing model (Husain 2005; Nouri2009).Europe offers huge potential for Islamic banks to grow, especially because there are significant Muslim populations in several countries (see Table 5). There are great potentials for Islamic finance industry in European soil. Many countries in Europe are considering issuing laws to promote Islamic banking industry. Countries like France, Germany, and Italy are taking positive steps to implement Islamic finance on it. Table 5 shows trend of Islamic finance in some countries in Europe. According to Grewa (2014), there are factors that would support the further development, of Islamic Bank in The Europe such as ; government incentives and the measures introduced to create an environment conducive to a growing and thriving Islamic finance industry; the growing Muslim population; the increased emphasis on alternative financial solutions; the substantial appetite for attracting liquidity from emerging markets.68
67Ahmad Alharbi, ‚Development of the Islamic Banking System‛ Journal of Islamic Banking and Finance ,Vol. 3, No. 1, (June 2015), 12-25
68Baljeet Kaur Grewal , ‚Islamic Finance in the Global Financial System‛ in Islamic Finance in Eurofspe, Occasional Paper No 146 (June 2013). https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp146.pdf (accessed 7 August 2015) 47 2. Islamic Banking in the United Kingdom The Islamic finance industry is not a completely new phenomenon in the UK. Over the past thirty years, a regulatory and legal framework has been established supporting the growth of Islamic finance, alongside the increased flow of Middle Eastern capital into London. 69 Islamic Bank of Britain (IBB) was the first Islamic bank in the United Kingdom in the 21st century, established in 2004. It was followed by the European Islamic Investment Bank (EIIB) which was incorporated in 2005 and authorized in 2006. A third bank, Bank of London and the Middle East (BLME) was incorporated in 2006 and authorized in 2007. In February 2004 the Islamic Bank of Britain was founded. Such a presence in the West, though not yet significant in terms of quantity, is producing management operating models that are distinct and autonomous from the original models, in an attempt to achieve a stronger credibility at both the local and the international levels. Islamic banking promotes the investment especially in Real Estate, Insurance, Transport and high street local market in UK70 The United Kingdom has one of the most advanced Islamic financial markets in the western world and is quickly becoming a key destination for foreign Shari’ah-compliant institutions. The country is home to the west’s first fully fledged Shari’ah-compliant retail bank and currently has five true Islamic banks. London is an important financial centre,
69UK Trade & Investment, ‘UK Excellence in Islamic Finance’ (UK Trade & Investment, October 2013) https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/253141/UKTI_UK_Excellence_in_Islamic_Finance.p df (accessed 1 August 2015). 70 Waseem Ahmad , ‚Islamic Banking in the United Kingdom: Opportunities and Challenges‛ Kingston Business School, London ( 6th October 2008).
48 with major international firms and the Middle East’s biggest traditional banks offering Islamic products. Wilson (2000), states that London will maintain its place as the major centre for Islamic financing in Europe in the future, with the largest value of financing continuing to involve investors from the Gulf.71 According to \Ainley (2007), There are six main reasons why London will keep growing as an important global centre for Islamic finance which are; Global expansion of Islamic finance; Markets and skills base; Islamic windows ; Excess liquidity in the Middle East; Public policy and taxation; Single financial regulator.72 However, Islamic banking is closely related to Muslim community, the 2011 Census shows that Muslims form 4.8% of the population of England and Wales, there are approximately 77,000 Muslims in Scotland and 3,800 in Northern Ireland. The Muslim population in England and Wales has increased from 1,546,626 in 2001 to 2,706,066 people in 2011. Totally, there are 2.7 million Muslim resident in the United Kingdom in 2011, 47 percent of Muslims are UK-born. The Muslim population is larger than all other non- Christian faith groups put together. 73 Which make Muslim residing the second biggest religion of the country.
71 Rodney Wilson, ‚Challenges and Opportunities for Islamic Banking and Finance in the West:The United Kingdom Experience‛ Islamic Economic Studies Vol. 7, Nos. 1 & 2, (Oct.’99 & Apr. 2000). http://www.irti.org/English/Research/ Documents/IES/118.pdf (accessed 7 August 2015) 72 Michael Ainley, Ali Mashayekhi, Robert Hicks, Arshadur Rahman, Ali Ravalia‚Islamic Finance in the UK: Regulation and Challenges‛, Financial Services Authority (November 2007). http://media4.efinancialnews.com/share/media / downloads /2007/11/2349281881.pdf (accessed 7 August 2015 73 Sundas Ali, ‚ British Muslims in Numbers‛, The Muslim Council of Britain, (January, 2015), http://www.mcb.org.uk/wp- 49 The Muslim population in United Kingdom is ethnically diverse, 68 percent Asian (1.83 million of 2.71 million), 32 percent non-Asian, and 8 percent is of White ethnicity..In UK Muslims are playing active role in the financial market. The Muslim community is holding most of small, medium and sole businesses in UK, 74 and 5.5 percent of them are occupied in hinger level or managerial job category.75 Beside the importance of religious side, government regulatory plays important part in the growth of Islamic finance industry. The importance of regulatory support to promote the growth of Islamic Finance and Banking can be seen from United Kingdom experience. Islamic finance started in the UK in the 1980s, but the industry only took of after 2000, boosted by political and regulatory support that helped maintain momentum and strengthen the expansion of its activities through a working group led by the Bank of England, including representatives from the Treasury, FSA, the Council of Mortgage Lenders, financial institutions and members of the Muslim community. 76 Ercanbrack (2011) states that there are two major determinants facilitated the development of Islamic finance in the UK: the abolition of the double taxation regime in 2004 and the broad consutative content/uploads/ 2015/02/ MCBCensusReport_2015.pdf (accessed 2 August 2015) 74 Victoria Rowley, ‚The Rise of Islamic Finance in the United Kingdom‛, UK Law Student Review Vol. 2 Issue 2, (July 2014), 73-85 75 Dr. Sundas Ali, ‚ British Muslims in Numbers‛, The Muslim Council of Britain, (January, 2015), http://www.mcb.org.uk/wp- content/uploads/ 2015/02/ MCBCensusReport_2015.pdf (accessed 2 August 2015) 76 Sharjil Ahmed , ‚History of Islamic Finance in the UK‛ in UK Excellence in Islamic Finance, https://www.gov.uk/government/uploads/ system/uploads/ attachment_ data/file/367154/UKTI_UK_Excellence_ in_Islamic_Finance_ Reprint_ 2014_ Spread.pdf (accessed 10 September 2015)
50 process initiated by the UK authorities to clarify the regulatory treatment of corporate sukuk.77 The implementation of Islamic banking in the United Kingdom comprised the following steps: (i) the abolishment of capital gains tax and stamp duty (land tax) for sukuk issuances and Shari’ah compliant home mortgages; (ii) the reform of arrangements for bond issues to enable returns and income payments to be treated similarly to interest in conventional banking systems; (iii) legislation to ensure that the regulatory treatment of Islamic instruments is consistent with its statutory objectives and principles, and (iv) tax relief on Islamic mortgages extended to companies as well as to individuals.78 The UK is also a major global provider of the specialist legal expertise required for Islamic finance, with around 25 major law firms providing legal services in this area. London, in particular, has become an important financial Centre, where major international firms and the Middle East’s biggest traditional banks are offering Islamic financial products and services in this city.79 Today, the UK is the leading Western country and Europe’s premier Centre for Islamic finance. It is well positioned to capture a growing share of Islamic finance business in the coming years.
77 Jonathan G. Ercanbrack, ‚The Law of Islamic Finance in the United Kingdom: Legal Pluralism and Financial Competition‛ Ph.D Thesis, (15 september 2011) 78 Abdul Karim Aldohni, The Legal and Regulatory Aspects of Islamic Banking The Legal and Regulatory Aspects of Islamic Banking: A Comparative Look at the United Kingdom and Malaysia (London: Routledge ,2013), 209 79 Filippo di Mauro,et.al,. ‚Islamic Finance in Europe‛, Occasional Paper Series, No. 146, European Central Bank, (2013), 29 51 3. Islamic Banking in France
France is another striking example of a European economy that has focused more on building up the infrastructure for wholesale Islamic financial services.With approximately 5 million residents, France has a large Muslim population, more than any other European country, however, despite the favourable demographics, France is falling behind its European rivals in courting the Islamic finance industry.80 The explanations can be multiple. First, there is a lack of political will, since the efforts of Minister of Economy and Finance in 2008. In fact, a real political will has been one of the main ingredients to the industry’s development. 81 Another factor is that the Islamic finance market is relatively underdeveloped in the countries of origin of Muslims in France such as Algeria, Morocco, and Tunisia82. In recent years, the French regulatory authorities have taken a number of steps to encourage Islamic finance in the country. In December 2007, Paris EUROPLACE, the organisation that promotes the city’s role as a financial centre, established the Islamic Finance Commission.83 In early 2008 France’s Christine Lagarde- Finance Minister, put her weight
80 Ezzedine Ghlamallah, ‚Islamic Finance in France‛, http://www.islamicbanker.com/articles/islamic-finance-france 81Baljeet Kaur Grewal, ‚Islamic Finance in France‛ in Islamic Finance in Eurofspe, Occasional Paper No 146 (June 2013), 25. https://www.ecb.europa.eu /pub/pdf/scpops/ecbocp146.pdf (accessed 7 August 2015). 82Mathieu Vasseux, ‚The Next Chapter in Islamic Finance Higher Rewards but Higher Risks‛ ,Report Oliver Wyman Financial Service, (2009),10 83A. Arnaud, ‚The French Licensing authority faced with globalization of Islamic Finance‛, in M. F. Khan and Mario Porzio (ed), Islamic Banking and Finance in the European Union: A Challenge, Cheltenham – Northampton: Edward Elgar,2010) 167-174.
52 behind the promotion of France as a centre for Shariah- compliant banking. Lagerde (2008), pledged that France will adapt their legal environment so that the innovation and stability of financial sector can benefit Islamic finance and make its activities as welcome in Paris as they are in London. 84 France’s goals are to attracts global funds to French soil and making France more competitive in the area of Islamic Finance. In order to achieve that, the authorities have looked into how legislative amendments can be made to attain these goals. The process went through various stages. 85 France has amended its tax regime to encourage the listing and trading of sukuk on Euronext in Paris and introducing a Shariah-friendly legal and tax environment allowing for the efficient structuring of a range of funding instruments compliant with Islamic principles.86 In June 2011, France witnessed the introduction of the first Islamic deposit scheme operated via the Islamic window of an existing conventional bank. Following this successful launch, an Islamic home finance product, a 10-year murabahah contract, was introduced. This was met with strong demand due to the fact that home financing has been a key expectation
84 Ahmed Belouafi, Abderrazak Belabes, Cristina Trullols, Islamic Finance in Western Higher Education: Developments and Prospects,( Hampshire: Palgrave,2012),37 85 A. Arnaud, ‚The French Licensing authority faced with globalization of Islamic Finance‛, in M. F. Khan and Mario Porzio (ed), Islamic Banking and Finance in the European Union: A Challenge, (Cheltenham – Northampton: Edward Elgar,2010) 167-174. 86Kerrie Sadiq and Ann Black, ‚Embracing Sharia-Compliant Products through Regulatory Amendment to Achieve Parity of Treatment‛, Sydney Law Review Vol. 34:189 (2012) http://sydney.edu.au/law/slr/slr_34/slr34_1/SLRv34no1SadiqandBlack.pdf( accessed 7 September 2015) 53 of French retail clients.87 Currently, there are plans to launch a similar Shari’ah-compliant deposit scheme aimed at small and medium-sized enterprises. The French tax authorities are also planning to issue additional guidelines dealing with other Islamic finance concepts, including musharakah and mudarabah, in the near future. There are presently six Shari’ah-compliant funds in France with total assets under management of USD 147.2 million, which are split relatively evenly between money market (47%) and equity (53%) assets. Going forward, Islamic finance appears to have good potential to develop further in France. Over the years, the country has established favourable trade flows with a number of close neighbours with large Muslim populations, including Morocco, Algeria and Tunisia. A significant proportion of the French population originates from North Africa, and this has been driving domestic demand for Islamic finance. Camille Paldi (2015) explains that there is a huge potential for Islamic finance in France. This is due to the fact that France is the fourth-ranked financial market worldwide and number one in the Eurozone and desires to attract liquidity from cash rich Gulf investors and Asia. This factor coupled with a large Muslim population and an open-minded and financially savvy general populace equates to a large success factor for Islamic finance in France. Once Islamic Finance shown how this type of innovative Holy Book finance is based on the same principles as Christian and Jewish banking, distributes wealth across the different sectors of society, and has the possibility to spur growth and job creation enabling
87 Filippo di Mauro,et.al,. ‚Islamic Finance in Europe‛, Occasional Paper Series, No. 146, European Central Bank, (2013), 34
54 talent and entrepreneurship to blossom, Islamic finance is going to become wildly popular and trendy in France. 88
4. Islamic Banking in Germany Muslims first came to Germany in large numbers during the 1960s and were known as Guest Workers 89 . These imigrant came only to find job to support their families back home and saved money to build a house in their home country when they returned. However, second and third generation Muslims take a very different view. They see their personal and professional futures as being in Germany. They want to own a home in Germany. These second and third generations are very attractive to bankers, both conventional and Islamic. They have been born in Germany, they are better educated, and they have higher income levels than the first generation, also have a high birth rate.90
88 Camile Paldi interview in ‚France and Islamic Finance‛ article IslamicFinance.de https://www.einnews.com/pr_news/245284337/france- and-islamic-finance. (accessed 7 August 2015) 89 In the 1960s, Germany recruited and admitted large numbers of foreign workers in order to increase German industrial production. At the time it was generally assumed that the then admitted ‚guest workers‛ would leave eventually. Instead, these workers, most of them Turkish, remained in Germany, brought their families, and now about ten percent of the German population has a migrant background.[2] The path to permanent immigration status for Turkish workers in Germany and their family reunification opportunities was greatly enhanced by the European Union (EU) Association Agreement with Turkey. H. Hartnell, ‚Citizenship and Migration in the European Union and Germany‛, Berkeley Journal of International Law, Vol. 24, Iss. 1 [2006]. 90Arab Bankers Association ‚The Potential For Retail Islamic Banking in Germany‛ http://arab-bankers.co.uk/posts/view/368/The- Potential-For-Retail-Islamic-Banking-in-Germany (accessed 1July 2015) 55 There are currently about 4.3 million Muslims in Germany.91 They have an average income of about 1,900 euro per month, and able to save about 20 percent of that income amounting to an aggregate savings amount of 2.6 billion euro per year, nearly double the national average. Insurance premiums account for about 1 billion euro of that total. The total accumulated wealth of Muslim community is about 25 billion euro. 92 This makes Germany have a big potential market for Islamic Finance. Yet until recently, banking services that take account of these people’s religious beliefs have not been available. 93 From regulatory side are no regulatory provisions which would prohibit or intentionally prevent Islamic financing products, hence it is possible offering Islamic financial products in the German market. But until recently, Federal Financial Services Authority (BaFin) the German Banking regulator, was not particularly aware of Islamic finance with the result that there are no special rules facilitating Islamic finance either. In 2009, BaFin organized a conference on
91Tom Heneghan ‚With refugees, German Muslim minority could be Europe's largest‛Reuters( Sep 22, 2015) http://www.reuters.com/article/2015/09/22/us-europe-migrants-germany- islam-idUSKCN0RM1AK20150922 (accessed 24 September 2015). 92Oliver Recklies,‛The Potential For Retail Islamic Banking in Germany ‚The Arab Bankers Association (2015). http://arab- bankers.co.uk/posts/view/368/The-Potential-For-Retail-Islamic-Banking- in-Germany 93According to a 2010 survey, 72 % of Muslims living in Germany are interested in Islamic Finance products. If offered by a German bank, 60 % of the respondents consider an investment. An outstanding 94 % of them declared interest if the services were offered by an Islamic bank. The strongest interest is shown in mortgages (62%), insurance (43%) and funds (42%). ‚Dubai to increase Islamic Finance products to Germany, Albawaba. (Published April 26th, 2011 ) http://vae.ahk.de/mitglieder/komitees/banking-and-finance/islamic- finance-in-germany/mou-dar-al-sharia-ifibaf/ (accessed 7 August 2015)
56 Islamic Banking, welcoming Islamic Banks to enter the German market. BaFin stated that there are no major legal obstacles for granting licenses to Islamic Banks and their products in Germany. Following this initiative, Kuveyt Turk Participation Bank, majority-owned by the Kuwait Finance House, was the first Islamic Bank to open an office in Mannheim, Germany in 2010, which is to start operating in 2011.94 However, for Islamic capital market Germany was the first Western country to tap the Islamic capital market when the federal state of Saxony-Anhalt issued the country’s first Islamic bond (sukuk) in 2004. The paper attracted strong demand and was fully subscribed, with 60 percent of the issue going to investors in Bahrain and the UAE and the remaining 40 percentto investors in Europe, particularly those in France and Germany. The 100 million euro ijarah sukuk (Islamic sale-and-leaseback debt instrument) was fully redeemed in 2009. In 2009, Germany’s Federal Financial Supervisory Authority (BaFin) accepted a request from a foreign institution to conduct banking operations within the country in accordance with Islamic principles. However, without a full banking licence, the range of offerings remained limited. A follow-up conference on Islamic finance was organised by BaFin in May 2012, which had a special focus on Shari’ah- compliant capital market products (Islamic funds, sukuk and asset-backed securities). The German market has also witnessed the offering of a new Shari’ah-compliant investment product that is benchmarked to the WestLB Islamic Deutschland Index. This
94Islamic Finance in Germany – Factsheet, http://vae.ahk.de/uploads/media /Islamic_ Finance_in_Germany_Factsheet.pdf (accessed 10 August 2015) 57 is comprised of shares in ten German firms whose business activities are conducted in line with the Shari’ah. German financial institutions also actively participate in the Islamic finance industry via their subsidiaries in London, Dubai and Kuala Lumpur. These institutions could play a key role in attracting Shari’ah-compliant funds to Germany through their established networks and expertise. 95 The prospects for the further development of Islamic finance in Germany are rather solid. According to Grewal (2013) , the potential development of Islamic market in Germany based on ; First, Germany is the largest economy in Europe and it features the largest Muslim population; Second, German exporters could use institutions offering Islamic financing solutions as alternative sources of funding and thereby further enhance their funding profiles; Third, Islamic trade finance products offer the potential to strengthen trade ties with countries such as Turkey; a country which is an active trading partner of Germany and that has a budding Islamic finance sector.96 From the description in this chapter we can resume that eventhough religion still the main reason for the Islamic Fiance and Bank market demand, but there also other reason why costumers choose Islamic Financial services. As the market of Islamic finance services became boarder crossing it’s tradisonal frontier, the non religious reason will become stronger and dominat. For that reason it need to be managed
95 Johannes Engels, ‚German Banking Supervision and Its Relationship to Islamic Banks‛in M. Fahim Khan, Mario Porzio ‚Islamic Banking and Finance in the European Union A Challenge‛( Massachusetts: Edward Elgar Publishing,2010), 179-182 96Baljeet Kaur Grewal , ‚Islamic Finance in the Global Financial System‛ in Islamic Finance in Eurofspe, Occasional Paper No 146 (June 2013). 26 https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp146.pdf (accessed 7 August 2015
58 to ensure the continous development of Islamic Finace services. Some of Europe countries have develop Islamic Finace and Banking, the one of the most rapid development is in the United Kingdom. From the Non Muslim countries experience, can be resume that authorities plays a important role in the development of Islamic Bank. Authorities need to develop and adjust banking and financial law, which was used to applyed for conventional banking so it become favorable to Islamic Finance and Banking. Without the authorities involvment to it will be hard for Islamic Finance to survive under the conventional bank laws.
CHAPTER. III RUSSIAN MUSLIMS AND SOCIO-POLITICAL CONDITION IN RUSSIA In this chapter will be explained the socio-political and economic conditions in Russia after the fall of Soviet Union, including macro-economic conditions in general, religious life of society especially Muslim, government politics, and economic policies. All this background is need to be examined in order to understand the Russian Muslim behavior toward Islamic finance and Banking also what is the obstacle and advantage of developing this institution in Russia. A. Ethnic Muslims in the Regions of Russia.
Russia’s engagement with Islam and with the Islamic world has a long and intensive history which started with the Russian conquest of Muslim regions in the 15th century and the incorporation of a large Muslim minority as a part of its native population. As an example Muslim Tatars have lived and coexisted with the ethnic Russians for over 400 years within the Russian state.1 The felt of the Soviet Union spreads 65 million Muslims in the Muslim regions of Central Asia and Azerbaijan from the now known Russian Federation, .nevertheless, even after this separation, the Russian Federation remained to be a state with a considerable amount of Muslim population.2 After Soviet Union, the process of the revival of the religious life arise in this country. Russian Muslims today geographically majority
1 Donald Dannreuther and Luke March, ed., Russia and Islam: State, Society and Radicalism. (New York: Routlegde,2010), 9 2 Yunus Yılmaz, ‚Muslims in Contemporary Russia: Russia’s Domestic Muslim Policy‛ European Journal of Economic and Political Studies 6 (2), 2013. ttp://ejeps.fatih.edu.tr/docs/articles/172.pdf (accessed 1 September 2014). 59 60 lives in North Caucasia, the Volga region and in rather big cities such as Moscow (see table 3.1). According to TheWorld Bank Data, Russia’s population at 2014 is 141,049,000 this population size is declaining since its peak of 148,689,000 in 1992.3 Russia is also home for at least 190 ethnic groups4 , the majority is of Russians (77.7 percent) are of Russian descent. The popualation base on ethnics are ; 3.7 percent of Tatar; 1.4 percent of Ukrainian; 1.1 percent of Bashkir; 1 percent of Chuvash; 1 percent of Chechen; and 10.2 percent other, while 3.9 percent are others.5 And is likely to be approaching (if not already exceeding) 16 million. 6 Adding the migrants from Central Asia and Azerbaijan would bring the total Muslim population of the Russian Federation up to roughly 20 million. It is this number that is most frequently quoted by Russian politicians, including President Vladimir Putin.7
3http://data.worldbank.org/indicator/SP.POP.TOTL 4http://www.bbc.com/news/magazine-29950844 (accessed 1 october 2015). 5 The Central Intelegence Agency, ‚The World Facts Book‛ https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html (accessed 19 September 2015) 6 Alexey Malashenko, ‚Islamic Challenges to Russia, From the Caucasus to the Volga and the Urals‛, Carnegie Moscow Center, http://carnegie.ru/2015/05/13/ islamic-challenges-to-russia-from-caucasus- to-volga-and-urals/i9l4 (accessed 1 September 2014) 7 Daniel Pipes, ‚Predicting a Majority-Muslim Russia‛ Daniel Pipes Middle East Forum (August 6 2005). http://www.danielpipes.org/blog/2005/08/predicting-a-majority-muslim- russia (accessed 4 October 2015)
61 Table 3.1. Muslims in Russia
Region Estimated Muslim Place/City Province Total Population Population (Million) (Person)
Volga Tatarstan 3.8 54 Bashkortorstan 4.1 54 North Dagestan 2.6 82 Caucasia Chechnya 1.1 95 Ingushetia 0.5 98 Kabardino-Balkaria 0.9 68 Karachay–Cherkessia 0.4 51 Adygea 0.4 26 North Ossetia–Alania 0.7 20 Capital of RF Moscow 10 20* Source: Based on the Russian Census 2002, cited in The Economist, April 4, 2007, http://www.economist.com/node/8961754
Russian Ethnics share of population dropped from 81.5 percent in 1989 to 79.8 percent in 2002,8 A low birth rate, high mortality and a large number of abortions has generated a phenomenon known in demographic literature as "the Russian cross", that is, large-scale depopulation that is graphically represented by the falling birth rate line crossing over the growing mortality one. In recent years, the decline in population has slowed down slightly, but it is expected that this trend will reverse and that the birth rate will once again
8Abdullah Rinat Mukhametov, ‚Russian Muslims Face Challenges of Demography and Migration‛, (14 August 2015). http://www.neweasterneurope.eu / fsarticles-and-commentary/1690- russian-muslims-face-challenges-of-demography-and-migration (accessed 19 September 2015).
62 lag behind the mortality one.9 According to forecasts from the Russian Federal State Statistics Service, by 2030, natural losses will make about 11 million people.10 In contrast the number of Muslims population grew,11 (see table 3.2). According to the last census which was held in 2002 about14.5 million of Russia’s 144 million population were ethnic Muslims. Henry Kissinger, in a July 2008 in the Washington Post, claimed that Russia has 25 million Muslims. While muslim religious leaders have claimed that the real number is 20 million.12 According to Gaynutdin(2011) there were twenty-three million Russian Muslims, an amount nearly ten million more than the 14.5 million officially tallied by the country’s census.13 Table 3.2. Russian Population Projection 1990 2000 2010 2020 2030 Total Popolation in Million 148.0 147.1 142.5 137.0 127.9 Muslim Popollation in Million 13.6 17.2 16.7 18.3 19.9 Muslim Percentage of Population 9.2 11.7 11.7 13.3 15.6 Source: Russian Federal State Statistics Services various year
9Sergey Zhuravlev, in Dmitriy Velikovskiy “The “Russian Cross” Demoscope, (August 2004). http://demoscope.ru/weekly/2004/0167 / analit07.php (accessed 4 October 2015). 10 Abdullah Rinat Mukhametov, “Russian Muslims Face Challenges of Demography and Migration” New Eastern Europe (14 August 2015), http://www.neweasterneurope.eu/articles-and- commentary/1690-russian-muslims-face-challenges-of-demography-and- migration 11 Timothy Heleniak, ‚Regional Distribution of the Muslim Population of Russia,‛ Eurasian Geography and Economics, Vol. 47, No. 4 (2006). 12Matthew Allen Derrick, ‚Placing Faith in Tatarstan, Russia: Islam and the Negotiation of Homeland‛, Desertation, Graduate School of the University of Oregon (2012),45. 13Ravil Gaynutdin, Islam: Responding to the Challenges of the Time (Moscow: Exmo Publishers, 2011), 698.
63 The Muslim share of the country’s population is expected to increase from 11.7 percent in 2010 to 14.4 percent in 2030.14 By contrast, Russia’s non-Muslim population is expected to shrink by an average of 0.6percent annually over the same 20- year period.15 According to Oliker (2009), drop in fertility rate is a common pattern countries undergoing the transition from central planning to markets,16 Although Some observers point to poor health conditions is the cause of the drop of ferility rate. This decline was much smaller than those experienced by other former Soviet republics such as Armenia, Georgia, and Ukraine, where populations fell by 15 percent, 14 percent, and 10 percent, respectively, from the late 1980s or early 1990s to 2006.17 Pew Research Center states that there are factors contribute to the different fertility rate between Muslim and Non Muslim in Russia, among others are; Muslim women generally have more children than other women in Russia. Higher Muslim fertility is directly related to the fact that Muslim women marry in larger numbers and divorce less often than other women in Russia,and Muslim women have fewer abortions on average than other women in Russia;. Nearly half of the country’s Muslims are under age 30, according to an
14 Pew Research Center,‛ /the-future-of-the-global-muslim- population‛ http://www.pewforum.org/2011/01/27/the-future-of-the- global-muslim-population/ (accessed 1 September 2014). 15Martha Brill Olcott, ‚Roots of Radical Islam in Central Asia‛ Carnegie Papers Russian and Eurasian Program, Number 77 (January 2007).5-10. 16 Olga Oliker, et al, Russian Foreign Policy : Sources and Implications (California:RAND,2009), 57 17 Российский статистический ежегодник, 2009 : статистический сборник [1970-2008], (Moskva: Росстат ,2009).
64 analysis of data from Russia’s 2002 census.18 Projections of population made by National Survey indicate that a significant growth of Muslim popullation will continue in the future.19 The population rate of Muslim is also affected by Islam teaching support to have more childreen. One of it is a hadeed narated by Abu Dawood this hadeeth indicates that it is encouraged to marry women who are fertile, so that the numbers of the ummah increase and this will make the prophet (pbuh) feel proud of the great number of his muslim ummah in comparison to all other nations on the day of judgment.20 The challenge Russia faces in accommodating its Muslim community lies not in its numerical size. In Russia, Muslim is more of a question of self-identification that highly correlates to ethno-nationality.21 Vali Ahmet Sadur in the 1990s, noted that Russia’s Muslims were still more focused on ethnic partitions rather than on being part of a united ummah. 22 Tatars, Bashkirs, Chechens, and other cultural groups in
18 Pew Research Center,‛ /the-future-of-the-global-muslim- population‛ http://www.pewforum.org/2011/01/27/the-future-of-the- global-muslim-population/ (accessed 1 September 2014). 19 FSJames W. Warhola, and Alex Lehning. ‚Political Order, Identity, and Security in Multinational, Multi-Religious Russia‛. Nationalities Papers 35 (5) 2007. 937. http://umaine.edu/polisci/files/2010/04/NationalitiesPapers-Warhola.pdf (accessed 30 September 2015). 20 Abu Dawood Hadeeth 2050, Classed as saheeh by al-Albaani in Irwa’ al-Ghaleel, 1784. ُ ..... َت َز َّو ُجوا ا ْل َو ُدو َد ا ْل َولُو َد َفإِ ِّني ُم َكا ِث ٌر ِب ُك ُم األ َم َم “.....Marry women who are loving and very prolific, for I shall outnumber the peoples by you”. 21 Matthew Allen Derrick, ‚Placing Faith in Tatarstan, Russia: Islam and the Negotiation of Homeland‛, Desertation, Graduate School of the University of Oregon (2012),65 22 Vali Ahmet Sadur, ‚The Problem of Davaat in Russia,‛ Minaret, no. 1–2 (2009), 21
65 Russia consider themselves to be Muslims by fate of belonging to a nationality traditionally associated with Islam. The ethnically Muslims are predominant in seven republics of the Russian Federation which are the Republics of Bashkortostan and Tatarstan in the Volga- Urals region, and the Republics of Chechnya, Ingushetia, Dagestan, Kabardino-Balkaria and Karachay-Cherkessia in the Northern Caucasus.23 (see table 3.1) The Republic of Dagestan population consist of over 90 percent traditionally Muslim ethnic groups. It is officially a homeland for 10 ethnics groups (Aguls, Avars, Dargins, Kumyks, Laks, Lezghins, Nogai, Rutuls, Tabasarans, and Tsakhurs). 24 Kabardino-Balkaria and of these regions, Russians are in plurality only in Bashkortostan. Then follows a group of eight regions where ethnic Muslims form significant pluralities, over than 10 percent. 25 Only one of them, Adygeya, is a republic. There, the ‘titular’ nationality26 yields in size to Russians. The lists and population of ethnic Muslim groups of Russia is shown in Table 3.2. and Figure 3.1.
23 Elmira Akhmetova, ‚Islam in Russia‛ http://islam.ru/en/content/ story/islam-russia. (accessed 19 September 2015) 24Gordon M. Hahn, Russia's Islamic Threat, (London: Yale University Press,2007),97-99 25 T Grigorii V. Golosov ,‛The representation of ethnic Muslims in Russia's regional legislative assemblies‛ Journal of Eurasian Studies, Volume 3, Issue 2, (July 2012), 93–105 26 The titular nation is the single dominant ethnic group in the state, typically after which the state was named Juan J. Linz, Alfred Stepan,‛ Problems of Democratic Transition and Consolidation. Southern Europe, South America, and Post-Communist Europe‛. (Baltimore: The John Hopkins Univ.Press,1996)244.hk
66 Figure 3.1 The Map Russia’s Ethnics Group
67 In the remaining regions of this category, the largest ethnic Muslim groups are Tatars or, in Astrakhan province, Kazakhs. Bashkirs and Azerbaijani are also visibly present. In twelve regions, ethnic Muslims form 5 to 10 percent of the population. In the remaining 62 regions, the shares of ethnic Muslim populations are smaller than 5 percent, which makes them small minorities. Karachaevo-Cherkessia are homelands for two groups each, Balkarians and Kabardinians, and Cirkassians and Karachai, respectively.27
Figure 3.2 Russian Population 1990-2030 Russian Population (Million) 150
145
140
135
130
125 1980 1990 2000 2010 2020 2030 2040
Source: Russian Federal State Statistics Services 2012
27 Except for Dagestan, Karachaevo-Cherkessia has the most complex ethnic makeup of any republic in the Northern Caucasus. There are five major ethnic groups in the republic. These are the Russians (40percent of the population ), the Karachai (36percent ), the Circassians or Cherkess (9.7percent ), the Abazins (6.6percent ), and the Nogais (3.1percent ). In the past several years, inter-ethnic relations have shifted in favor of the Karachai. This is the most important factor influencing the current political situation in the republic. Fatimat Tlisova, Karachaevo- Cherkessia: An Inside Look, (Washington, D.C. : Jamestown Foundation,2012),5.
68 The republic of Dagestan is officially a homeland for 10 ethnic groups, Aguls, Avars, Dargins, Kumyks, Laks, Lezghins, Nogai, Rutuls, Tabasarans, and Tsakhurs. None of this groups constituting a majority. Kabardino-Balkaria and Karachaevo-Cherkessia are homelands for two groups each, Balkarians and Kabardinians, and Cherkassians and Karachai Thus of the 31 groups, 19 do have their ethnic homelands in the Russian Federation, even though some of them are shared, while the remaining 12, with the only exception of Abazins, have their majorities residing in foreign countries. 28 Table 3.3 lists the ethnic Muslim groups of Russia in the descending order of their numeric sizes.Tatars are by far the largest ethnic Muslim group in Russia. Tatars constitute the largest ethnic Muslim minorities in the vas majority of Russia’s regions. It is also important to note that a large part of Tatars live in a neighboring republic, Bashkortostan.29 The weak correlation between the Muslim identity and religion practice proves in a recent poll held in Russia shows that 90 percent of Russia’s citizenry who consider themselves to be Muslims do not attend mosques.30 According to Murtazin (2002), Tsarist and Soviet policies seriously weakened traditional education and institutional foundation of Russian Islam, resulting in a shortage of Muslim religious institutions and properly educated clergy. Consequently, the Muslim religious revival during perestroika triggered a crisis within Russian’s Muslim community, caused by a lack of educated
28 Grigorii V. Golosov, ‚The representation of ethnic Muslims in Russia’s Regional Legislative Assemblies‛, Journal of Eurasian Studies 3 (2012), 93–105 29Martha Brill Olcott, ‚Roots of Radical Islam in Central Asia‛ Carnegie Endowment for International Peace, Number 77 (January 2007). 30 Alexei V. Malashenko, ‚Islam in Russia, Social Research: An International Quarterly‛, Volume 76, Number 1, (Spring 2009), 321-358
69 Imams, Preacher, Lecturer, Scientist-theologians, and expert of Shari’a and other Islamic sciences.31 The Soviet authorities treated Islam cruelly, majority of mosques were destroyed. Before 1917, there were more than 15,000 mosques in what is now Russia, but in 1956, only 94 remained. Beside mosques, the system of religious education also was destroyed, and thousands of Islamic clergy (mullahs) were purged.32 This was the reason why During the Communist era, most Soviet traditional Islam33 were nominal Muslim
Table 3.3 The Ethnic Muslim Population of Russia
Overal Population Ethnic Groups Total Number (percent ) 1 Tatars 5,554,601 3.83 2 Bashkirs 1,673,389 1.15 3 Chechens 1,360,253 0.94 4 Avars 814,473 0.56 5 Kazakhs 653,962 0.45 6 Azerbaijani 621,84 0.43
31Marat Murtazin, ‚Muslims and Russia: War or Peace?‛ Journal of Social and Political Studies, Sweden, No. 1 (2000). http://www.ca- c.org/journal/eng-01-2000/17.murtazin.shtml (accessed 3 October 2015). 32 Valiulla Yakupov, ‚Islam in the Republic of Tatarstan,‛ Sovereign Spiritual Center, http://islamrt.ru/htm/stat30-08/suver.htm. (accessed 3 October 2015) 33In the 1990s, Russian politicians and the academic community came to divide Islam into ‚traditional‛ and ‚nontraditional‛ branches. Traditional Islam is understood as a religious tradition that intertwines with ethnic culture and adherence to ‚one’s own‛ centuries-old theological and legal school of thought (mazhab). See Alexey Malashenko, “The Dynamics of Russian Islam‛ Carnegie Europe (February 1, 2013) http://carnegieeurope.eu/publications/?fa=50811 (accessed 3 October 2015).
70
7 Kabardinians 519,958 0.36 8 Dargins 510,156 0.35 9 Kumyks 422,409 0.29 10 Ingush 413,016 0.28 11 Lezghins 411,535 0.28 12 Karachai 192,182 0.13 13 Laks 156,545 0.11 14 Tabasarans 131,785 0.09 15 Adygei 128,528 0.09 16 Uzbeks 122,916 0.08 17 Tajiks 120,136 0.08 18 Balkarians 108,426 0.07 19 Turks 92,415 0.06 20 Nogai 90,666 0.06 21 Cherkessians 60,517 0.04 22 Abazins 37,942 0.03 23 Turkmen 33,053 0.02 24 Kirghiz 31,808 0.02 25 Rutuls 29,929 0.02 26 Aguls 28,297 0.02 27 Kurds 19,607 0.01 28 Abkhazians 11,366 0.01 29 Arabs 10,63 0.01 30 Tsakhurs 10,366 0.01 31 Afghans 9,8 0.01 32 Others 26,789 0.02 Source: Calculated from 2002 Russian Cencus Data
.
71 who lack of discipline in performing rituals and a pervasive non observance of taboos were eroding the religious domain.34
B. The Government Attitude Toward Islam and Muslims Russia has had a long history of state control over religious organizations for political purposes. Under USSR, Muslims same as other religions in the USSR, could not fully practice their religion and its laws. This condition changed in 1991, freedom of religion became one of the main tenets in the newly democratic Russian Federation. The government actively promoted the freedom of its main religions. Russian Muslim came into direct contact with their religion that has been regarded with distrust and suspicion for hundreds of years.35 Islam experienced a revival, with hundreds of mosques and religious schools opening across the country. Post- Communist the number of mosques in Russia increased from 160 to 7,000 between the years 1990 and 1997. This increase is indication of a change in Goverment attitude to become more moderate toward Islam. The number of Islamic missionaries from abroad also increased from zero to one thousand between those same years. Furthermore, the late 90s also saw an increase in the frequency in usage of the terms Wahhabism and Salafism.36
34 Valiulla Yakupov, ‚Islam in the Republic of Tatarstan,‛ Sovereign Spiritual Center, http://islamrt.ru/htm/stat30-08/suver.htm. (accessed 3 October 2015) 35 Yevgeny Bendersky, ‚Moscow treads softly with its Muslims‛,World Security Network( 15-Sep-04) http://globalsecuritynews.com/Russia/Bendersky-Yevgeny/Moscow-treads- softly-with-its-Muslims (accessed 3 October 2015). 36Rebecca M. Miller , ‚Comeback: How Islam Got Its Groove Back in Russia‛,The National Interest, (15 April 2015) http://nationalinterest.org/ feature/ comeback-how-islam-got-its-groove- back-russia-12609 (accessed 3 October 2015).
72 There is no such thing as a uniform Russian Islam. No united Muslim community (ummah) is to be found in Russia; rather, there are two subsets, those from the North Caucasus and those from Tatar-Bashkir areas. The two largest Muslim areas have different histories and different social and cultural parameters: North Caucasus–based Muslims are more traditional than Tatars, who survived the Russian Empire and then went through an even tougher process of Soviet assimilation. The history of the Tatars and Tatar Islam is so different that it may be argued that they have their own sub civilization. This all rise from geographical condition and cultural condition which put them in the border btween west and east. 37 After the felt of the Soviet Union, both Muslim domains have seen trends that can be described as the politicization and radicalization of Islam or, rather, the proliferation of its nontraditional interpretations, often referred to as Wahhabism, Salafism, fundamentalism, and Islamism. In the North Caucasus, Wahhabism and Salafism were considerably more pronounced and influential in terms of the local political situation and the region’s relations with the federal center. 38 In addition to other social and economic causes, the two Chechen Wars (1993–96 and 1999–2003) magnified religious radicalism and extremism. In Tatarstan and Bashkortostan, the situation remained relatively calm. Religious radicalism among the Tatars and the
37 Rafael Khakimov, Where Is Our Mecca? (Kazan: Magarif Publishers, 2003), 57
38Vakhit Kh. Akayev, “The Conflict between Traditional Islam and Wahhabism in the North Caucasus: Origins, Dynamics and the Means for its Resolution” Julie Wilhelmsen and Erika Fatland, (eds), Chechen Scholars on Chechnya. (Oslo: Norwegian Institute of International Affairs, 2010). 63-88
73 Bashkirs was sporadic. The only relatively large radical organization was the Ittifaq movement, owing its fame to founding leader Fauziya Bayramova, a popular poetess. Interestingly, the Chechen jihad was not popular among the Tatars. There were only a few dozen Tatars fighting with the separatists during the two Chechen Wars, compared to the several hundred Arab jihadists or so called mujahedeens.39 Russian government is looking at Islamic religious communities through the prism of the war on terror40. The fear of radicalism also supported by resesrach from a number of scholars, such as Mikhail Delyagin (2005) who fear that the combined impact of Muslim immigration, demographic decline of ethnic Russians, and the ideological power of Islamic fundamentalism, means that Russia faces the prospect of an ‘Orange-Green’ revolution.41 Gordon Hahn (2007; 2008) argue similarly that the virus of islamist radicalism, far from being expurgated in Chechnya as the Putin administration claims, is now spreading from Chechnya into the rest of the North Caucasus and increasingly other parts of Russia, extending as far as the Volga region and Moscow. Russia is experiencing the beginning of an islamist jihad.42 The Russian authority views informal Islamic groups are a dangerous, because not only peaceful people associated with such groups, but also extremists with ties to armed
39Alexey Malashenko , ‚slamic Challenges to Russia, From the Caucasus to the Volga and the Urals‛ (May 13, 2015). http://carnegie.ru/2015/05/13/islamic-challenges-to-russia-from-caucasus- to-volga-and-urals/i9l4 (accessed 19 January 2016). 40 Alexey Malashenko, “The Dynamics of Russian Islam” Carnegie Europe (February 1, 2013) http://carnegieeurope.eu/publications/?fa=50811 (accessed 3 October 2015). 41 M. Delyagin, Rossiia Posle Putina: Neizbezhna li v Rossii “oranzhevo-zelenaya” revolutsiya? (Moscow: Veche,2005). 42 Hahn, G. M. (2007) Russia’s Islamic Threat (New Haven: Yale University Press),1.
74 underground organizations. 43 Thus causes the Russian government to prohibited all kind of imformal Islamic group, including peaceful groups alongside groups that actually have extremist structures. There have been many cases of authorities attempting to prohibit the wearing of the hijab or the possession of religious literature on grounds of extremism, eventhought people often have no idea that the literature they have in their house may be considered extreme.44 Anyway, in daily life, Muslims are generally well treated. In Russia Islam devided into traditional Islam and Non traditional Islam by Politicians and the Academics.Traditional Islam is understood as a religious tradition that intertwines with ethnic culture and adherence to centuries-old theological and legal school of thought (mazhab). Non-traditional Islam is a forms of Islamic views that began entering Russia after the breakup of the Soviet Union, and the border with the wider Muslim world opened.45 It includes Salafism, fundamentalism, and Wahhabism; the one general term used to define all of these strands is ‚Islamism.‛ The Russian authorities accus- tomed to the confrontation between this two factions of Islam and have always viewed nontraditional Islam as alien and hostile, and labeled as the ideological foundation for terrorist.46
43http://www.dw.com/en/islam-in-russia-caught-between-acceptance- and-rejection/a-18730925 (accessed 13 October 2015) 44Aleksei Malashenko &Akhmet Yarlykapov, ‚Radicalisation of Russia’s Muslim Community‛, International Affairs,Volume 86, Issue 1, (January 2010),109–126. 45 Domitila Sagramoso and Akhmet Yarlykapov, ‚Caucasian Crescent: Russia’s Islamic Policies and its Responses to Radicalization‛, in Robert Bruce Ware (ed). The Fire Below: How the Caucasus Shaped Russia, (Armork NY: M.E.Sharpe,2009), 159-189. 46Alexei V. Malashenko, The Dynamics of Russian Islam, Carnegie Moscow Center (February 1,
75 Many terrorist acts in the Northern Caucasus are justifiably related to the radicalism and extremism of the neo- Wahhabi trend in Islam, which is non-traditional for the region. In this respect, the need has arisen to limit and, in general, intercept the ideological and practical activity of the neo-Wahhabis. For this purpose, the power bodies, with the support of the official clergy represented by the spiritual administrations of Muslims of the region, carried out several legislative and ideological-propagandistic measures. For example, legislative acts were adopted in Daghestan, Chechnia, Ingushetia, and Karachaevo-Cherkessia that prohibit the extremist activity of the Wahhabis. Special subdivisions have been created in the power-related structures that are called upon to fight the spread in Wahhabi influence and oppose their extremist (including terrorist) acts.47 In the other hand the traditionalists believe in the possibility of peaceful evolution and claim that ‚re- Islamization‛ and instituting sharia law is possible within the framework of the Russian state. 48 This point of view help the tradisionalist to has better relation to the Russian government.
C. Banking Demand and Financial Literacy in Russia
The outreach of financial services among the Russian population has been growing in recent years. In 2008, about 48 percent of the adult population did not use any banking
2013).http://carnegie.ru/publications/?fa=50811 (accessed 13 October 2015) 47 Vakhit Akaev,‛ Conflicts Between Traditional And Non-Traditional Islamic Trends: Reasons, Dynamics, And Ways To Overcome Them (based on North Caucasian documents)‛, Central Asia And The Caucasus,No. 2(50), (2008).108-116. 48 Alexei V. Malashenko, ‚Islam in Russia, Social Research: An International Quarterly‛, Volume 76, Number 1, (Spring 2009), 321-358
76 services, but at the end of 2011 this number was reduced to 22 percent,49 and consumer credit in the Russian Federation has expanded from almost nothing to 9.2 percent of Gross Domestic Product in 2008, an average yearly growth at rate of 84 for five years. 50 Anyway, the increases have been uneven throughout the Russian population. And still leaves the majority of the population without a bank account. More than 40 percent of the population in Russia is lacks of access to any form of financial services. Only 16 percent have bank accounts and less than one percent of the population invests in securities, investment funds or insurance.The share of the population is even lower at the bottom 40 percent of the population in terms of income and for people with primary education or less (24 percent).51 In Russia, the most used financial products are plastics cards, which mostly received from their employers to paid their salaries and the other group use their ATM only to receive cash from ATMs. After plastic cards, the second most used formal financial service is bill payment. The next most used type of formal financial services is credit products but 89 percent of these are consumer loans. Only approximately one- fifth of the population use any form of formal deposit account, and of these, there are 42 percent who use term deposits while others have demand deposits or other current accounts. 52
49 NAFI. 2012. “One Hundred Facts on the Financial Behavior of Russians.” Moscow 50 Sue Rutledge, “Improving Protection in Financial Services for Russian Consumers” ,The World Bank http://siteresources.worldbank.org/INTECALEA/ Images/1040210- 1251917524508/KB_V13_Consumer_Protection_RU.pdf (accessed 3 October 2015). (accessed 3 October 2015). 51 World Bank Global Findex Database, http://bit.ly/W7uux9. (accessed 3 October 2015) 52 Timothy Lyman, Stefan Staschen, and Olga Tomilova, “Financial Inclusion in Russia” CAGP Landscaping Report, (January 2013)
77 From above discription, it is clear that Russians do not show much interest in using formal financial services. Putin (2006) noted that most of Russian citizens avoid banks, they simply not understand what banks do and considering that it is too hard to understand.53 The low financial literacy and lack of information affect the ability to save. 54 But according to Imaeva (2014), the main factors affecting customers choice of financial service providers and decision to use financial services are provider reliability, simplicity, clarity, and transparency of products, product conditions and price. But most of all is the amount of commissions charged on transactions. Other factors include physical access and customer service, is not too dominant, and more often mentioned as factors that customers would be willing to forgo or put up with as long as the main factors are in place. 55 More Imaeva points that trust is a barriers for financial inclusion in Russia. Trust levels strongly and directly correlate with awareness and usage levels which in turn, correlate with income levels. According to a research help by Imaeva (2014) With the exception of cash loans and credit cards, reasons for not using other financial products include insufficient knowledge by
53 The World Bank,” Russian Federation” Diagnostic Review of Consumer Protection in Financial Services, Volume I Key Findings and Recommendations (July 2009), http://siteresources.worldbank.org/INTECAREGTOPPRVSECDEV/ Resources/ RU_CPFL_Vol_I_draft_EN.pdf (accessed 9 October 2015). 54 Annamaria Lusardi,” Household Saving Behavior: The Role of Financial Literacy, Information, and Financial Education Programs” NBER Working Paper No. 13824 (February 2008), http://www.dartmouth.edu/~alusardi/Papers/ Literacy_ Information_Education.pdf 55 Guzelia Imaeva, Irina Lobanova, and Olga Tomilova, “Financial Inclusion in Russia:The Demand-Side Perspective”, CGAP, Moscow, (August 2014). https://www.cgap.org/sites/default/files/Working-Paper- Financial-Inclusion-in-Russia-Aug-2014.pdf. (accessed 10 October 2015).
78 respondents about these products this ranked among the top five reasons not to use financial products. Insurance products are seen as unnecessary by the majority of respondents. This corresponds to much lower awareness and usage levels compared to other financial products, and the highest degree of respondents’ confusion about these products. For delivery channels, the top reason not to use traditional channels includes their lower convenience. Transitional and innovative channels are viewed as more convenient, but at the same time less reliable and much less known to respondents.56 World Bank Survey (2009) found that Russian consumers had low levels of financial literacy and did not know their rights as financial consumers. 57 The rapid growth of household lending has been accompanied by an increase in the number of households that have difficulty in understanding the risks and obligations or the sevices available.58 According
56 Guzelia Imaeva, Irina Lobanova, and Olga Tomilova, “Financial Inclusion in Russia: The Demand-Side Perspective”, (Moscow, August 2014) https://www.cgap.org/ sites/default/files/Working-Paper-Financial- Inclusion-in-Russia-Aug-2014.pdf(accessed 10 October 2015) 57 In June 2008, the World Bank conducted a financial literacy survey of over 1,600 households in 40 regions of the Russian Federation. The results showed that the Russian population had low level of financial literacy and lacked awareness of their rights as financial consumers. Respondents also had little faith that financial institutions would solve any problems that arose with financial transactions. Over three-quarters gave a 50:50 chance (or worse) that disputes with financial institutions would be resolved quickly and fairly. The World Bank, “Russian Federation Diagnostic Review of Consumer Protection in Financial Services”, (July, 2009) http://siteresources. worldbank.org/ INTECAREGTOPPRVSECDEV/ Resources/RU_CPFL_ Vol_I_draft_ EN.pdf (accessed 10 October 2015). 58Sue Rutledge, “Improving Protection in Financial Services for Russian Consumers“,ECA Knowledge Brief Volume 16 (2013) http://web.worldbank.org/ WBSITE /EXTERNAL/ COUNTRIES/ECAEXT/ 0,,print:Y~is CURL:Y~contentMDK
79 to Yudayeva (2013), better financial literacy is expected to create favorable conditions for increasing saving, forming responsible patterns of financial behavior among the population, and developing the financial sector in Russia. The problem of low financial literacy is crucial in Russia, since the country's young financial services market is still in the formation stage.59 Improved financial literacy is essential for strengthening the ability to manage increased risk, avoiding excessive personal debt, managing financial difficulties, reducing the risk of bankruptcy, maintaining savings, and ensuring adequate welfare at retirement.60 Financial literacy is also an important determinant in the effort of increasing people’s financial inclution which in turn will help families improves their quality of life. Financial literacy defined as the knowledge and understanding of personal finance concepts and the skills, motivation and confidence to make informed financial choices, and participate in economic life.61 Financial inclusion and financial literacy are integral to each other. They are two elements of an integral strategy. Community financial literacy is a very important factor in increasing public
:22431187~pagePK:146736~piPK:146830~theSitePK:258599,00.html(acce ssed 8 October 2015). 59 Irina Filatova, ‚Rising Financial Literacy among Russians is a State Priority‛ http://www.themoscowtimes.com/business/article/rising- financial-literacy-among-russians-is-a-state-priority/482956.html l(accessed 8 October 2015) 60 World Bank. Russian Federation - Financial Literacy and Education Project. Washington, DC: World Bank.(2010) http://documents.worldbank.org/curated / en/2010 /04/12167698/russian- federation-financial-literacy-education-project 61 Eliki Boletawa, ‚Financial Literacy: An Important Tool For Financial Inclusion‛ (January 23, 2015) http://blogs.afi- global.org/2015/01/23/financial-literacy-an-important-tool-for-financial- inclusion/(accessed 8 October 2015)
80 awareness of the importance of the role of financial institutions in order to achieve the goal of improving welfare. Financial literacy create awareness, while financial inclusion creating financial access for the public.62 Financial inclusion provides access while financial literacy provides awareness. Disadvantaged people need both access to and awareness of financial services to boost their economic condition and out of poverty.A study by Klapper (2006) on the impact of financial crisis on househods finds that financial literacy is significantly related to greater participation in formal financial markets and negatively related to the use of informal sources of borrowing. Moreover, individuals with higher levels of financial literacy are significantly more likely to report greater levels of unspent income and less likely to report lower levels of spending. Finally, the relationship between financial literacy and the level of unspent income is higher during the financial crisis, after controlling for household characteristics. Our results suggest that greater financial literacy can help individuals face unexpected macroeconomic and income shocks.63 The World Bank Survey (2010) showed that Russian consumers are interested in learning how to protect their financial future, and would like to receive financial education in order to protect themselves financially and plan for the future, to know about the laws that protect them, and the procedures that should be followed in case of a dispute with a
62 Duvvuri Subbarao, ‚Financial literacy and financial inclusion are integral to each other Inaugural remarks‛, The India-OECD-World Bank Regional Conference on ‚Financial education‛, New Delhi,(4 March 2013). http://www.bis.org/review/r130305j.pdf(accessed 8 October 2015) 63 Leora F. Klapper, Annamaria Lusardi, Georgios A. Panos, ‚Financial Literacy And The Financial Crisis‛ Working Paper 17930, National Bureau Of Economic Research, (2012) http://www.nber.org/papers/w17930 (accessed 8 October 2015)
81 financial institution. However, consumers also showed some distrust of private financial sector institutions, including banks, insurance companies and other providers of financial services.64 There are also urban-rural differences in financial literacy rate, people living in urban areas in Russia tend to be more financially literate than those living in rural areas. This is may well be due to differential exposure to the modern financial sector in the last few decades. There are also notable differences in financial knowledge among people with different religious beliefs. But there are no sex differences in financial knowledge, both women and men are equally financial illiterate. Most importantly, financial literacy in Russia is significantly related to the use of formal banking and borrowing and negatively related to the use of informal borrowing.65 Realizing the importance of financial leteracy, the Government of Russia requested that the World Bank prepare support its financial education and literacy improvement efforts in Russia. The initiative for engagement in improving financial literacy and education in Russia was triggered during Russia’s G-8 Presidency in 2006 when financial literacy was established as one of the policy themes for the Finance Ministers Meeting. At the time, the World Bank was expected to support the program through technical assistance under a Fee-for-service
64 Sue Rutledge, ‚Improving Protection in Financial Services for Russian Consumers‚,ECA Knowledge Brief Volume 16 (2013) http://web.worldbank.org/ WBSITE /EXTERNAL/ COUNTRIES/ECAEXT/ 0,,print:Y~is CURL:Y~contentMDK :22431187~pagePK:146736~piPK:146830~theSitePK:258599,00.html(accesse d 8 October 2015) 65 Annamaria Lusardi and Olivia S. Mitchell, ‚Financial Literacy around the World: An Overview‛, Netspar Discussion Paper 02/2011-023 (accessed 8 October 2015)
82 Arrangement. However, at the end of 2009 the Ministry of Finance of the Russian Federation requested the Bank’s support of the Financial Education and Financial Literacy (FEFL) project as an investment lending operation with sizable counterpart financing.66 The improvement of Financial literacy among people will boost the country's economic growth. This program is held by the Russian Ministry of Finance program and the target are pupils, students and low and middle income categories of population.67Currently not many programs are in place. Nor are there many players who offer those programs. Recent developments in Russian financial markets have highlighted several trends. First, increases in financial services utilization have been uneven. Second, skyrocketing consumer borrowing makes them vulnerable to various forms of harassment from lenders, credit bureaus, debt collectors, and identity thieves. Third, Russian consumers have a low level of financial literacy and are not aware of their rights in the financial services market. Thus, the financial future of the Russian people depends not only on their own financial decisions but also is shaped by the country’s overall financial condition and its institutional framework. Klapper (2013) find that the rapid growth of consumer credit combined with low levels of financial literacy might end up being a dangerous mix ansitions quickly to a market-based banking system, financial education and basic financial
66 Margaret; Png, Margaret. Official Documents- Amendment to the Loan Agreement for Loan 7983-RU. (Washington, DC: World Bank:2005). http://documents.worldbank.org/curated/en/2015/06/24786986/official- documents--amendment-loan-agreement-loan-7983-ru l(accessed 8 October 2015) 67 Irina Filatova, ‚Rising Financial Literacy among Russians is a State Priority‛ http://www.themoscowtimes.com/business/article/rising- financial-literacy-among-Russians-is-a-state-priority/482956.html l(accessed 8 October 2015).
83 literacy are still lagging. Many young Russians have parents who did not have experience with bank loans and did not receive formal financial literacy courses in school.68
D. Recent Economic Condition in Russia In the periode of 2001 to 2009, Russian economy grew, on average 7 percent annually, while annual per capita income increased over 400 percent. 69 (figure 3.2). The increase of per capita income lead to increase in purchasing power and lead to increase in demand for consumer credit, particularly for the purchase of household appliances and other durable goods. Within this same time period, Russia consumer loans grew at a very fast rate, reaching US$ 170 billion in 2008. This accounted for about 10 percent of GDP in 2009 compare to 2 percent in 2003.70 In the last quarter of 2008 the Russian economy has been hit hard by the global financial crisis and resulting recession that became readily apparent in the last quarter of 2008. Even before the financial crisis, Russia was showing signs of economic problems when world oil prices plummeted sharply around the middle of 2008, diminishing a critical source of Russian export revenues and government funding.71 In short, the 2008 financial crisis consisted of collapsing oil prices and diminished foreign borrowing pulling GDP growth into negative while Russian financial authorities drew down
68 Leora F. Klapper,Annamaria Lusardi, Georgios A. Panos,‛ Financial Literacy And The Financial Crisis‛, Working Paper 17930 (2006) http://www.nber.org/ papers/w17930 (accessed 8 October 2015). 69Per capita income grew from US$ 2,101 in 2001 to US$ 8,676 in 2009 but decreased in later years due to monetery crisis. 70Leora F. Klapper,Annamaria Lusardi, Georgios A. Panos,‛ Financial Literacy And The Financial Crisis‛, Working Paper 17930 (2006) ttp://www.nber.org/papers/w17930 (accessed 8 October 2015) 71Bank Of Russia Annual Report ( 2014 ).
84 reserves in order to stabilize the economic condition.This crisis consisted of four quarters of negative growth, after which the economy returned to positive, albeit weak, growth through the first quarter of 2015.72 The crisis brought an abrupt end to about a decade of impressive Russian economic growth that helped to raise the Russian standard of living and brought economic stability that Russia had not experienced for more than two decades. This success was a major factor in the popular support that former President (now Prime Minister) Putin and the current president, Dmitriy Medvedev enjoyed, and it was also arguably a factor in the boldness with which the Russian leadership reasserted Russia’s status as a world power, challenging the United States, Europe, the other former Soviet states, including its military confrontation with Georgia in August 2008. The sudden downturn could undermine the popular support and Russia’s ability to project its foreign policy interests.73 In mid-2014, for the second time in the short span of time Russia economy hitted by the worldwide collapse of energy prices74 and Ukraine sanctions that bumped Russia
72 Paul Roderick Gregory ,‛ A Russian Crisis With No End In Sight, Thanks To Low Oil Prices And Sanctions‛, Forbes, (May 14, 201) http://www.forbes.com/sites/ paulroderickgregory /2015/05/14/a-russian- crisis-with-no-end-in-sight-thanks-to-low-oil-prices-and-sanctions/ 73 William H. Cooper, ‚Russia’s Economic Performance and Policies and Their Implications for the United States‛, Congressional Research Service (June 29, 2009) https://www.fas.org/sgp/crs/row/RL34512.pdf (accessed 8 October 2015) 74Russia is one of the world's largest oil producers, and its dramatic interest rate hike to 17 percent in support of its troubled rouble underscores how heavily its economy depends on energy revenues, with oil and gas accounting for 70percent of export incomes. Russia loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has warned that Russia's economy would shrink by at least 0.7percent in 2015 if oil prices do not recover.
85 from credit markets. Eventhough the intensity the 2008/9 and 2014 crisis strikes were about the same, but the damage will be longer and deeper the second time around. Energy prices will not rise in the short time , and sanctions will remain in place as long as Russia makes no serious moves toward peace in Ukraine.75 Grafik 3.3 Russian GDP Percapita 2007-2014 GDP per capita (current US$) 2007-14 20.000,0
15.000,0
10.000,0
5.000,0
- 2007 2008 2009 2010 2011 2012 2013 2014
Source: The World Bank Data Bank The deteriorating external economic conditions, amid the exhaustion of traditional sources of economic growth which had begun in previous years, became a challenge to the Russian economy in 2014. The imposition of economic sanctions against Russia and the fall in oil prices since mid- 2014 led to the ruble depreciation, increased inflation, lower incomes of economic agents, heightened uncertainty, worsening consumer sentiment and a fall in business
75 Paul Roderick Gregory. ‚A Russian Crisis With No End In Sight, Thanks To Low Oil Prices And Sanctions‛ Forbes World Affair, (May 14, 2015) http://www.forbes.com/sites/paulroderickgregory/2015/05/14/a- russian-crisis-with-no-end-in-sight-thanks-to-low-oil-prices-and-sanctions/
86 confidence. The result was a slow economic activity and a prolongation of the break in investment.76 The slowdown in production growth led to a fall in the production capacity utilisation in industry. As a result, GDP growth dropped from 1.3 percent in 2013 to 0.6 percent in 2014. At the end of 2014, the economy’s positive financial result shrank by 9.1 percent. 77 The share of loss-making enterprises increased by 1.3 percentage points to 28.1 percent weakening demand and worsening financial standing of organisations were accompanied by growth in non-payments. The share of overdue receivables increased by 0.9 percentage points to 6.5 percent at the end of 2014 and the share of overdue payables went up by 0.4 percentage points to 5.7 percent. The share of overdue bank loans at the end of 2014 remained at 0.6 percent.78 In 2014, the financial results of Russian organisations were shaped by demand constraints and a stricter price and non-price borrowing conditions in the domestic and foreign markets.79 A drastic decline in the balance of profits and losses was seen in the core types of activity: manufacturing industries, transport and communications, and the wholesale
76 Padma Desai ‚Russia's Financial Crisis: Economic Setbacks And Policy Responses‛ Journal of International Affairs, Spring/Sfsummer 2010, Vol. 63, No. 2 (2014) 77 William H. Cooper, ‚Russia’s Economic Performance and Policies and Their Implications for the United States‛, Congressional Research Service (June 29, 2009) https://www.fas.org/sgp/crs/row/RL34512.pdf (accessed 8 October 2015) 78 Mikael Johansson, Andreas Johnson, Dainis Gaspuitis, and Vilija Tauraite, Eastern European Outlook (March 2015). http://sebgroup.com/siteassets/corporations_and_institutions/prospectuses _and_downloads/research_reports/eastern_european_outlook/2015/eastern _european_outlook_201503_eng.pdf (accessed 30 October 2015) 79 World Bank Group – Russian Federation Partnership: Country Program Snapshot (April 2015) (accessed 30 October 2015)
87 and retail trades. At the same time, the balance of profits and losses saw a significant growth in mining, agriculture, and electricity, gas and water production and distribution. The adjustment of the Russian labour market to the new conditions came about primarily through a change in wages rather than the number of employed. Real imputed wage growth slowed to 1.3 percent in 2014 compared with 4.8percent in 2013. In these conditions, the positive contribution of final consumption expenditures to economic growth fell significantly. 80 Russia is facing a deep recession in 2015. Structurally weak and still highly dependent on energy exports, the economy is hard hit by the sharp oil price decline. Falling oil prices in late 2014 have greatly weakened the rouble, leading in turn to rapidly accelerating inflation, large capital outflows and sharp interest rate hikes. Lower oil prices also reduce budget revenue, hampering government efforts to sustain growth through expansionary fiscal policy. Sensitivity analyses of the oil price decline by the IMF and others indicate that an oil price downturn of USD 10 during one year leads to a negative GDP effect of 1-1.5 per cent. 81
80The World Bank in the Russian Federation, ‚The Dawn of a New Economic Era?‛ No. 33 (April 2015) http://www.worldbank.org/content/dam/ Worldbank/document/ eca/russia/rer33-eng.pdf (accessed 30 October 2015) 81Mikael Johansson, Andreas Johnson, Dainis Gaspuitis, and Vilija Tauraite, Eastern European Outlook (March 2015). http://sebgroup.com/siteassets/corporations_and_institutions/prospectuses _and_downloads/research_reports/eastern_european_outlook/2015/eastern _european_outlook_201503_eng.pdf (accessed 30 October 2015)
88 Figure.3.4 Russian GDP Growth, Oil Prices, Foreign Borrowing, Funds (2007-2016)
Western sanctions aimed both at individuals and specific companies in the financial and energy sectors,82 have proved to have increasingly noticeable effects. The companies
82 The sanctions imposed by the U.S. on entities in Russia can be divided into two types: the freezing of assets and the restriction of entry into the U.S., as well as sectoral limitations.10 These sanctions are targeted at Russian president Vladimir Putin’s closest circle and officials involved in implementation of policy towards Ukraine (64 people, institutions and companies), and the list might be expanded in future. Apart from Kremlin decision-makers and advisors, sanctions are targeted at entities in Russia’s financial, energy and defence industry sectors, which in the American assessment were engaged in military and economic aggression against Ukraine. Jarosław Ćwiek-Karpowicz and Stanislav Secrieru (ed), Russia and Saction, (Warszawa: Polski Instytut Spraw Międzynarodowych ,2015). 23
89 directly targeted have had major problems borrowing abroad. In practice they are shut out of European and US capital markets, creating difficulties in financing large investment projects. The sanctions also create general uncertainty among companies and worsen capital spending, which has been weak for a long time.83 Sanctions imposed by the Europe Unions, the U.S. and others can be expected to exacerbate Russian economis problems. Given the Russian economy’s vulnerability to shocks,84 Russia faced three crisis components simultaneously structural, cyclical (internal market), and external.85 Sanctions
83 Jarosław Ćwiek-Karpowicz and Stanislav Secrieru (ed), Russia and Saction, (Warszawa: Polski Instytut Spraw Międzynarodowych ,2015). 23 84 In response to sanctions, Russia has pursued retaliatory measures. Most notably, in August 2014, Russia announced a one-year ban on the import of certain foods from the United States, the EU, Australia, Canada, and Norway.26 The Russian government also cracked down on McDonald’s restaurants operating in Russia, although restrictions may be loosening.27 Additionally, in May 2014, Russia’s Deputy Prime Minister, Dmitry Rogozin, threatened to ban exports of rocket engines to the United States.28 The Russian government did not ultimately impose the ban, but in December 2014, Congress passed and the President signed legislation that could restrict the military’s use of rocket engines designed or manufactured in Russia. Rebecca M. Nelson, ‚U.S. Sanctions on Russia: Economic Implications‛ Congressional Research Service 7-5700 (February 4, 2015) 85 The structural rates of Russian GDP growth fell from approximately 4.0–5.0percent annually during the 2000s to 1.0–1.5percent in 2014, and are expected to continue decreasing in 2015. In other words, in the last 10–15 years, Russia's economy has been losing 3–4 p.p. of GDP growth per year .This is also an internal cyclical business crisis caracterized by decrease in the growth rates of investments; a slowdown in the growth of bank loans to the non-financial sector; an increase in the proportion of ‘bad’ debts for banks; an expansion of consumer demand by the population, as fueled by consumer lending; a decline in the share of profits in the economy; and a reduction in the number of small and
90 will causes capital flight, fiscal difficulties for the government, the adoption of anti-inflationary monetary policy, and hindered access to financing which will leads to downward pressure on investment and stifle it as a source of growth. Lack of confidence resulting from sanctions is likely to harm the exchange rate and depress domestic consumption.86 Difficult relations with its trading partners could stymie the contribution of non-energy exports to Russia’s economic growth, the condition of low employment and declining productivity growth, indiceted that production growth is unlikely to boost economic growth to make up for downward pressure in other fields.87 Russian GDP growth averaged a paltry 2.4 percent from 2011 to 2014 Russia experienced the deepest recession and the slowest recovery. \ Even without the sanctions, imposed on the Russian economy and the steep fall in oil prices the old growth model is exhausted. The natural resources based economy no longer
medium-sized businesses. The crisis is connected with changes in external economic conditions . The crisis of 2008–2009 was apparently overcome without serious consequences was, in fact, due to the continuance of the previous Russian economic growth model, under which high growth rates are possible only with constantly growing oil prices. Their actual stabilization in 2010 until the first half of 2014 at approximately 100 USD/bbl had already noticeably reduced the contribution of the oil industry to the nation's GDP. Falling oil prices drove down the foreign trade component of GDP growth to practically zero in 2014 and will apparently make a negative contribution in 2015. Vladimir Maua, Alexey Ulyukaevb.‛Global crisis and challenges for Russian economic development Vladimir Maua‛, Russian Journal of Economics, Volume 1, Issue 1, March 2015, Pages 4–29 86 Jarosław Ćwiek-Karpowicz and Stanislav Secrieru (ed), Russia and Saction, (Warszawa: Polski Instytut Spraw Międzynarodowych ,2015). 47 87International Monetery Fund, "Cheaper Oil And Sanctions Weigh On Russia’s Growth Outlook‛, IMF Survey Magazine,( August 3, 2015) http://www.imf.org/external/pubs/ft/survey/so/2015/CAR080315B.htm (accessed 3 November 2015)
91 depandable. The Ministry of Economic Development has stated that in 2012, the Russian economy shifted to a growth phase, characterized the slowing of investments and consumption against a background of weakening foreign demand. Also forecasts that higher commodity prices would not boost growth by more than 1.5 percent.88 With the worsening of confidence in the economy , domestic households are unlikely to spend or create new debt. The state's ability to raise wages and spend on infrastructure is also limite, there are doubt on the ability of the Russian government find sensible investment projects that would really boost the economy. 89 The Russian economy is also believed to be operating close to full production capacity, which anyway prevents a new round of low-investment consumption-driven growth as has been the case over the last decade. 90 With nothing changed, rising consumption would only mean higher imports and possibly inflation. Russian economists and politicians agree that is a modernization based on innovations and a strong manufacturing sector is the only way for Russia to retain and foster its international standing in the future. Russia manufacturing sector actually unable to compete with other countries. The lack of competitivness causes by outdate manufacturing technologies and Russian wages are too high. But Russia has almost achieved the GDP per capita level of
88 Ministry Of Economic Development. ‚Prognoz dolgosrochnogo socialno-ekonomicheskogo razvitiia Rossijskoj Federacii na period do 2030 goda‛ (Prognosis of Long-Term Socio-Economic Development of the Russian Federation Through 2030), (Moscow: March 2013). (accessed 3 November 2015) 89 Jakub Kucera , ‚Russia’s Current Economic Conundrum‛ MPRA Paper No. 64320, ( 27 May 2015) http://mpra.ub.uni-muenchen.de/64320/ .(accessed 3 November 2015) 90 Agustin Roitman,‛ Russian Federation‛, IMF Country Report No. 14/176 (July 2014)
92 new European Union members such as Poland and thus has truly departed from the group of countries that focus on mass production of cheap, relatively low-tech products such as China, Turkey, Mexico and India.91 According to Mau (2015) Russia is being in a competitiveness trap, a situation in which relatively high wages exist alongside insufficient institutions. There are two ways out of this trap , to improve the underdeveloped institutions such as courts, which are notoriously incapable of defending property rights, or to lower wages..92
E. Russian Households Saving Behaviour Almost fifty percent of Russians have to spend all their money on current consumption without saving anything. A quarter of the Russian nationals have savings, but only 8 percent of them can live on that money for over one year. 93 According to the Demoscope survey (2013) Peoples financial planning horizons are extremely short: 43 percent of the respondents reported making plans for a month, 25 percent planned for the next few months, and only 9 percent of Russians made plans for a year or more in the future. Most saving is made to serve as a rainy day fund of the households, followed by savings as security for old age, savings for medical
91 Jakub Kucera , ‚Russia’s Current Economic Conundrum‛ MPRA Paper No. 64320, ( 27 May 2015) http://mpra.ub.uni- muenchen.de/64320/.(accessed 3 November 2015) 92Vladimir Mau,. ‚Mezhdu modernizaciej i zastoem – ekonomicheskaia politika 2012 goda‛ (Between Modernization and Stagnation – Economic Policy of 2012‛), Voprosy ekonomiki, no. 2 (2013). https://mpra.ub.uni- muenchen.de/64320/1/MPRA_paper_64320.pdf .(accessed 3 November 2015) 93Vladimir Shabanov , ‚Most Russians Spend All Money on Current Consumption‛. (October 2008).http://english.pravda.ru/business/finance/15-07-2010/114235- russians_ savings-0/.(accessed 3 November 2015)
93 treatment, and for vacation, entertainment, and travel, and saving for real estate.94 The current economic crisis is affecting a majority of Russia’s population, as shown by the decline in purchasing power for more than 90 percent of the population. At the end of 2014, growth in household final consumption spending fell overall to 1.3 percent. Amid the contraction in household real disposable income, consumption was buoyed by a reduction in households’ propensity to save in 2014, down to 7.9 percent. The fiscal policy was pursued in line with budgetary regulations and had a neutral impact on the economy as a whole. The general government expenditures on final consumption made a small negative contribution to GDP growth. With this condition95, 53 percent of the population unable to accumulate any savings. Even the large share of people with monthly household income over 50,000 RUB, who should be able to save are not saving.96 Not only being unable to accumulate saving, to maintain the level of consumtion, people have to use their saving or sell asset. Empirical results show that the latest financial crisis indeed influenced savings behavior of Russian households: before the financial crisis of 2010’s Russian households saved their assets for the precautionary savings motive, whereas after the financial crisis Russian households started to dissave their accumulated
94 Dilyara Ibragimova,‛Money Management In Russian Families‛, Basic Research Program Working Papers, WP BRP 11/SOC/2012. (2012). http://www.hse.ru/ data/ 2012/ 08/17/1257047979/11SOC2012.pdf .(accessed 3 November 2015) 95Akrur Barua ,‛Russia Time for Some Contemplation‛, in Ira Kalish (ed). Global Economic Outlook (Los Angeles: Deloitte Research , 2014). 32-39 96 ‚Russia’s current economic downturn: a 360° view How to adapt today to succeed tomorrow‛, PwC Russia (2015) https://www.pwc.ru/en/publications/assets/e-crisis-survey_eng.pdf .(accessed 3 November 2015)
94 assets in order to maintain the permanent level of consumption.97 The investement and saving income lowered at the time of crisis, in 1997 Russian spent 23,8 percent of their income for saving and investment but in 1998 they spent only 14,5 percent. This apending continue to decrease to 12,5 percent in 1999.98 A negative income shock also occurred in 2009, when the global financial and economic crisis hit the Russian economy. Surprisingly the savings rate seems to increase.99 The increase in the household savings rate in times of economic turmoil may possibly be associated with the rise in uncertainty motivating precautionary savings. 100 The increasing of precautionary savings motive in Russia, also can be find in IMF calculation which find that savings for a rainy day motive provided for 40 percent of the total increase in savings.101 In Russia, the share
97Stsiapan Padchasha, ‚Financial Crisis And Savings: Evidence From The Russia Longitudinal Monitoring Survey‛, Thesis in Financial Economics, Kyiv School of Economics (2012) 98Farida F. Adigamova and Marina E.Orlova, ‚Saving and Investment Behaviour of Household in Russia‛, The Social Science 10 (6): 996-1001 (2005). http://docsdrive. com/pdfs/medwelljournals/sscience/2015/996- 1001.pdf .(accessed 17 November 2015) 99Data from Russia’s Deposit Insurance Agency shows that in 2009 the volume of individual deposits in Russian banks increased by a record 1.5 trillion Roubles to reach more than 7.5 trillion. https://www.rt.com/business/economic-downturn-russians-saving/ .(accessed 3 November 2015) 100 Maurizio Bussolo,Simone Schotte, Mikhail Matytsin, ‚Population Aging and Households’ Saving in the Russian Federation‛ Policy Research Working Paper, No.7443. (October 2015) https://openknowledge.worldbank.org/ bitstream/ handle/ 10986/22874/Population0agi0e0Russian0Federation.pdf?sequence=1(acces sed 17 November 2015) 101 Anastasia Kostomarova, ‛Russians Spend When Crisis Looms‛, (12 Oct, 2012), https://www.rt.com/business/russians-crisis-saving-spending- 257/ (accessed 20 November 2015)
95 of Russians who save for a case of more turbulence went up to 29 percent in 2011 from 23 percent in 2008 In 2009 people's savings on bank deposits have been growing steadily. It increased by 26.7 percent in 2009 and exceeded 8 trillion rubles in May 2010. Nineteen percent of Russians said that they put their money on current accounts. Every tenth Russian said that they save money on interest-free credit cards. Many prefer to follow the risk diversification principle: they save a part of their money in cash and another part in banks.102 The Russian Ministry of Finance and the Demoscope Research Center have published findings The Study of Financial Behaviours and Savings Habits of the Russian Population. The study found that the average Russian family earns a combined monthly income of 39,300 rubles (15,500 rubles per person), and wealthier Russians make approximately five times more than poor families. Financial security does not correlate with age, but instead correlates with level of education and place of residence: families living in bigger cities tend to have higher incomes. As can be seen at grafik 3.3, Moscow has the highest salary indeks almost twice of all the countries in this federation. Thus, the average per capita monthly income is 23,800 rubles in Moscow and St. Petersburg and 11,200 rubles, half as much in small towns and rural areas. Only 45.1% of the households reported having savings, and the average balance of current bank accounts stood at 36,900 rubles, while the average amount in deposit accounts stood at 188,100 rubles. The wealthiest categories of surveyed households owned half of all the funds in bank accounts and
102Vladimir Shabanov, ‘Most Russians Spend All Earnings on Current Consumption‛, http://www.marketoracle.co.uk/Article21150.html (accessed 7 November 2015)
96 deposits.103 Saving is not the only source for most Russians, they can count on relatives or friends if necessary: 45.6 percent of the respondents are certain that they can borrow 50,000 rubles from their social circle at any given moment.104 This fact support Notten (2007) finding that, financial markets play a limited role as a smoothing channel in shock economic condition, in Russia. During the 2007 crisis Russians have hardly changed their saving behavior, with just 14 percent of those who make savings at all changing their financial strategy. Interestingly, the share of Russian households that don’t spend everything and save at least some portion of their income has been around the low 30 percent since 1996. The reasons is that various economic turmoils have left the incomes of the wealthiest almost untouched, while low income households have seen their money fading away further and have had no room for the smallest of savings.The ongoing crisis is set to last a long time, which made precautionary saving a key component of the overall savings growth both in developed economies and in Russia.105 One explanatory factor why financial market does not have a dominant role in people’s financial arrangement is because households’ confidence in Russia’s financial institutions has not yet been restored, despite the reforms in this sector after the 1998 banking crisis. During this crisis, many households lost their savings as a result of the bankrupcies. Households seem to use internal strategies, such us kinship , social networks and
103 Maria Denisova, ‚Russians Keep Cash in Banks, Not at Home‛, http://opec.ru/ en/1758772.html (accessed 9 November 2015). 104Maria Denisova, ‚Russians Keep Cash in Banks, Not at Home‛, http://opec.ru/ en/1758772.html (accessed 9 November 2015) 105Anastasia Kostomarova, ‛Russians Spend When Crisis Looms‛, (12 Oct, 2012), https://www.rt.com/business/russians-crisis-saving- spending-257/ (accessed 20 November 2015)
97 capital accumulation, gift giving, the provision of loans and (pension) benefits. Furthermore, some evidence show that pensions and household food production may be used for intergenerational risk-sharing within families.106 Another traditional factor, stimulating economic growth, is domestic consumer demand. Unfortunately, there are problems, first the population is heavily indebted. Beside low rate of saving Russian household also have debt buren issue. Despite relatively weak development in Russia's financial sector, the population has a huge debt burden. Outstanding individual debt in Russia is dominated by short-term consumer loans with high interest rates, and a significant percentage of borrowers spend at least half of their earnings paying off debt. 107 Although loans to the population make up only 17 percent of the GDP, due to short average loan terms, a small proportion of long-term mortgage loans, and high nominal interest rates, Russians spend approximately 13 percent of their disposable income on servicing loans. This is more than in the US, (see Grafik 3.3) where the population's loan debts total approximately 70 percent of the GDP but where debt servicing costs are near 10 percent of
106 Geranda Notten , ‚Managing Risks: What Russian Households Do To Smooth Consumption‛, (10 August 2007 ) https://mpra.ub.uni muenchen.de/4670/1/MPRA_ paper_4670.pdf (accessed 9 November 2015) 107Maria Denisova, ‚One-Third of Russians Use Half Their Salary to Pay Off Debt‛, OPEC.ru (20-3-14 http://opec.ru/en/1675908.html (accessed 9 Oktober fs2015)
98 Figure 3.5. Salary Index in Russia
income. 108 In other words, even after the country overcomes the acute phase of the current crisis, further expansion of consumer demand by means of lending is not economically viable and bears serious risks. The high rate of indebtness will cause a bubble economic, and for that reason Russia’s central bank has warned by IMF that Russia’s consumer lending sector threatens the country’s financial stability.109
108Vladimir Maua, Alexey Ulyukaevb.‛Global crisis and challenges for Russian economic development Vladimir Maua‛, Russian Journal of Economics, Volume 1, Issue 1, March 2015, Pages 4–29
109 Courtney Weave, ‚Russia Central Bank Warns On ‘High’ Household Indebtedness‛, EU Economy (November 20, 2013)
99 Grafik 3.6 Russia and U.S Debt Burden 2009-2014
Islam takes the matter of debt very seriously and warns against it and urges the Muslim to avoid it as much as possible. Debt should not be undertaken except in cases of necessity. The consequences of debt is not only will be bear in this life but also in here after. This shown by following hadeed
َي ٍْ َفب َس َق ان ُّشٔ ُح ا ْن َج َس َذ َٔ ُْ َٕ ثَشِٖ ء ِي ٍْ ثَالَث َد َخ َم ا ْن َج َُّ َخ ِي ٍَ ا ْنكِ ْج ِش َٔا ْن ُغهُٕ ِل َٔان َّذ ْٚ ٍِ ‚Whoever dies free from three things – arrogance, cheating and debt – will enter Paradise.‛ (Narrated by al-Tirmidhi (1572); classed as saheeh by al-Albaani in Saheeh al- Tirmidhi. )
Despite it is not forbiden to tahe a debt, Islam has discouraged debt as much as possible, and that debt is something that has a serious and direct effect on one's iman. In fact the longest http://www.ft.com/ cms/s/0/ 42629d66-51df-11e3-8c42-00144feabdc0.html (accessed 19 November 2015)
100 ayah in the Qur'an is the ayah of debt in Al Baqara 282, (2:282).
َ َ َٚب أُّٚ َٓب ان َّ ِزٚ ٍَ آ َي ُٕا إِ َرا تَ َذا َٚ ُْ ُت ْى ثِ َذ ْٚ ٍ إِنَ ٗ أ َج م ُي َس ًًّّٗ َفب ْك ُت ُجٕ ُِ ۚ َٔ ْنَٛ ْك ُت ْت ثَ ْٛ َُ ُك ْى َكبتِ ت ثِب ْن َع ْذ ِل َٔ ََل َٚ ْأ َة َكبتِ ت أَ ٌْ َٚ ْك ُت َت َك ًَب َعهَّ ًَ ُّ انهَّ ُّ َف ْه َٛ ْك ُت ْت َٔ ْن ُٛ ًْهِ ِم انَّ ِز٘ َعهَ ْٛ ِّ ا ْن َح ُّك َٔ ْنَٛ َّتكِ انهَّ َّ َسثَّ ُّ َٔ ََل َٚ ْج َخ ْس ِي ُْ ُّ َش ْٛ ًّئب َفإِ ٌْ َكب ٌَ انَّ ِز٘ َعهَ ْٛ ِّ ا ْن َح ُّك َس ِفٛ ًّٓب َأ ْٔ َض ِعٛ ًّف ب أَ ْٔ ََل َٚ ْس َت ِطٛ ُع أَ ٌْ ُٚ ًِ َّم ُْ َٕ َف ْه ُٛ ًْهِ ْم َٔنُِّٛ ُّ ثِب ْن َع ْذ ِل َٔا ْس َت ْش ِٓ ُذٔا َش ِٛٓ َذ ْٚ ٍِ ِي ٍْ ِس َجبنِ ُك ْى ۖ َفإِ ٌْ نَ ْى َٚ ُكٕ َب َس ُجهَ ْٛ ٍِ َف َش ُج م َٔا ْي َشأَتَب ٌِ ِي ًَّ ٍْ تَ ْش َض ْٕ ٌَ ِي ٍَ ان ُّش َٓ َذا ِء أَ ٌْ تَ ِض َّم إِ ْح َذا ُْ ًَب َف ُت َزكِّ َش إِ ْح َذا ُْ ًَب ا ْْلُ ْخ َش ٖ َٔ ََل َٚ ْأ َة َ َ َ ان ُّش َٓ َذا ُء إِ َرا َيب ُد ُعٕا َٔ ََل تَ ْسأ ُيٕا أ ٌْ تَ ْك ُت ُجٕ ُِ َص ِغٛ ًّشا أ ْٔ َكجِٛ ًّشا إِنَ ٗ أَ َجهِ ِّ َرنِ ُك ْى أَ ْل َسطُ ِع ُْ َذ انهَّ ِّ َٔأَ ْل َٕ ُو نِه َّش َٓب َد ِح َٔأَ ْد َ ٗ أَ ََّل تَ ْشتَب ُثٕا ۖ إِ ََّل َ َ أ ٌْ تَ ُكٕ ٌَ تِ َجب َس ًّح َحب ِض َش ًّح ُت ِذٚ ُشٔ َ َٓب ثَ ْٛ َُ ُك ْى َفهَ ْٛ َس َعهَ ْٛ ُك ْى ُج َُب ح أ ََّل َ تَ ْك ُت ُجٕ َْب ۗ َٔأ ْش ِٓ ُذٔا إِ َرا تَجَبَٚ ْع ُت ْى َٔ ََل ُٚ َضب َّس َكبتِ ت َٔ ََل َش ِٛٓ ذ َٔإِ ٌْ تَ ْف َعهُٕا َفإََِّ ُّ ُف ُسٕ ق ثِ ُك ْى ۗ َٔاتَّ ُمٕا انهَّ َّ ۖ َٔ ُٚ َعهِّ ًُ ُك ُى انه َّ ُّ ۗ َٔانهَّ ُّ ثِ ُك ِّم َش ْٙ ء َعهِٛ ى ‚O ye who believe! When ye contract a debt for a fixed term, record it in writing. Let a scribe record it in writing between you in (terms of) equity. No scribe should refuse to write as Allah hath taught him, so let him write, and let him who incurreth the debt dictate, and let him observe his duty to Allah his Lord, and diminish naught thereof. But if he who oweth the debt is of low understanding, or weak, or unable himself to dictate, then let the guardian of his interests dictate in (terms of) equity. And call to witness, from among your men, two witnesses. And if two men be not (at hand) then a man and two women, of such as ye approve as witnesses, so that if the one erreth (through forgetfulness) the other will remember. And the witnesses must not refuse when they are summoned. Be not averse to writing down (the contract) whether it be small or great, with (record of) the term thereof. That is more equitable in the sight of Allah and more sure for testimony, and the best way of avoiding doubt between you;
101 save only in the case when it is actual merchandise which ye transfer among yourselves from hand to hand. In that case it is no sin for you if ye write it not. And have witnesses when ye sell one to another, and let no harm be done to scribe or witness. If ye do (harm to them) lo! it is a sin in you. Observe your duty to Allah. Allah is teaching you. And Allah is Knower of all things.‛ Q.S: Al Baqara 282, (2:282). To boost economic growth with expansion of consumer demand at the expense of the population's regular income (wages) is also unlikely. After the decline in the ruble exchange rate during the second half of 2014, labor costs significantly decreased in Russia, becoming competitive even versus countries in Southeast Asia. Nevertheless, demographic issues will soon raise wages again, and the income of hired employees will increase. At the same time, it is evident that economic advancement is impossible if labor costs continue growing, and thus, it will be necessary to restructure sectors and to release and shift the labor force. This makes employees more restrained about their future income and more inclined to save.110 The inconsistent policy toward developing the pension system drives people to consider providing for themselves on their own after retiring, which also encourages saving. Of course, under present conditions, with rate volatility and inflation growing, any long-term savings in money terms are out of the question, but a decline in inflation and an increase in inflation predictability will significantly heighten the incentive to save.Thus, in the near-future, the population will
110 Sergey Drobyshevsky,‛ A View on Russian Economy Mid-term Perspectives‛,The World Financial Review, (November 13, 2013). http://www.worldfinancialreview.com/?p=431 (accessed 19 November 2015)
102 be net savers repaying their debts rather than actively consuming.111 The Russian economy is struggling, the combination of lower oil prices, international sanctions and geopolitical risks weigh heavily on the economy. 112 Low oil and gas prices, geopolitical tensions and ongoing international sanctions deepened Russia's recession in the first half of 2015. A significant increase in the poverty rate, decreased consumer demand and sharp contraction in real wages have had a severe impact on households. The traditional perspective on finance, low financial literacy, unfavour economic condition that is not encorage saving and investement, are all become obstacle economic growth and banking and financial development in this country. Russian economy is doomed but if the institutional reforms take off, the country can quickly eliminate many constraints to development and achieve more stable economic growth. Much needed reforms include loosening the administrative barriers for establishing new business and entering new markets, fighting corruption and pressure against business from the side of different public bodies, better
111Vladimir Maua , Alexey Ulyukaevb ‚Global crisis and challenges for Russian economic development‛ Russian Journal of Economics‛ Volume 1, Issue 1, March 2015, Pages 4–29 http://ac.els- cdn.com/S2405473915000045/1-s2.0-S2405473915000045- main.pdf?_tid=e1839b10-86c2-11e5-b53b- 00000aab0f6b&acdnat=1447060907_ f6c0e 1ebb6f3f171d6cd24ce430921a8 (accessed 19 November 2015) 112 President Putin laid most of the blame for Russia’s economic condition on the sharp drop in oil prices, which is down around 45percent since its June highs, roughly equal to the drop in the ruble’s value versus the U.S. dollar this year. But Putin acknowledged that Western sanctions, which were levied earlier this year in response to Russia’s annexation of Crimea, were around 25percent to 30percent to blame as well. (accessed 25 October 2015)
103 property rights protection and reforming the natural resource monopolies. 113 The World Bank also has an optimistic forcast for Russia economy, this institution has updated its economic outlook for Russia for 2015 and 2016 to reflect a further stabilization of global oil prices. The increase of oil price would allow the Central Bank of Russia to pursue monetary easing at a more rapid pace for the rest of 2015, as a result bringing down borrowing costs and increasing lending to firms and households.114
113 Sergey Drobyshevsky,‛ Russia: Prospects for Growth and Convergence‛, THINK TANK 20:Growth, Convergence and Income Distribution: The Road from the Brisbane G-20 Summit, http://www.brookings.edu/~/media/Research/ Files/Interactives/ 2014/ thinktank20/chapters/tt20-russia-growth-prospects- drobyshevsky.pdf?la=en 114The World Bank, ‚World Bank Revises Its Growth Projections for Russia for 2015 and 2016‛, World Bank Press Release June 1, 2015, http://www.worldbank.org/en/news/press-release/2015/06/01/world-bank- revises-its-growth-projections-for-russia-for-2015-and-2016
104
CHAPTER IV THE DEVELOPMENT OF ISLAMIC BANKING IN RUSSIA In this chapter will be explained about demand of Islamic Banking in general, factors affecting it both from the governmental side which include regulation, government attitude toward Muslim, and macro-economic policy and also from the demand side which include factors affecting the demand for the Islamic banking services in the community such as literacy in the field of Islamic finance. The understanding of Islamic teaching related to financial institutiom and saving behaviour. In this chapter also will be discussed about issues related to the development of Islamic banking in Russia. At the end of this chapter will be reviewed experience of implementation of Islamic banking in neighbor countries with similar banking regulation. A. The Demand for Islamic Banking Russia is home to 15 to 25 million Muslims1, which makes it the largest Muslim population country in Europe. The prohibition of riba in Islamic teaching, will create demand for banking and financial institution which is fulfill the requirements of Syariah law from muslim community. With so many potential clients of the future of Islamic financial institutions there is no doubt of the need for the introduction of Islamic finance in Russia. However, it’s not that simple, and for the implementation of major projects in
1 Simon Rogers, “Muslim Populations by Country: How Big Will each Muslim Population by 2030?”(28 January 2011) http://www.theguardian.com/news/datablog/2011/jan/28/muslim- population-country-projection-2030 (accessed 03 October 2015) 105 106 the field of Islamic business and finance need more detailed information on the country's Muslim population and consumer behavior. There is no standard way of defining what an Islamic bank is, but in general the Islamic bank is an institution that mobilizes financial resources and invest them in an effort to achieve the goal of social and accepted Islamic finance that has been determined.. Both mobilisation and investment of funds should be conducted in accordance with the principles of Islamic Shari'a". Which are; Prohibition of Interest or Usury; Ethical Standards; Moral and Social Values; Liability and Business Risk.2 According to Islamic financiers, Islamic banking is based on the real economy, which means it excludes many of the games that Western banks play.3 According to Eldar Yakhin the study of marketing opportunities of Islamic financial services in Russia should be placed on the analysis of population and its religious and ethnic composition, living standards, the market of financial services, culture and models of consumer behavior of different population groups, including Muslims.4 With this point of view, it is logical that in calculating the possible financial resources of Islamic Bank and Islamic financial institutions will come mostly from Muslims population. As was mentioned before Russian Muslim population varies from 15 to 25 million people according to the Rosstat’s
2 http://www.albaraka.com/default.asp?action=article&id=46 (accessed 03 Desember 2015) 3“The Ethics of Prosperity” http://world- economic.com/articles_wej-81.html (accessed 03 January 2016) 4 Eldar Yakhin, “How Many Russian Muslim Money?” http://islamic-finance.ru/board/2-1-0-23 (accessed 03 October 2015)
107 data 2010.5 However 70 years of atheist propaganda had bad effect to their religious identity. Researchs finds that most of muslim in Russia does not practice their religion. Lack of understanding Islamic teaching, including the prohibition of riba affects their investment and banking choosing, most of them does not matter whether they will invest available cash to Islamic financial institutions or to conventional banks. This statement is supported by Bekkin, his conclusion based on the fail of Badr Forte the only Islamic Financial Institution established in Russia. According to Bekkin this fail was caused by lack of demand for Sharia financial institution in Russia. Majority of Muslims in Russia are not aware of the prohibition of certain conventional banking activities under Sharia law. And for them who practicing Islamic teachings, their practice is limited to attending mosque on Friday, fasting during Ramadhan, and performing Hajj, ironically one of they mostly ignore other Islamic basic teaching which is paying zakah.6 The lack of understanding on Islamic teaching, which lead muslims to follow a way of life that is forbiden. This has been warn in Quran Surah Al-An'am, ayah 116 (Q.S. 6:116). Quran Surah 6:116 َ َوإِ ْن ُت ِط ْع َأ ْك َث َر َم ْن ِفي ا ْْل ْر ِض ُي ِضلُّو َك َع ْن َس ِبي ِل ه َِّللا ۚ إِ ْن َي هت ِب ُعو َن إِ هَّل ال هظ هن َوإِ ْن ُه ْم إِ هَّل َي ْخ ُر ُصو َن If thou obeyedst most of those on earth they would mislead thee far from Allah's way. They follow naught but an opinion, and they do but guess.
5 Federal State Statistics Service http://www.gks.ru/ (accessed 03 October 2015) 6 Renat Bekkin, “Islamic Finance in the Former Soviet Union” 183 http://www.ide.go.jp/Japanese/Publish/Download/Report/pdf/2008_04_07_ shiryou.pdf (April 2013)
108
In the above verse, Islam is emphasizing the importance of Muslim understanding of the Islamic teachings. Without understanding and compliance in implementing these teachings they will follow the rules generally accepted in society. But the generally accepted values are not always based on the teachings of Islam, a lot of customs and traditions of society that actually detracts from the religious command. In the Quran there is also a warning to those who understand the teachings of Islam but still do things that are forbidden. The warning was contained in the Quran. Quran verses Fussilat Surah 1- 4: (Q.S. 41;1-4) ٌ۬ ٌ۬ ۡ ح ٓم )١( َتن ِزي ل ِّم َن ٱل هر ۡح َمٰـ ِن ٱل هر ِحي ِم )٢( ِك َتٰـ ب ُف ِّص َلت َءا َيٰـ ُت ُه ۥ ُق ۡر َءا ًنا ٌ۬ ٌ۬ ٌ۬ َ َ َع َربِ ًّيا لِّ َقۡو ٌ۬ م َي ۡع َل ُمو َن )٣( َب ِشي ًرا َو َن ِذي ًرا َفأ ۡع َر َض أ ۡڪ َث ُر ُه ۡم َف ُه ۡم ََّل َي ۡس َم ُعو َن )٤( Ha. Mim. A revelation from the Beneficent, the Merciful. A Scripture whereof the verses are expounded, a Lecture in Arabic for people who have knowledge. Good tidings and a warning. But most of them turn away so that they hear not.
Nonetheless the share of high-Muslim religious consciousness in Russia in recent years has increased significantly. However it’s hard to find out the reliable estimates of the number of the most religious Muslims in Russia. Analysts and market experts production of halal (permitted by Islam) estimate the number of consumers of halal products in the amount of 2% of the total Russian population. Also, some regional and central Spiritual
109
Administration of Muslims say that the proportion of complying with all the requirements of the religion of Muslims around 8 percent. Based on these estimates the number of people loyal to the Islamic financial products in Russia now about 750 thousand to 2.8 million. This compare to UK with 2.7 millions of Muslims7 which is makes it similar to Russian Muslim population. Nevertheless, in the UK operates 20 financial institutions8 that offer services according to the standards of Shariah law and only 4 institutions in Russia. From the results of the All-Russia Population Census of 2010 (Rosstat, 2010), prediction of potential customer base of the Islamic finance industry equates around 500,000 people.9 The fact that in most cases in Muslim households males only interact with the financial services industry may further decrease this number, while business customers would
7 Office for National Statistics, “Religion in England and Wales 2011” http://www.ons.gov.uk/ons/dcp171776_290510.pdf (accessed 04 October 2015) 8 http://www.interfax.ru/business/423427 (accessed 04 October 2015) 9 During the time of post-Soviet Russia the number of Muslims has increased from 1.5 to 10 million people. Research find that only 10 per cent of all believers across confessions practice their religions more or less consistently. Using the same percentage it can be assume that genuine devotees of Islam are 1 million. average number of children per a nuclear family was 2.4 in the Northern Caucasus Federal District (a territory where ethnic Muslims overwhelmingly prevail). Assuming that this coefficient holds for the entire nation, the above one million may be more or less accurately adjusted by a factor of 0.5 to return the number of practicing adult Muslims. In other words, according to our assessment, the potential customer base of the Islamic finance industry equates around 500,000 people Andrei Juravliov,” Islamic Finance in Russia: Status Quo and Outlook”, Sosial Science Research Network , (April 2013). https://www.academia.edu/11907272/Islamic_Finance_in_Russia_Status_Q uo_and_Outlook. (accessed 20 November 2015)
110 constitute additional clientele. According to a recent survey conducted by the Russian Muftiy Council about 60 percent of religious Muslims in Russia do not use traditional banks except for services settlement and cash services10. However, neither can be calculated, as a matter of principle, and we suppose that these factors have to, and may, be disregarded. Based on a report by the National Agency for Financial Information, a private research group, (NAFI, 2013) and official data on population (Rosstat 2010; UniSIS 2013), the number of users of banking services can be estimated at 90 millions. Should every adult willing to live by Sharia prescriptions prefer to bank the Islamic way, the measure of the resulting shift or intake of customers will be slightly above 0.5 per cent of the sector’s total. Besides the consideration of the amount of Moslem in Russia who need shariah complient financial services. Recession faces by Russian economy are leading banks to call for the development of Islamic finance as one away to seek for alternatives to European and U.S. pools of funding. The expansion of the Shariah-compliant industry would let the country attract fresh capital from the Middle East and Asia.11 Russia, however, lags behind in the industry. Russian Muslims are slow to change their financial habits, while some financial autorities are plagued by a deep-rooted distrust of Islam in no hurry to adapt economic legislation to facilitate Islamic
10 Andrei Juravliov,” Islamic Finance in Russia: Status Quo and Outlook”, Sosial Science Research Network , (April 2013). 4-5 https://www.academia.edu/11907272/Islamic_Finance_in_Russia_Status_Q uo_and_Outlook. (accessed 20 November 2015)https://www.academia.edu/11907272/Islamic_Finance_in_Russia_Sta tus_Quo_and_Outlook. (accessed 20 November 2015) 11 Daria S Solovieva, ‚Russia Sanctions Spur Bank Drive for Shariah Funding Role‛, Bloomberg. (20-10-2014). http://islamic- finance.ru/blog/2014-10-20-260) (accessed 04 November 2015)
111 banking. In Russia, the Islamic finance market is at an embryonic stage. The total volume of assets managed by Russian halal financial institutions at $10 million, a blip on the radar for the country's banking system, whose total assets stood at 57.4 trillion rubles ($1.7 trillion) in 2013.12 The saving behaviour of muslims in Russia, also can reflect the saving behaviour of Russian population in general. According to the National Agency for Financial Study percentages of Russian populations with saving remains flat around 25- 30 percent since the begining of 2000. Even at the time when Russian economy was booming between 2000- 2008, where income rising the number of people saving money was not increase.13 The relation between saving and Income can be seen at Grafik 4.1 below. From the grafik we can see that saving growth relatively stable compare to the rate of disposible Income which is very fluktuatif especially during the crisis. Uniqely when the disposible income growth drop during the crisis 2009 the rate of saving growth was rising from 10,1 at 2008 to 13,1 at 2009. According to some scholar this unique condition was caused by govermental and bank policy which stimulate the saving and deposits, coupled by factor of expectations or saving for rainy days.14
12Alexey Eremenko, ‚Islamic Finance Budding Slowly in Russia‛ The Moscow Time, http://www.themoscowtimes.com/business/article/islamic-finance- budding-slowly-in-russia/502671.html (accessed 04 November 2015) 13Anastasia Kostomarova,”Time to Focus on Savings” Russia Today (2010) www.rt.com/business/russia-households-saving-crisis/ (accessed 04 November 2015) 14The poll conducted at the end of 2014 shows that the most powerful motive in RUssian saving is precautionary saving, that is, the desire to smooth consumption. Rainy-day considerations, including job and health safety concerns, account for 70 percent of a total sum of 166 prcent. The most popular answer is for buying housing – is 33 percent can be
112
Grafik 4.1. Saving and Income Growth in Russia 2002-2012 SAVING AND INCOME GROWTH IN RUSSIA 2002-2012 18 16 S Yd 14 12 10 8 6 4 2 0 -2 -4 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 S 12,8 7,9 11,8 11 12,4 12,1 10,1 13,1 15,5 13,9 Yd 7,7 9,4 11,9 13,6 14,1 8 -2 8,6 4,4 4,6 Data from Rosstad and World Bank 2002-2012.
Sberbank data shows that Marginal Propensity to Save (MPS) in Russia increase from 16 percent to around 18 percent at 2014. This increase was caused by people’s desire to protect their savings from Rubel devaluation.15 Russian
considered a precautionary motive, corresponding to the need for shelter. Saving for the sake of additional income such as, earning interest is the least popular answer, comprising only 2 pecent of total responses. Dmitrii Timofeev, “Non-Keynesian Savings Of Russians”, Working Papers Series: Financial Economics, WP BRP 49/FE/2015 (2014), 5. http://poseidon01.ssrn.com/delivery.php?ID= 806101124 0290261170840140080720230770580080190840440011090041150071120 6707206910007500912205403112212010811800208107909609701300808 5046038081099118081067125120123075091060073084112084010064002 084111016086080076000001091066087071064095124068030080125003 &EXT=pdf (accessed 04 November 2015) 15 Sberbank, “Sberbank CIB Ivanov Consumer Confidence Tracker Update” (2014) http://www.sberbank.ru/en/press_center/cib/article?newsID =200001570-1-2&blockID= 11008166®ionID=77&lang=en (accessed 04 November 2015)
113 savings behavior as a reaction for recent global financial is very unique and is so different from that was observed in the developed world. It is clearly non-Keynesian, and it means that traditional income-smoothing fiscal and monetary channels do not work here.16 The ongoing Russian recession seems very different from what is explained as Keynesian Economic Cycle. The Ukrainian affair provided the initial shock for the private sector in 2014 and 2015. But instead of cutting buck and increasing demand for monetary assets, Russians did the opposite. The private sector fled from the ruble, and frantically increased purchases of housing and consumer goods. This caused a burst of inflation and a collapse in exchange rates. The Bank of Russia had to react drastically hiking the key interest rate from 5.5 percent to 17 percent. This effectively stopped the run on the ruble, but killed investment activity in the country and ignited a recession.17 The saving behavior of people in Russia is affected by their past recession history. People spend less on
16In Keynesian Economic Cycle some shock (i.e., the financial shock of 2007-2009) causes the private sector to cut back spending, which induces a higher level of demand for precautionary savings in the economy. This leads to the “paradox of thrift,” namely, a glut of entities running financial surpluses. At the same time there is a lack of entities willing to run financial deficits. High demand for precautionary saving leads to relative appreciation of non-risky monetary assets, including cash. This leads to a deflationary recession. The remedy, of course, is budget expansion, clearing of the financial market via the interest rate channel, and possibly increasing the supply of cash. Sergei Guriev and Aleh Tsyvinski , Challenges Facing the Russian Economy after the Crisis, Anders Åslund , Sergei Guriev and Andrew Kuchins (eds) (Washington DC:.Piterson Institute for International Economics, 2014) 25 17Dmitrii Timofeev, “Non-Keynesian Savings Of Russians Basic”, Working Papers National Research University Higher School of Economics, Financial Economics WP BRP 49/FE/2015, Moscow, Russia (2015). http://www.hse.ru/data/2015/12/02/1081034488/49FE2015.pdf (accessed 10 January 2015)
114 consumption,18 and protect their money from rubel devaluation by buying Dollar and buy asset. There are two kind of assets which are choosen mostly housing and equities. Russians believe that housing was the best investment of all. That is why housing in Russia may be seen as the investment asset closest to being risk-free.19 Althought it seem like there is no relations between real income which decreasing at the time of crisis and household savings. Using longrun macro data for linear regression we can prove that the rate of Gross Domestic Product which is also can be seen as national income is positively correlated with domestic savings. Using Analysis of Varian on data at table 4.1 we finds that there is corellation between GNP and Gross Domestic Saving.
18Nielsen, “Russian Consumers Brace For Austerity” Russian Consumer in New Economics Study, Nielsen (January 2015) . http://www.nielsen.com/us/en/insights/news/2015/russian-consumers-brace- for-austerity.html (accessed 25 December 2015) 19 Dmitrii Timofeev, “Non-Keynesian Savings Of Russians”, Working Papers Series: Financial Economics, WP BRP 49/FE/2015 (2014), 22. http://poseidon01.ssrn.com/delivery.php?ID= 806101124 02902611708401400807 20 2307705800801908404400110900411500711206707206910007500912205 4031122120108118002081079096097013008085046038081099118081067 1251201230750910600730841120840100640020841110160860800760000 01091066087071064095124068030080125003&EXT=pdf (accessed 04 November 2015)
115
Tabel 4.1 GDP (Constant Price) and Gross Domestic Savings Russia 1990-201320
Tahun GDP riil Gross Domestic Savings 1990 843.164 6.970.110 1991 800.515 6.809.660 1992 684.191 4.750.670 1993 624.882 3.389.880 1994 546.336 2.379.010 1995 523.689 2.095.990 1996 504.855 1.960.500 1997 511.913 1.712.120 1998 484.782 1.268.680 1999 515.808 1.643.220 2000 567.388 2.828.800 2001 596.280 2.685.340 2002 624.565 2.606.090 2003 670.133 3.108.550 2004 718.221 3.900.640 2005 764.016 4.743.930 2006 826.310 5.526.460 2007 896.836 5.598.020 2008 943.901 6.420.190 2009 870.080 3.829.260 2010 909.266 4.989.990 2011 948.438 6.142.850 2012 980.324 6.056.370 2013 999.469 Source: World Bank Data Using Anova test we can prove that there is a relation between GDP Riil and Gross Domestic Savings. F test value 93,931 gives the significancy of null hypotesis the value of
20World Bank, “Russian Federation Data”, http:// data.worldbank.org/ country /russian-federation (accessed 04 November 2015)
116
0,00 which meant we have to reject the null hypothesis that there is no mean difference between this two groups, and accept alternative hypothesis that there is exsist significant differences between the means of these to groups, hence there is relations between them (see table 4.2 ).
Table 4.2 Regression Output
Variables Entered/Removeda Variables Model Variables Entered Removed Method 1 GDP riilb . Enter a. Dependent Variable: Gross Domestic Savings b. All requested variables entered. Model Summary Adjusted R Std. Error of Model R R Square Square the Estimate 1 ,904a ,817 ,809 798442,4289 a. Predictors: (Constant), GDP riil ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 59882081517343,820 1 59882081517343,820 93,931 ,000b
Residual 13387716556743,130 21 637510312225,863
Total 73269798074086,950 22 a. Dependent Variable: Gross Domestic Savings b. Predictors: (Constant), GDP riil
117
Coefficientsa
Unstandardized Coefficients Standardized Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -3079201,581 746612,103 -4,124 ,000
GDP riil 9,919 1,023 ,904 9,692 ,000
The result from regression shows that R square value is 0,847, means that independent variabel able to explains 85 percent of all variation happens to dependent variabel. T test value for Null Hypothesis of there is no relation between independent variabel and dependent variabel gives value of 9,692. This t test value is above t table with degree of freedom (df) 2121 and α=0.05 which is 0.68635. Since t test > t table, we have to reject null hypothesis of no relation between independent and dependent variabel and conclude that there is a positif and significant relation between Gross Domestic Savings and and GDP riel. The relation between GDP and Gross national saving can be writen as.
Statistical interpretation of this model means that an increase in a billion USD of Riel Gross Domestic Product will cause an increase of 0.904 unit of Gross National Savings. However, to attract muslim so they will keep their money in Shariaa Banking have more obstacle than merely the rate of income or the amout of muslim populations, there is also government policy and banking regulations which need
21The t-distribution has one parameter called the degree of freedom (df), where df = The total data used -1 . or simply df = n-1. We have complete 22 set of data that given df of t test 21.
118 to be adjusted to make it more favorable for the growth of Islamic bank.
B. Regulation and Political Condition
In the perspective of Islamic Economics, the task of the state is to uphold justice in the economy, preventing any oppression as well as action against the offenders in the economic field. This effort is done by the power of government officials, even if the conditions allow coercion in need, as outlined above under paragraph Quranic verses Al- Hadid 25.
Quran Verse Al-Hadid ; 25 (Q.S. 47;25)
لَقَ ۡد أَ ۡز َسۡلٌَا ُز ُسلٌََا بِٲۡلبَيٌَِّٰـ ِت َّأًَ َصۡلٌَا َه َعُِ ُن ٱۡل ِكتَٰـ َب َّٱۡل ِوي َصا َى لِيَقُْ َم ۡ ۡ ۡ ۡ ٌ۬ ٌ۬ ٱلٌَّا ُض بِٲلقِ ۡس ِ ۖط َّأًَ َصلٌَا ٱل ََ ِدد َد ِي َِ ب َأ ض َش ِدد د َّ َهٌَٰـفِ ُع لِلٌَّا ِض َّلِيَ ۡعلَ َن ٱ ََّّللُ َهي ۡ ٌ۬ دٌَ ُص ُسٍُ ۥ َّ ُز ُسلََُ ۥ بِٲل َغ ۡي ِ ۚب ِ َّى ٱ ََّّللَ َ ِْ ٓ َ ِصد ص ٥٢(
We verily sent Our messengers with clear proofs, and revealed with them the Scripture and the Balance, that mankind may observe right measure; and He revealed iron, wherein is mighty power and (many) uses for mankind, and that Allah may know him who helpeth Him and His messengers, though unseen. Lo! Allah is Strong, Almighty
Islamic banking is primarily different from classic banking because of five rules of thumb. The first is that risk and profit need to be equally divided between the transaction parties. Secondly, speculation and uncertainty in transactions is strictly prohibited – making money from money (aka with interest) is also prohibited. Some activities, mostly those that
119 are not useful to society, are not allowed either, and lastly, transactions need to be backed by real assets, or need to be a transaction of assets. According to Islamic financiers, Islamic banking is based on the real economy, which means it excludes many of the games that Western banks play.22 Islamic banks could have a huge social impact and act as an alternative to traditional banks, and legislation is crucial to facilitating Islamic finance transactions. But the growing of Islamic banking and finance is depend on government political will to prepare a law on Islamic banking and finance which is theoritically possible in Russia.23 Compare to United Kingdom which have almost same back ground, Russia is likely to have more difficulties introducing Islamic finance. The introduction of Islamic banking will require deep, fundamental changes to Russian law, there are numerous factors that will significantly complicate the alignment of Islamic finance and standardized Western banking, including the facts that Islamic regulations require that assets be sorted according to their source and deny explicit interest payments or futures transactions.24 From regulation side, 15 years of violent turmoil in the largely Muslim North Caucasus, create Islamophobia which makes many government officials share and become one of the reason why they have little desire to modify Russian legislation for the industry. The situation is better in the Muslim heartlands, authorities in Tatarstan are interested
22http://world-economic.com/articles_wej-81.html 23Alexander Winning and Bernardo Vizcaino, ‚Russia looks to lift first barrier to Islamic finance as crisis grows‛ Reufsters (Mar 20, 2015). http://uk.reuters.com/ article/2015/ 03/20/islam-financing-russia- idUKL6N0WL58620150320 (accessed 04 November 2015) 24M.Jay Richardson, ‚Islamic Banking In Russia?‛, https://www.linkedin.com/pulse/islamic-banking-russia-cbiiipro-cib-crcmp- cste-fbr-frm-cand (accessed 04 November 2015).
120 in supporting Islamic finance and have hosted numerous conferences on the matter, said Linar Yakupov, head of the republic's Investment Development Agency.25 On 24 December 2010 the Association of Russian Regional Banks conducted a meeting to discuss Islamic finance opportunities and concluded that in general there are no obstacles for executing transactions in accordance with Sharia principles even under the current tax and legal environment. However, in the regulated banking sector there may be restrictions for Islamic finance transactions based on the regulations and by laws. The major obstacle is that russian banks in general may not be involved in buy-sell transactions with commodities, what is required for some Islamic finance transactions, e.g.Murabaha (sale on credit). It must be noted that the russian banks are explicitly allowed to participate in lease transactions, often used in Islamic lease securitisation (Sukuk-al-ijara).The general conclusion was that the restrictions are not prohibitive and still allow open "Islamic windows", i.e. units of the banks operating under Sharia- compliant procedures, even under the current environment.26 According to Shvetsov, the first deputy chairman of Bank of Russia, the absence of legal infrastructure and a lack of high-level government backing have been a key barrier to
25 Alexey Eremenko,” Islamic Finance Budding Slowly in Russia”, The Moscow Times, http://www.themoscowtimes.com/business/article/islamic-finance-budding- slowly-in-russia/502671.html (accessed 03 October 2015) 26“Islamic Finance Opportunities within the Russian Tax and Legal Regime” http://www.taxand.com/taxands-take/news/islamic-finance- opportunities-within-russian-tax-and-legal-regime. (accessed 20 December 2015)
121 the growth of Islamic finance in Russia, eventhough there is a huge demand for Islamic banking products in Russia.27 In March 2015, a draft law to amend Russian law No. 395-1 ‘On Banks and Banking Activities’ dated the 2nd December 1990 (the Banking Law) was introduced to the Russian State Duma28. The proposed amendments were aimed at allowing banks to carry out trade operations which are fundamental to Islamic financing that are not currently possible under the Banking Law. However, the State Duma rejected the draft law, a working group than was created to prepare a revised draft of changes to the Banking Law to permit the functioning of Islamic finance in Russia. There are complex issues involved and a comprehensive reform of the Russian finance system is required for the proper development of the Islamic finance market. The reform shall be able to remove major obstacle for Islamic Finance and Banking in Russia. Which are:
27 Sergey Shvetsov, in Daria S Solovieva, ‚Russia Sanctions Spur Bank Drive for Shariah Funding Role‛ BloombergBusiness, (August 13, 2014) http://www.bloomberg.com/news/articles/2014-08-13/russia- sanctions-spur-drive-for-shariah-funding-islamic-finance (accessed 04 November 2015) 28The State Duma of the Russian Federation is the lower chamber of the Federal Assembly, the Russian parliament. The Duma has 450 members (deputies), each elected to a term of five years. Russian citizens at least 21 years old are eligible to run for the Duma. Under the electoral laws enacted in 2004, seats in the Duma are awarded on the basis of the percentage of election votes won by a party. The party then appoints candidates to fill its eligible seats. A party is required to win at least 7 percent of the vote in order to get seats in the Duma. ttps://www.usrbc.org/goverment/russian_government/russian_gove rnment_state_duma/ (accessed 30 December 2015)
122
(1).Excessive tax burden Unlike a conventional bank, Islamic financial institutions are entering into transactions with real assets rather than with funds. Under Russian law, transactions with assets are usually subject to VAT (18%). In an Islamic trade finance (Murabahah) transaction, a financial institution purchases assets and sells them to a client (borrower) with a margin, subject to deferred installment payments. In this situation, Russian law would require the seller to pay income tax on the margin, as soon as the transaction is made, regardless of when the margin is ultimately received by the seller (and regardless of whether the margin will in fact be received). On the contrary, under Russian law, conventional banks are only required to pay income tax upon the actual receipt of income (being the interest on the loan). Bank depositors have to pay tax on the interest income only when the interest rate exceeds 18.5%, while investors in Islamic (and any other) investment companies have to pay income tax on any income. Many Russian companies which provide Islamic finance services function through several legal entities: an investment company, such as a limited partnership, which can attract and use investments with fewer restrictions than conventional banks; a bank or a branch of a bank, which provides payment and cash services; and a separate trade or leasing company. The use of these structures creates various administrative and tax issues. For instance, income tax may be payable by one company
123
even if the group of companies as a whole is not profitable. The excessive tax burden on these transactions, which are typical in the Islamic finance market, increases the cost of funding provided by Islamic finance companies, and makes these structures less attractive compared to standard banks. The development of the Islamic finance market would require Islamic finance operations to be given similar tax treatment to standard banking operations.
(2). Banking law and regulatory issues The key feature of Islamic finance funds is that income and risk are shared by the finance institution and its investors (depositors). Because of this, Islamic finance institutions are not in a position to guarantee the return of the principal amount of investments. However, the Banking Law requires that the principal amount of a bank’s deposit should be returned to an individual depositor in any event (subject to Russian insolvency laws). Russian law provides that the payment of interest is an essential element of loan and deposit transactions. This conflicts with one of the fundamental principles of Islamic finance, being the prohibition of interest payments (Riba). Because Islamic finance institutions are dealing with real assets, these assets must be shown on their balance sheets. The Bank of Russia regards these assets to be
124
non-core assets, which in turn negatively affects a bank’s own capital requirements and creates regulatory risks. 29
Islamic financial transactions are treated as trade transactions. The Russian legislation, in particular the Civil Code, Tax Code, Federal Law on Banks and Banking, and regulations of the Central Bank contain provisions that effectively make Islamic financing either excessively dear or outright impossible. It is a common grievance of Sharia finance in conventional jurisdictions where banks are prohibited from engaging in manufacturing and trade, the tax treatment of Islamic transactions put Islamic financial entities at a disadvantage vis-à-vis ordinary commercial banks, whilst regulatory charge on capital in the event of participating in the equity of other companies adversely affects the capital adequacy ratio of an institution.30 The resulting tax effect, as it is well known, is a higher amount of expenses born as taxes or duties on several stages of a transaction, such as murabaha or ijarah.31 The legislation which is not in favor to shariah financial services, also can reduce actual demand of Islamic
29 Grigory Marinichev & Alexey Chertov,”Islamic Finance in Russia: Recent Developments”IFN Islamic Finance News, Vol 12, Issue 34( Augustus 2015) http://www.islamicfinancenews.com/authors/grigory- marinichev-alexey-chertov(accessed 30 December 2015). 30Andrei Juravliov, “Introducing Islamic Finance to Russia: Assessing Viability and Impediments” 31Andrei Juravliov,” Islamic Finance in Russia: Status Quo and Outlook”, Sosial Science Research Network , (April 2013). https://www.academia.edu/11907272/ Islamic_Finance_in_Russia_Status_Quo_and_Outlook. (accessed 20 November 2015)
125 finance services. According to Ali Khasanov32, director of the department of internal affairs of the spiritual administration of Muslims of the Russian federation the main reason of small demand for Islamic financial services is associated with the high cost of the product. He stated that the payment for the same service is double higher than in conventional bank. As a result, even those Muslims who would use the services of an Islamic bank can not afford it. In the table below can be seen advantages and weak sides of Islamic Banking establishment in Russia.
32 Ali Khasanov- Interview was taken on 7th of August 2015.
126
Table 4.3 The Advantage and Weakness of Islamic Banking in Russia
Advantages Weak sides Islamic Banking can be a tool In Russia banks can not be to attract new sources of involved in trade activities foreign investment from therefore it is impossible to Islamic Countries. use one of most popular instruments of Islamic Banking murabaha A tool to attract inner sources The lack of specific of investment such as muslim legislation. Amendments population and immigrant should be done in the workers from Central Asia following laws: ‚On Banks and Banking activity‛, ‚On the Central Bank of Russian Federation (Bank of Russia)‛, ‚On the Securities Market‛, ‚The Civil Code of Russian Federation‛ and ‚Tax Code‛ It will help to muslim people are not sufficiently population to invest, take a informed about the tools and loan and keep money the specifics of Islamic according to Syariah rules banking Lack of the staff with good experience of working in Islamic Banking
Based on the history on developing Islamic bank in France, Kazakhstan, Luxemburg, and the UK, it proves that
127 basicly such restrictions can be easily remove. Any modification of the banking and tax laws and rules, needed to support a fledging Islamic operation, would constitute, in the opinion of the Central Bank and the Federal Tax Service, which mean as long as the political leadership remains disinterested in supporting,the Islamic financial alternative the situation wich allowed Islamic Bank to establish and develop will hardly change.33 On October 2015, Russian lawmakers have introduced to parliament a draft bill to support Islamic finance, aiming to attract capital inflows.The draft law, sent to parliament's lower house, the State Duma, proposes allowing banks to engage in trade activities, a concept central to many of the structures used in sharia-compliant financial products. While many other obstacles remain, the bill is seen a first step to spur development of a sector which has posted double-digit growth in several Gulf and Southeast Asian countries, but which has struggled to get off the ground in Russia.34 The sanctions, inflicted in retaliation for Russia's activities in Ukraine, helped to shrink the country's GDP by 4.2 percent. Sberbank has struggled considerably in 2014, with a 19 percent fall in profits.Naturally, this economic blow has prompted Russia to look to sources of capital outside.35 But
33 Baljeet Kaur Grewal, “Islamic Finance In The Global Financial System”, Islamic Finance In Europe, Occasional Paper Series No 146 (June 2013). 19-25. https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp146.pdf?50223aa58804d 7b4f32f4f302534672d 34 Daria S Solovieva, “Russia Sanctions Spur Bank Drive for Shariah Funding Role”, Bloomberg http://islamic-finance.ru/blog/2014-10- 20-260 (accessed 20 November 2015) 35http://www.islamicbankingmagazine.com/index.php/858/item/17 70-hope-and-faith-for-russia-to-form-financial-ties-with-the-islamic-world (accessed 20 December 2015)
128 regardless of the interest for flow of investment. Government doubts about the necessity of Islamic Bank in Russia, are voiced by politicians in the government of Russia. According to executive vice president of the Association of Russian Banks Elman Mehdiyev, Islamic banking operation will create a misunderstanding on the part of the population and the growth of the load on the deposit insurance system, he said. Because Islamic Banks is not possible without trading activity, which is practiced the separation of profits and risks.36 While the Ministry of Finance stated that the spread of Islamic banking in the Russian Federation is still in the discussion stage. Hence any planned or possible amendments in Russian legislation is premature. The further development of Islamic finance in Russia will very much depend on the decisions of the Central Bank of Russia and the government on whether or not to establish a regional pilot project on Islamic finance implementation in Tatarstan. Should the proposal succeed, we may finally see the establishment of a fully-fledged Islamic bank in Russia. Otherwise, it may take a few more years to reach this stage.37 Another problem related to Islamic Bank regulation is related to the significant differences in the Islamic traditions followed in the regions of the North Caucasus and Central Russia, it is likely that the understanding of Islamic banking rules will vary across regions. This differences will affects decisions made by individual banks in Tatarstan and
36Валерия Францева, Ольга Шестопал, “Исламский банкинг не уложился в российские законы”, Коммерсантъ №230 от (14.12.2015), стр. 8 http://www.kommersant.ru/doc/2876934(accessed 27 December 2015) 37Roustam Vakhitov, “Islamic finance in Russia: Ready, steady, go?” , IFN Islamic Finance News (Wednesday, 09 December 2015). http://www.islamic financenews.com/news/islamic-finance-russia-ready- steady-go (accessed 27 December 2015).
129
Chechnya, or Bashkiria and Dagestan. To standardize the rules applied in Islamic finance Government may have to choose to regulate the industry at the level of the Central Bank as opposed to allowing individual regions to handle decision making related to Sharia-compliant banking products.38 Another reason why Russia Government is still wary of Islamic finance is the industry’s perceived links to Saudi Arabia. Russia has been trying to limit Saudi influence in the Muslim regions of the North Caucasus and the Volga Federal District since the early 2000s. Some Russian security officials confirmed to this author that they believe the exposure of the Russian banking industry to Islamic finance would lead to an upsurge in covert Saudi influence in the country. This fear is also underpinned by the role that the Jeddah-based Islamic Development Bank (IDB) plays in the expansion of this industry. IDB is actively involved in the negotiations with the Russian Central Bank to introduce Islamic banking in the country and supports a proposal to transform Tatarstan into a regional hub of Islamic finance.39
C. Challenges for Islamic Banking and Finance in Russia Islam provides guidance for managing all aspects of life, including the political field.40 In Islam the highest
38Yuri Barmin, “Alternative Finance In A Time Of Crisis: How Russia Is Looking To Introduce Islamic Banking” , Russian International Affairs Council. http://russiancouncil.ru/en/inner/?id_4=6458#top-content (accessed 27 December 2015) 39 Jeyhun Huseynov, “Russia Keen To Limit Saudi Influence In Islamic Finance Role” (2015) http://cismarkets.com/en/2015/08/russia- keen-to-limit-saudi-influence-in-islamic-finance-push/ (accessed 5 December 2015) 40Although Muslim jurists debated political systems, the Qur’an itself did not specify a particular form of government. But it did identify a set of social and political values that are central to a Muslim polity. Three values are of particular importance: pursuing justice through social
130 authority is in the hands of Allah, which left men just as the sovereignty of that. Hence Government regulations that prevents a person or a group of people from performing their religious order forbidden. Islam considers the notion of the transcendent power, power in this sense should be accountable to the Creator. Humans do not arbitrarily to exercise power, because humans are the extension of the Creator of the earth.
QS. An-Nisa : 58-59 (Q.S 4: 58-59) ِ َّى ََّّللاَ دَأْ ُه ُس ُك ْن أ َ ْى تُ َؤ ُّدّا األ َهاًَا ِت ِلَٔ أَ ُْلَِِا َّ ِ َذا َح َك ْوتُ ْن بَ ْي َي الٌَّا ِض أَ ْى تَ َْ ُك ُوْا بِا ْل َع ْد ِل ِ َّى ََّّللاَ ًِ ِع َّوا دَ ِعظُ ُك ْن بِ َِ ِ َّى ََّّللاَ َكا َى َس ِوي ًعا بَ ِصي ًسا ُ ٢٥( دَا أَدَُِّا الَّ ِرد َي آ َهٌُْا أَ ِطي ُعْا ََّّللاَ َّأَ ِطي ُعْا ال َّس ُسْ َل َّأّلِي األ ْه ِس ِه ٌْ ُك ْن َِإِ ْى تٌََا َش َْتُ ْن ِي َش ْي ٍء َِ ُس ُّدٍُّ ِلَٔ ََّّللاِ َّال َّس ُسْ ِل ِ ْى ُك ٌْتُ ْن تُ ْؤ ِهٌُْ َى بِا ََّّللِ ْ َّا ْليَ ْْ ِم اآل ِخ ِس َذلِ َك َخ ْي س َّأَ ْح َس ُي تَأ ِّدال ٢٥
"Surely, Allah commands you to fulfil trust obligations towards fsthose entitled to them and that, when you judge between people, judge with fairness. Surely, good is what Allah exhorts you with. Surely, Allah is All-Hearing, All- Seeing. [58] O those who believe, obey Allah and obey the Messenger and those in authority among you. Then, if you quarrel about something, revert it back to Allah and the Messenger, if you believe in Allah and the Last Day. That is good, and the best at the end." cooperation and mutual assistance; establishing a non-autocratic, consultative method of governance; and institutionalizing mercy and compassion in social interactions. So, all else equal, Muslims today ought to endorse the form of government that is most effective in helping them promote these values. Khaled Abou El Fadl,” Islam and the Challenge of Democracy”Boston Review (April 2003), http://bostonreview.net/forum/khaled-abou-el-fadl-islam-and-challenge- democracy (accessed 11 January 2015)
131
The second verse is considered by scholars as the principle, the principle that raise fundamental Islamic teachings about power in the sense of responsibility towards their mandate and the power of Allah. This indicates that all aspects of human life has been governed by Allah through a constitution that is in the Qur'an. Mandate intended with regard to many things, one of which is equitable treatment. Demanded justice not only to the group, class, or Muslims alone, but includes the entire human being even all creatures. According to Al-Ghazali the religion and the ruler are two connected guarantors, the religion is the foundation and the ruler its guardian. If there is no religion, it is doomed and if there is no guardian for it, it will perish.41 The actualization of the values of Islam can be executed properly when the Muslims have the authority and power to create mashlahah. Islam views states as an instrument for the realization of the ultimate goals, both spiritual and material. However, the authority exercised by the state is not absolute. It is a trust from God and is to be exercised in accordance with the terms of the trust as laid down' in the Shari'ah. Two of the most important terms of this trust are that the state should. Be democratic and welfare- oriented.42 Quran verses above provides the foundation that the obligation for the government to provide for the rights of Muslims and people of other religions fair treatment. One is the development of policies that enable them to carry out activities that do not conflict with the teachings of Islam. It became the foundation of Islam is based on the government's
41 Ibn al-Muflih al-Hanbali, Adab al-Shar`iyya, vol.1, p.200. 42M. Umar Chapra, The Islamic Welfare State and its Role in the Economy, Islamic Foundation (Lancester: The Islamic Foundation,1979),1
132 obligation to provide a facility that allows Muslims carry out activities life in accordance with religious teachings, including economic activities. Many people believe that Islamic banks are for the Muslims, because its business activities are based on the principles of Islam. In other words, Islamic banks cater only to people who are Muslims only, while non Muslims can not. This view is wrong and needs to be clarified. Islamic banks are not related at all to religious rituals or worship of Islam.43 Islamic banks, in carrying out its activities, not limited only to people who are Muslims, but is also open to non-Muslims. Islamic banks can provide financing or services to non- Muslims. Islamic banking is growing rapidly around the world, not only in Islamic countries Great Britain at this time determined to be the center of Islamic banking and finance in the world.44 As well as Singapore, which was determined to be the center of Islamic finance in the world to loosen the rules concerning Islamic banking so that it can thrive.45 In Malaysia, almost 15 percent of customers of Islamic banks is
43Standard Chartered Saadiq, https://www.sc.com/pk/_documents/saadiq/Saadiq_Handbook.pdf (accessed 11 January 2015) 44Matthew C. Mitchell,Muhamad Iqbal Mohd Rafi, Sean Severe, Jeffrey A. Kappen , “Conventional Vs. Islamic Finance: The Impact Of Ramadan Upon Sharia-Compliant Markets”` Organizations And Markets In Emerging Economies , Vol. 5, No. 1(9) (2014). http://www.drake.edu/media/collegesschools/cbpa/intbiz/ Mitchell% 20 et %20al%20-%202014%20-%20OMEE%20 %20Conventional%20vs%20Islamic% 20 Finance.pdf (accessed 11 January 2015). 45Islamic Finance News, “Islamic Finance Asia” (2010) http://www.islamicfinancenews.com/authors/islamic-finance-asia (accessed 12 January 2016)
133 non-Muslim.46 This indicates clearly that Islamic banks are not only for people who are Muslims only. One of the few countries where Islamic banking cannot enter is Russia, despite the fact that there were, are, and will be attempts to gain a foothold in the multimillion Russian market.47 Since the idea of Islamic finance appeared in Russia in the 2000s, it has suffered significantly of being mistakenly associated with the issue of Islamic terrorism. The recent upsurge in Islamic State activity in the Middle East has negatively affected the image of the industry as well. Many Russians also fear a close link between Islamic finance and religious teachings, which would surely prevent predominantly Orthodox Christian Russians from using the services of these financial institutions.48
46Abdul Aziz Abdullah , Rokiah Sidek, Ahmad Azrin Adnan, “Perception of Non-Muslims Customers towards Islamic Banks in Malaysia” International Journal of Business and Social Science Vol. 3 No. 11 ( June 2012) http://ijbssnet.com/journals/Vol_3_No_11_June_2012/18.pdf (accessed 12 January 2016) 47 For example, at the international summit, “Economic Cooperation of Russia and the Countries of the Organization of Islamic Cooperation”, held in Tatarstan 2009, The Deputy Chairman of the Federation Council of the Federal Assembly of the Russian Federation, Ilyas Umakhanov, stated that Islamic banking is the most stable financial system and wish to hold a public debate on the prospects of cooperation in the field of direct investments and the joint development for recommendations on the functions of the financial system, given the specifics of the Islamic model. He consider this cooperation to be promising, and it is at the stage where it can become a truly large-scale cooperation. Anastasia Yakovleva, “The Ethics of Prosperity”, The Economic Journal (July - August 2012), http://world- economic.com/articles_wej-81.html (accessed 12 January 2016) 48Yuri Barmin, “Alternative Finance In A Time Of Crisis: How Russia Is Looking To Introduce Islamic Banking” , Russian International Affairs Council. http://russiancouncil.ru/en/inner/?id_4=6458#top-content (accessed 27 December 2015)
134
European Union imposed economic sanctions on following Russian conflict in Ukraine, has to be paid by Russia’s economy falling down. Falling oil prices, the depreciation of the ruble, and the downgrade of Russia’s debt to junk status by Moody’s and Standard and Poor’s (S&P). 49 Faced with economic downturn, Russia is forced to find new methods of gaining access to international capital, including the multi-trillion dollar world of Islamic Finance.50 The process to facilitate Islamic Finance moving remarkably fast. In the summer of 2014, Russian banks lobbied Moscow’s central bank to enable sharia-compliant financial institutions to enter the Russian market.51 In December, Russia's National Rating and the Islamic International Rating Agency entered an agreement to jointly rate sharia-compliant products. By March 2015, the State Duma Committee on Financial Markets was already hosting a meeting with the representatives of the embassies of Egypt and Iran, various banks and financial institutions, as well as national monetary authorities.52
49http://www.theguardian.com/world/2015/feb/21/russias-debt- downgraded-junk-moodys (accessed 12 January 2016)
50Anatoly Aksakov, the president of the Association of Regional Banks of Russia and a deputy in the Duma, stated that Russia is interested in attracting tens of billions of dollars from Malaysia and Indonesia, as well as the United Arab Emirates and otherArab states. http://rbth.com/business/2015/08/25/kremlin_moves_to_attract_islamic_fun ds_48697.html (accessed 12 January 2016) 51Islamic finance.com “Malaysia exports Islamic Finance Expertise to Drive Russian Islamic Finance Ambitions” https://www.islamicfinance.com/2015/04/ malaysia-exports-islamic- finance-expertise-drive-russian-islamic-finance-ambitions/(accessed 12 January 2016) 52Katarzyna Sidło, “Can Islamic money be a remedy for Russia's economic problems?” Russia Direct (Apr 8, 2015) http://www.russia-
135
In 2015, a wide range of forums on the development of Islamic banking took place in Russia. In April, the Lower Chamber of the Russian Parliament’s Committee on Financial Markets held a meeting discussed the major issues for the development of Islamic banking and Islamic finance in Russia which is the lack of the necessary legal framework. In April 2015, a working group to develop proposals to introduce relevant changes to Russian legislation was established.53 On the 7th October, the Central Bank of Russia, together with the representatives of State Duma, the Association of Russian Banks, the Association of Regional Banks of Russia and the largest players in the financial market of the Russian Federation, held expert hearings within the final stage of the feasibility study for the launching of Islamic banking in Tatarstan, as a pilot project for the launch of Islamic banking and finance in the Russian Federation. These studies will form the basis for amending the legislation for the development of Islamic banking in the country.54 The Central Bank appears to support the idea of introducing Islamic banking standards in a number of regions of the Russian Federation. If the government’s decision is positive, and the project develops well, the Central Bank will be ready to continue the dialogue on the draft law on Islamic banking, which had been previously submitted to the State Duma.55 On a more practical level, in early October 2015, the company LaRiba Finance, which provides services in the field direct.org/opinion/can-islamic-money-be-remedy-russias-economic- problems (accessed 12 January 2016) 53 http://muslimeco.ru/eng/onews/363/ (accessed 12 January 2016)
54Irina Magon and Roustam Vakhitov, “Islamic finance in Russia: Ready, steady, go?” http://www.islamicfinancenews.com/news/islamic- finance-russia-ready-steady-go (accessed 12 January 2016) 55http://muslimeco.ru/eng/opubl/90/ (accessed 12 January 2016)
136 of Islamic finance, signed a contract with the large retail network Eldorado. LaRiba will provide financial services to customers of Eldorado. This financial services is based on a Murabahah model. In addition to Eldorado, the company provides its services in another two big retail supermarkets in Makhachkala, the capital of Dagestan. In late October, the Government state that Dagestan can be a platform for testing banking products and services compliant with Shariah.56 a large Bahraini bank proposed to establish a joint Russian-Bahraini bank in Russia that will work with the principles of Islam. 57 Numerous obstacles stand in Russia’s way to becoming the regional hub for Islamic finance, though. Lack of appropriate legislation is the first one. As of right now, the federal law ‚On Banks and Banking Activities‛ prohibits banks from any kind of industrial and commercial activities. However, a number of Islamic financial instruments require that banks act as intermediaries between clients and private businesses, for example while buying real estate property or a car that would be later re-sold to a client within an ijara or murabaha scheme. What is more, double- or even triple- taxation might be incurred by some schemes. For example, murabaha the most popular sharia-compliant instrument, which involves more than one transfer of the underlying assets, might face multiple points of taxation. Another problem will come from the lack of one common set of international standards that all sharia- compliant financial institutions would follow. Islamic instruments are structured based on various interpretations of
56 http://en.news-4-u.ru/in-dagestan-may-receive-islamic- bank.html (accessed 12 January 2016) 57http://www.veb.ru/common/upload/files/veb/actions/20151021_1 / 20151021 prg_e.pdf (accessed 12 January 2016)
137
Islamic law, the choice of which is largely dependent on the institution’s home country. Russia like other countries interested to develop Islamic Bank in the world will also have to face this problem. The Bahrain-based Islamic International Rating Agency might not certify many Islamic Bank instruments, simply because they may be created in accordance to a different interpretation of sharia.58 The problem of variety of interpretations of Islamic Law will arise not only across countries but also within them. There are significant differences in the Islamic traditions followed in the regions of the North Caucasus and Central Russia, hence the understanding of Islamic banking rules will vary across regions, and It is likely to affect decisions made by individual banks in Tatarstan and Chechnya, or Bashkortostan and Dagestan. In order to standardize the rules applied in Islamic finance Moscow may have to choose to regulate the industry at the level of the Central Bank as opposed to allowing individual regions to handle decision making related to Sharia-compliant banking products.59 High level of corruption will also create it’s own problem. The principles of Islamic finance prohibit generating income through corrupt practices and fraudulent activity. Yet due to the Central Bank’s poor oversight over Russian commercial banks, the level of corruption in the country’s financial sector is noticeable.60 Islamic banks from countries
58Katarzyna Sidło, “Can Islamic money be a remedy for Russia's economic problems?” (Apr 8, 2015), http://www.russia- direct.org/opinion/can-islamic-money-be-remedy-russias-economic- problems (accessed 12 January 2016) 59 http://www.muslimeco.ru/eng/opubl/94/ (accessed 12 January 2016) 60Yuri Barmin, “Alternative Finance In A Time Of Crisis: How Russia Is Looking To Introduce Islamic Banking” , Russian International
138 with harsh legal punishments, such as Saudi Arabia, Qatar and Malaysia, will have to adjust the way their banks operate to meet the realities of the Russian financial system should they engage this market. The tense situation in the Middle East, cause relations between the recent allies changing dramatically. It affects not only diplomatic relations, but also economic situation of the countries involved in the conflict. Another reason why it is hard to establish Islamic Bank is Russia Government’s warriness of Islamic finance is the industry’s perceived links to Saudi Arabia. Russia has been trying to limit Saudi influence in the Muslim regions of the North Caucasus and the Volga Federal District since the early 2000s.61 Some Russian security officials confirmed to this author that they believe the exposure of the Russian banking industry to Islamic finance would lead to an upsurge in covert Saudi influence in the country.This fear is also underpinned by the role that the Jeddah-based Islamic Development Bank (IDB) plays in the expansion of this industry. IDB is actively involved in the negotiations with the Russian Central Bank to introduce Islamic banking in the country and supports a proposal to transform Tatarstan into a regional hub of Islamic finance. Aside from the positive statement and economic benefits from Islamic Bank for the country, the majority of Russian experts today do not see great potential in the development of Islamic bank. According to Roman Konigsberg the Deputy Director of the bank audit FBK,
Affairs Council. http://russiancouncil.ru/en/inner/?id_4=6458#top-content (accessed 27 December 2015) 61Sergey Markedonov, “The Rise of Radical and Nonofficial Islamic Groups in Russia’s Volga Region “, The Center for Strategic and International Studies (Washington, DC : Center for Strategic and International Studies , 2013) 1-8
139
Islamic financial products are not unique to Russian banks because Russian are familiar with ideas such as mutual funds, leasing, venture capital financing, and joint ventures. According to him, passive operations are more complex to implement in the Russian financial system. To abandon interest earnings, the operations of an Islamic bank are built mainly on the joint financing of projects or the transfer of the property under a finance lease. Rejecting any sort of speculation based on the uncertainties and ensuring the complete awareness of the bank on its projects reduces its financial risks, but increases the cost of banking services.62
The above information suggests that, in spite of the large Muslim population, in the foreseeable future Russia is unlikely to witness rapid and wide-scale development of Islamic financial services industry soon. Russia does not possess the necessary market and sufficient ethical motivation to aid development of Islamic financing as part of the overall banking system or as a distinct alternative system likely to appeal also to non-Muslims. Nor do the Russian authorities have any political or economic motivation or will to promote and encourage institutionalisation of alternative financial activities. Russian Muslims are slow to change their financial habits, while nonbelievers are plagued by a deep-rooted distrust of Islam as are, to some extent, the financial authorities, who are in no hurry to adapt economic legislation to facilitate Islamic banking, analysts said. The further development of Islamic finance in Russia will very much depend on the decisions of the Central Bank of Russia and the government on whether or not to establish a
62 Anastasia Yakovleva,” The Ethics of Prosperity” World Economic Journal, (July - August 2012) http://world- economic.com/articles_wej-81.html (accessed 12 January 2016)
140 regional pilot project on Islamic finance implementation in Tatarstan. Should the proposal succeed, we may finally see the establishment of a fully-fledged Islamic bank in Russia. Otherwise, it may take a few more years to reach this stage. Another major boost for the development of Islamic finance in Russia is the stronger cooperation and multiplication of Islamic businesses, which naturally require genuine Islamic finance. Therefore, the development of small and medium Islamic businesses in Russia may encourage the development of Islamic finance in Russia as well.
CHAPTER 5 CONCLUSION AND SUGGESTION
A. Conclusion Islam is the second most widely professed religion in Russia, and it is considered as one of Russia’s traditional religions and also a part of Russian historical heritage. After the felt of Soviet Union government removes restrictions on religion and freeing believers to embrace and implement the teachings of their religion. Whilst the followers of religions no longer need to concealed the perform of their religious rituals, muslims still have to face the lack of financial and banking services in accordance with Islamic teachings. Until the present time Russian Muslims have difficulties of getting access to Islamic Banking and have to use usury based financial system offered by conventional banking and financial institutions. No doubt the establishment of Islamic Banking in Russia is very important. This is due to several factors. First of all is current political situation, the sanctions against Russia from a number of countries forced to seek for internal resources and foreign investment. Such internal reserves can be Russian Muslim citizens and immigrant workers from the republics of Central Asia located in Russia. As a sources of foreign investment can be countries of the Middle East and Southeast Asia. For intensification of these two processes government should support the establishment of Islamic Banking. The idea of financial institutions operating on the basis of Islamic principles should resonate Russian Muslims and attract significant investments into the Russian economy and compensate the outflow of capital caused by sanctions.
141 142 Main factors that slowdown the establishment of Islamic Banking in Russia are following: 1) Lack of special legislation. Banks are banned from engaging in trading activities what makes impossible to use one of the most popular tools of Islamic Banking- murabaha. In addition, this kind of activity involves tax at each stage of the operation, once when bank buys goods and second when sells it to customer, which, of course, affect the cost of service for the customer and will not add competitive advantages for the bank. 2) Poor awareness of people about the tools and specificity of Islamic banking. Lack of public awareness and the traditional distrust of Russian consumers in financial institutions may be the factors that will hinder the development of Islamic banking in the early stages. In addition, due to the incompetent media, the word “Islamic” for the Russian people in the street causes negative perception. 3) Lack of experienced staff who worked in the field of Islamic Banking and Finance. Currently, there are no such experts. There are experts in the field of banking, but usually they do not know the Islamic principles, or there is Sharia experts, but they have never worked in the financial field. 4) Lack of standardization. At the moment, there are no common standards of financial reporting and the regulatory framework for Islamic financial institutions. As a result, in some countries they are working in accordance with AAOIFI standards (Accounting and Auditing Organization for Islamic Financial Institutions), while in others they use standards developed exclusively for this country, for example, in Iran. 5) Lack of IT - resources, adapted to work with Islamic financing instruments. Currently such programs not available Russia. Existing Islamic financial institutions are forced to alter existing software themselves, which often leads to computer malfunctions and technical errors in the work. 143 B. Suggestion For successful establishment of Islamic Banking in Russia should be done amendments on several legislation such as: On Banks and Banking Activities; On the Central Bank of the Russian Federation (Bank of Russia), On Securities Market, On Civil Code and On Tax Code. For example: in the Article 5 of the Federal Law 395-1 can be made amendments which is allow purchase and sale with single tax for Islamic financial institutions. Due to the poor awareness of Russian population about specifics of the Islamic banking, it is recommended to educate the Russian population through the publication of literature, online articles, various courses, video lectures, and other methods about Islamic Banking and the necessity of Islamic banks in the life of Muslims. One of the good solutions can be well planned and developed trainings for local imams. Lack of experienced staff can be solved by training those who worked in conventional banks. Some experts can be attracted from foreign countries. Concerning standardization and lack of IT resources this is issue can be solved by making or finding new partners and exchanging the experience.
This will help to open a full-fledged Islamic bank that will be able to compete with traditional banks. As seen from above Establishment of Islamic Banking is very big project. Russia has a good potential which with the right management can be used for successful development of islamic banking.
144
BIBILOGRAPHY
BOOK Ahmad, Abu Umar Faruq ., Developments in Islamic Banking Practice: The Experience of Bangladesh, Florida: Universal Publisher, 2010. Aldohni, Abdul Karim., The Emergence of Islamic Banking in the UK: A Comparative Study with Muslim Countries, New York: Routledge,2011. Aldohni, Abdul Karim., The Legal and Regulatory Aspects of Islamic Banking: A Comparative Look at the United Kingdom and Malaysia, New York:Routledge, 2011. Al-Najjar, Ahmad., ‚Islamic Banks: A Model and a Challenge‛ in Gauhar (ed.) The Challenge of Islam, London: Economic Council of Europe, 1978. Al Zuhayli, Sh. Wahba ‚The Juridical Meaning of Riba.‛ in Abdulkader Thomas (ed), Interest in Islamic Economics Understanding Riba,New York: Routledge,2006 Askari ,Hossein., Zamir Iqbal, Abbas Mirakhor, Globalization and Islamic Finance: Convergence, Prospects and Challenges, Singapore:John Wiley & Sons,2010. ------, Zamir Iqbal, Noureddine Krichene, and Abbas Mirakhor,‛Risk-sharing in Finance: The Islamic Finance Alternative‛ Reviewed by Abdul Azim Islahi, Singapore: John Wiley and Sons, 2012. Chapra, M.Umer., ‚Why has Islam prohibited interest? Rationale behind the prohibition of interest‛ in Abdulkader Thomas (ed). Interest in Islamic Economics Understanding Riba, New York: Routledge, 2006. Choudhury, M.A., Contributions to Islamic Economic Theory , London: Macmillan Press Ltd, 1986
145 146 DeLorenzo,Yusuf Talal, A Compendium of Legal Opinions on the Operation of Islamic Banks, London: Institute of Islamic Banking and Insurance,1997. Elfakhani, Said M. ., Imad J. Zbib and Zafar U. Ahmed , ‚Marketing of Islamic financial products‛ Handbook of Islamic banking, in M. Kabir Hassan and Mervyn K. Lewis (ed) , ‚Islamic banking: an introduction and overview‛ in Handbook of Islamic Banking, Massachusetts:Edward Elgar Publishing, Inc, 2011. Greuning, Hennie van., Zamir Iqba, Risk Analysis for Islamic Banks, Washington DC : The International Bank for Reconstruction and Development / The World Bank, 2008 Hassan, M. Kabir and Mervyn K. Lewis (ed) , ‚Islamic banking: an introduction and overview‛ in Handbook of Islamic Banking, Massachusetts:Edward Elgar Publishing, Inc, 2011. Haque, Z , Riba: The Moral Economyof Usury, Interest and Profit , Kuala Lumpur: S. Abdul Majeed & Co, 1995. Iqbal, Zamir and Abbas Mirakhor, An Introduction to Islamic Finance: Theory and Practice, Second Edition, Singapore: John Wiley & Sons, 2011. ------, and Philip Molyneux, Thirty Years of Islamic Banking History, Performance and Prospects, (New York: Palgrave Macmillan, 2005), 12 Karsten, Ingo .,Islam and Financial Intermediation, Washington D.C., IMF Staff Papers, 1982 Kayed, Rasem N. ., M. Kabir Hassan, Islamic Entrepreneurship, New York:Routledge, 2001. Nomani, Farhad., ‚The Dilema of Riba Free Banking in Islamic Public Policy‛ in Sohrab Behdad, Farhad Nomani (ed.) Islam and the Everyday World: Public Policy Dilemmas, New York: Routledge,2006.
147 ------and A. Rahnema, Islamic Economic Systems,London: Zed Books Ltd,1994 Patton, M.Q. ‚Quality in qulitative research:Methodological principles and recent developments‛, dalam Sharan B. Merriam, Qualitative Research , San Fransisco,John Wiley &Sons.2009. Qureshi, A.I., Islam and the Theory of Interest, Lahore: Sh. Muhammad Ashraf, 1970 Raharjo, Dawam ‚ The Question on Islamic Banking in Indonesia‛ in Mohamed Ariff (ed), Islamic banking in Southeast Asia ,Singapore: Institute of Sout East Asian Studies, 1992 Rahman ,Fazlur., Islam and Modernity: Transformation of an Intellectual Tradition Chicago: The University of Chicago Press, 1982. Saeed, Abdullah., Islamic Banking and Interest: A Study of Prohibition of Interest and its Contemporary Interpretation, Leiden: Koninklitje Brill, NV, 1996 Saleh, Nabil A., Unlawful Gain and Legitimate Profit in Islamic Law: Riba, Gharar and Islamic Banking,Cambridge: Cambridge University Press, 1986 Sunan Ibn Ma>jah , Abū ʻAbdillāh Muḥammad ibn Yazīd Ibn Mājah al-Rabʻī al-Qazwīnī, Sunan Ibn Ma>jah, Book of Inheritance, Vol. 4, #2727; translated by Nasiruddin al- Khattab, Riyadh: Mahtaba Dar-us-Salam, 2007. Siddiqi, Mohammad Nejatullah., ‚Riba, Bank Interest and the Rationale of its Prohibition‛ Visiting Scholars’ Research Series IDB-islamic Research and Training Institute, Jeddah: IDB, 2004 Solé , Juan ‚Introducing Islamic Banks into Conventional Banking Systems‛ IMF Working Paper WP/07/175, 2007.
148 Usman,Muhammad Taqi, An Introduction to Islamic Finance, Dordrecht:Kluwer Law International, 2002 Wilson, Rodney J. A. .,Banking and Finance in the Arab Middle East, Surrey:Macmillan, 1983. Van Greuning , Hennie and Zamir Iqbal, Risk Analysis for Islamic Banks, Washington, D.C.: The World Bank,2008.\
JOURNALS/ARTICLES
Adomanis ,Mark., ‚Is Russia Turning Muslim?.‛ Forbes 10/23/13 http://www.forbes.com/sites/markadomanis/2013/10/2 3/is-russia-turning-muslim/ Aldohni, Abdul Karim ‚The Emergence of Islamic Banking in the UK: A Comparative Study with Muslim Countries‛, Arab Law Quarterly, Vol. 22, No. 2 , 2008 Al-Salem, Fouad H. .,‚Islamic Financial Product Innovation‛ International Journal of Islamic and Middle Eastern Finance and Management, Vol. 2 No. 3, (2009) 187- 200 http://www.kantakji.com/media/7727/f120.pdf Afzal, Mohammad ‚Debate over Interest: Islamic Perspective ‛Journal of Economic and Social Research 7(1), 51-69, (undated) www.fatih.edu.tr/~jesr/ jesr. afzal .pdf Ahmad, Abu Umar Faruq .,‚Riba and Islamic Banking‛, Journal of Islamic Economics, Banking and Finance, 3(1), 2007. ------and M. Kabir Hassan , ‚The Time Value of Money Concept in Islamic Finance ‚ http://i- epistemology.net/economics-a-business/899-the-time- value-of-money-concept-in-islamic-finance.pdf Ahmad , Imran and Ghulam Shabbir, ‚Frequently Asked Questions (faqs) on Islamic Banking‛ Islamic Banking
149 Department State Bank of Pakistan, Karachi (t.t) http://www.sbp.org.pk/departments/ibd/faqs.pdf Ahmad, Abdel-Rahman Yousri, ‚Riba, Its Economic Rationale and Implications‛, The Institute of Islamic Bank and Insurance http://www.islamic- banking.com/iarticles_8.aspx Ahmad ,Ziauddin., ‚Islamic Banking: State of The Art‛ Islamic Economic Studies, Vol. 2 No. 1, 1994 Alasrag, Hussein., ‚Principals of the Islamic Finance.‛ MPRA Paper No. 56872 (June 2014),15 http://mpra.ub.uni- muenchen.de/56872/1/MPRA_paper_56872.pdf Al-Jarhi,Mabid Ali, ‚Islamic Finance: An Efficient and Equitable Option‛, World Faith Development Dialogue, Berkley Center for religion, Peace and World Affairs ,Oct. 2001. ------and Munawar Iqbal. "Islamic Banking: Answers to Some Frequently Asked Questions," Islamic Development Bank, Occasional Paper No. 4, 2001.http://irtipms.iskandertech.com/OpenSave.asp?pu b=92.pdf Barakat Islamika, ‚Murabaha transaction‛(t.t) http://www.barakat.kg/islamskie-modeli- finansirovanija/sdelka-murabaha.html Bashir, B. A., ‚Successful Development of Islamic Banks‛, Journal Res. Islamic Economics., Vol. 1, No. 2, 1404/1984. Bhat,Nasir Nabil., ‚The Western Economic Thought and its Response‛ International Journal of Science and Research (IJSR), Volume 4 Issue 3, March 2015. Bhat, Zameer Ahmad and Javed Iqbal,‛A Study of the Principles and Development of Islamic Finance‛ Abinav Journal Volume No.2, issue No.6 (June 2013), 96.
150 http://www.abhinavjournal.com/images/Commerce_&_ Management/ Jun13/12.pdf Bekkin, Renat ‚Islamic Finance in Former Soviet Union.‛ Discussion paper of the Institute of Developing Economies, Japan. March 2009. Berger , Allen N. and Christa H. S. Bouwman, Bank Liquidity Creation. Review of Financial Studies, Vol. 22. No.9.(2009), 3779-3837, also Sabri Mohammad, Liquidity Risk Management in Islamic Banks: A Survey, Afro Eurasian Studies, Vol. 1, Issues 2, Spring & Fall 2013. Chamie, Joseph and Barry Mirkin, ‚Russian Demographics: The Perfect Storm‛ YaleGlobal, (11 December 2014), http://yaleglobal.yale.edu/content/russian- demographics-perfect-storm. Chachi, Abdelkader., ‚Origin and Development of Commercial and Islamic Banking Operations‛, J.KAU: Islamic Econ., Vol. 18, No. 2, 2005 A.D/1426 A.H Chapra, M. Umer., ‚The Nature of Riba in Islam‛, Hamdard Islamicus, vol.7, issue: 1,1984 Choudhury, Salah Uddin Shoaib ‚Russia becoming a Muslim state!.‛, Asian Tribune, Vol. 12 No. 1128, (2006) http://www.asiantribune.com/index. php?q= node /211 Dusuki, A., and Abdullah, N. (2007). Why do Malaysian customers patronise Islamic banks? International Journal of Bank Marketing, 25(3), 2007. ------, ‚Challenges of Realizing Maqasid al-Shari’ah (Objectives of Shari’ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures‛ ISRA Research Paper, No.05 (2009). Elasrag, Hussein ‚Corporate Governance in Islamic Financial Institutions‛, MPRA Paper No. 56872, (June 2014) http://mpra.ub.uni-muenchen.de/56872/1/ MPRA _paper_56872.pdf.
151 El Gamal, M.A. A Basic Guide to Contemporary Islamic Banking and Finance Islamic Society of North America, Plainfield, IN, 2000, http://www.ruf.rice.edu/~elgamal/files / primer.pdf El-Hawary, Dahlia., Wafik Grais, and Zamir Iqbal, ‚Regulating Islamic Financial Institutions: The Nature of the Regulated,‛ World Bank Working Paper No. 3227, Washington: The World Bank,2004. Elnaggar, Hanan Ibrahim ‚Developing Dual-Banking System Regulations in Egypt‛, 2011. http://www.regulacao.gov.br/publicacoes/artigos/devel oping-dual-banking-system-regulations-in-egypt. Errico, Luca and Mitra Farahbaksh, Islamic Banking: Issues in Prudential Regulations and Supervision (March 1998). IMF Working Paper, WP/98/30, 1-32, 1998. http://www.imf.org/external/pubs/ft/wp/wp9830.pdf Farooq, Mohammad Omar ‚The Debate on Riba and Interest in Twentieth Century Jurisprudence‛ Courtesy: Islamic Law and Finance , Graham & Trotman, 1988 Fazlan, S. and A. Mohammad, ‘The efficiency of Islamic Banks: Empirical Evidence from the MENA and Asian Countries Islamic Banking Sectors’, paper presented at the Fifth International Islamic Finance Conference, 3- 4th September, Kuala Lumpur, 2007. http://www.macrothink.org/journal /index.php/ jpag/article/ download/ 6677/_56. Grewal, Baljeet Kaur ‚A Comparison of Islamic and Conventional Finance‚, in Islamic Finance in Europe, Occasional Paper series no 146, June 2013 Grim, Brian J. and Mehtab S. Karim, ‚The Future of the Global Muslim Population.‛ Report Pew Research Center’s Forum on Religion & Public Life (January 2011), 128 http://www.euro- muslims.eu/future_global.pdf
152 Hanif, Muhammad ‚Differences and Similarities in Islamic and Conventional Banking.‛ International Journal of Business and Social Science Vol. 2 No. 2, February 2011. Haque, Ziaul "The Nature and Significance of the Medieval and Modern Interpretations of Riba" The Pakistan Development Review Winter, 32:4, Part II, 1993. Hassan , M. Kabir,‛Stability of Money Demand Under Interest FreeVersus Interest-Based Banking System‛ Humanomics, Vol. 14 Iss: 4, (1989), 166 – 185. Hossain, Tareq bin., Rafikul Islam, ‚A Survey of Operations Management Practices in Islamic Banks of Bangladesh‛, paper In: 9th Asian Academy of Management International Conference 2011 (AAMC2011) , 14-16 October, 2011, Park Royal Hotel, Pulau Pinang. http://irep.iium.edu.my/15602/1/AAM_2011.pdf International Monetary Fund (IMF), ‚IMF Facilitates Establishment Of Islamic Financial Services Board‛, News Brief No. 02/41(May 1, 2002), https://www.imf.org/ external/ np/sec/nb/2002/nb0241.htm Interfax, ‚20Mln Muslims in Russia and mass conversion of ethnic Russians are myths‛ (10 April 2007), http://www.interfax- religion.com/?act=news&div=2869 Iqbal, Zamir., ‚Islamic Financial Systems.‛ Finance & Development, June 1997 https://www.imf.org/external/pubs/ft/fandd/1997/06/pd f/iqbal.pdf. Islam Today, ‚Principles of operation of Islamic Banks: the Principle of Ijarah‛(19 Oktober 2012) http://islam- today.ru/ekonomika/prin cipy_raboty_ islamskix_ bankov_ princip_idzhara/
153 La Bella, Simone and Vladimir Malyaev, ‚Development of Technologies of Application of Islamic Financial Product in The Russian Federations‛ FORMENTE, Anno IX, N.1-2 (2014), 204. http://www. bccpompianofranciacorta.it/DocDownload.asp?DocId= 1305 Karim, Adiwarman. A., and A.Z.Affif,, ‛Islamic banking consumer behavior in Indonesia: A qualitative approach‛. Paper presented at the 7th International Conference on Islamic Economics, 1-3 April 2008, King Abdul Aziz University, Jeddah, Saudi Arabia, 2006. Khan, Iqbal., ‚Managing Director Head of Global Islamic Finance‛, Issues and Relevance of Islamic finance in Britain , HSBC Amanah Finance, UK http://www.islamic-banking.com/iarticle_3.aspx. Khan, Mohsin S. and Abbas Mirakhor, ‚Monetary Management in an Islamic Economy‛ , J. KAU: Islamic Econ., Vol. 6, 1414 A.H./1994 A.D. Khalil, Emad H. and Abdulkader Thomas, ‚The modern debate over riba in Egypt‛ in Abdulkader Thomas (ed) Interest in Islamic Economics Understanding Riba (New York:Routledge,2006. Maali , Bassam and Christopher Napier ‚Accounting, Religion and Organisational Culture: the Creation of Jordan Islamic Bank‛ paper Accounting, Business and Financial History Conference, Cardiff, 2004. Marimuthu, C. W. Jing, L.P. Gie, L.P. Mun, T.Y.Ping. Islamic Banking: Selection criteria and implications. Global Journal of Human & Social Science, 10(4), 2010. Malik, Maas Miyas., ‚The Potentials and Challange of Introducing Islamic Finance Services in non Muslim Countries (CIS, China, African and Australian)‛, INCEIF July 10,2010.
154 http://www.assaif.org/content/download/33129/174190 /file/ IF%20in%20Non-Muslim%20countries.pdf Manzoor , Muhammad Mazhar, Muhammad Aqeel and Abdul Sattar, ‚Factors Paving the Way towards Islamic Banking in Pakistan‛ World Academy of Science, Engineering and Technology Vol:4,2010. Mayer,A,E. ‚Islamic Banking and Credit Policies in the Sadat Era: The Social Origin of Islamic Banking in Egypt.‛ Arab Law Quarterly, Vol. 1-1,November 1985. Mejía, Alejandro López., Suliman Aljabrin, Rachid Awad, Mohamed Norat, and Inwon Song. Regulation and Supervision of Islamic Banks, IMF Working Paper P/14/219, 2014 Moisseron, Jean-Yves., Bruno-Laurent Moschetto, Frédéric Teulon, ‚Islamic Finance: a Review of the Literature‛ IPAG Business School Working Paper 2014-093, 2014.http://www.ipag.fr/wpcontent/uploads/recherche/ WP/ IPAG_WP_ 2014 _ 093. pdf Nefedov, Mikhail ‚On The Islamic Banking ‚ Almanac of Modern Science and Education, № 4 -71, 2013 http://scjournal.ru/articles/issn_1993- 5552_2013_4_37.pdf. Nomani, Farhad., ‚The Problem of Interest and Islamic Banking in a comparative perspective: the case of Egypt, Iran and Pakistan‛ Review of Middle East Economics and Finance, volume.1 No.1, 2004 Otiti, Saidat Adeola, ‚Islamic Banking– Interest-Free Banking‛, Moslem Public Affairs Centre, 17 August 2011. http://www.mpac-ng.org/archived-article/635- islamic-banking-interest-free-banking.pdf ------, ‚Evolution of Islamic Banking & Finance‛ Muslim Public Affairs Center (MPAC), http://www.mpac- ng.org/archived-article/636-evolution-of-islamic- banking-a-finance.html
155 Pravda.ru, ‚Islam to become Russia’s predominant religion by 2050?‛ http://english.pravda.ru/history/21-07- 2008/105837-russiaislam-0/ Razi ,Mohammad., ‚Riba in Islam‛ paper Fiqh of Contemporary Issues, Toronto (May 2008 http://www.kantakji.com/media/3012/p205.pdf Sadoveanu , Diana,‛Islamic Banking in European Union Countries: Challenges and Opportunitie CES Working Papers,, III,4, 2011. http://ceswp.uaic.ro/articles/CESWP2011_III4_SAD.p df Schoon,N., ‚Islamic Finance- a History‛ Financial Services Review, August 2008. http://www.assaif.org/content/download/ 5961/34413/file/Islamic %20Finance %20History.pdf Sekreter , Ahmet, et al. ‚Parallelism between Interest Rate and Profit Rate: Comparison of Islamic Banking and Conventional Banking‛ Journal of Business, 1(2):15- 24, 2012 Siddiqui,Shamim Ahmad, ‚Establishing the Need and Suggesting a Strategy to Develop ‚Profit and Loss Sharing Islamic Banking‛ (PALSIB) Journal of Islamic Economics, Banking and Finance, Vol. 6.2010, 4, 2010 Sulimina, Anna., ‚Russia looking at banking the Islamic way‛ Kompass, 08 Sep 2010 http://www.telegraph.co.uk/sponsored/rbth/business/79 89199/Russia-looking-at-banking-the-Islamic- way.html Solé, Juan .,‚Introducing Islamic Banks into Conventional Banking Systems‚IMF Working Paper WP/07/175, (2007), 7-13. Thambiah ,Seethaletchumy, Uchenna Cyril Eze, Khong Sin Tan, Robert Jeyakumar Nathan, and Kim Piew Lai, ‚Conceptual Framework for the Adoption of Islamic
156 Retail Banking Services in Malaysia‛ Journal of Electronic Banking Systems, Volume 2010 http://www.ibimapublishing.com/ journals/JEBS/2010 /750059 /750059.html. Twigg, Judyth ‚Differential Demographics Russia’s Muslim and Slavic Populations ‚PONARS Policy Memo No. 388 , 2005 http://www.gwu.edu/~ ieresgwu/ assets/docs/ponars/pm_0388.pdf Usmani, Muhammad Taqi ‚Mudaraba one of the forms of investment in Islam‛, Islam.ru , 9 Oktober 2013. http://www.islam.ru/content/economica/mudaraba- odna-iz-form-investirovaniya-islam ------‚Mudaraba one of the forms of investment in Islam‛, Islam.ru 9 Oktober 2013 http://www.islam.ru/content/economica/mudaraba- odna-iz-form-investirovaniya-islam, Venardos, Angelo M., Islamic Banking and Finance in South- east Asia : Its Development and Future, Singapore: World Scientific Publishing,2005. Warde, Ibrahim., ‚Islamic finance‛ Le Monde Diplomatique, http://mondediplo.com /2001/09/09islamicbanking, Wilson, Rodney, ‚The Determinants of Islamic Financial Development and the Constraints on its Growth‛, IFSB 4th Public Lecture on Financial Policy and Stability , Amman, Jordan, 2011 Zeineb, Ghada Ben & Sami Mensi, ‚Does the PLS Paradigm Spur the Islamic Banks Vs Conventional Banks Soundness: Case of the Global Financial Crisis‛ Journal of Economics and Development Studies, Vol. 2, No. 3, September 2014. Zhuravskiy, Alexey ‚Islam in Contemporary Russia, Islam in Russia‛, Center for Research into post-Comunist Economies (CRCE) Autumn Colloquium (2010)
157 http://www.crce.org.uk/publications/demographics/part 6.pdf Zhuravlev, A.Iu. ‚Printsipy funktsionirovania islamskikh bankov‛, in: Islamskie finansy v sovremennom mire: ekonomicheskie i pravovye aspekty, ed. by R.I. Bekkin, Moskva: UMMA, 2004. http://www.globalislamicfinancemagazine.com/?com=news_li st&nid=1021 http://iamal.ru/ http://www.perepis2002.ru/index.html?id=11 http://www.lariba.ru/ http://www.masraf.ru/ http://repository.berkleycenter.georgetown.edu/20011010isla micfinance.pdf@ http://www.financialislam.com/murabahah.html. http://www.islamicbanker.com/education/shirkat-ul-milk-and- shirkat-ul-aqd www.albalagh.net/Islamic_economics/riba_judgement html, (accessed March 18, 2014).
158
GLOSSARY Avars native ethnic group, the most predominant of several ethnic groups living in the Russian republic of Dagestan. The Avars reside in a region known as the North Caucasus between the Black and Caspian Seas. Azeris (or Azerbaijanis) ethnic group living mainly in the Iranian Azerbaijan and the independent Republic of Azerbaijan. They are the second most numerous ethnic group among the Turkic peoples after the Anatolian Turks. CIS abbreviation for Commonwealth of Independent States an alliance of former Soviet republics formed in December 1991, including: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. Dagestan federal subject (a republic) of Russia, located in the North Caucasus region. Its capital and largest city is Makhachkala, located at the center of Dagestan on the Caspian Sea.
159 160 GDP abbreviation of gross domestic product a monetary measure of the value of all final goods and services produced in a period (quarterly or yearly). GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons Kabardinians (or Kabardins) ethnic group living mainly in northern Caucasus more commonly known by the plural term Kabardin. Kabardino-Balkaria federal subject of Russia (a republic) located in the North Caucasus. Karavhaevo-Cherkessia republic of Russia located in the North Caucasus area of southern European Russia. Kazan the capital and largest city of the Republic of Tatarstan, Russia Kemerovo industrial city and the administrative center of Kemerovo Oblast, Russia, located at the confluence of the Iskitim and Tom Rivers, in the major coal mining region of the Kuznetsk Basin.
161 Mudarabah form of business contract in which one party brings capital and the other personal effort. The proportionate share in profit is determined by mutual agreement. But the loss, if any, is borne only by the owner of the capital, in which case the entrepreneur gets nothing for his labour. Musharakah financing technique adopted by Islamic banks. It is an agreement under which the Islamic bank provides funds which are mingled with the funds of the business enterprise and others. All providers of capital are entitled to participate in the management but not necessarily required to do so. The profit is distributed among the partners in predetermined ratios, while the loss is borne by each partner in proportion to his contribution North Caucasus northern part of the Caucasus region between the Black Sea and the Caspian Sea and within European Russia. Riba unjustified increment in borrowing or lending money, paid in kind or in money above the amount of loan, as a
162 condition imposed by the lender or voluntarily by the borrower. Rosstat Russian Federal State Statistics Service Russian Council of Muftis religious group representing the Muslim community of Russia. It was founded on 2 July 1996.[1] The Chairman of the Council is the spiritual leader of the Muslims of Russia Takaful insurance concept in Shariah whereby a group of participants mutually agree among themselves to guarantee each other against a defined loss or damage that may inflict upon any of them by contributing as tabarru' or donation in the takaful funds. It emphasizes unity and co- operation among participants.
INDEKS
A Badr Forte Bank, 14 BaFin, 61, 62 Abdullah, 29, 32, 35, 46, 67, Balkarians, 74, 75, 78 68, 145 Bashir, 34 Abdullah, Abidin and Sidek, Bashkir, 66, 80 35 Bashkiria, 141 accounts, 1, 40, 85, 86, 105, Bashkirs, 8, 71, 74, 77, 81 106 Bashkortostan, 8, 9, 71, 72, Adygeya, 72 76, 81, 150 Agha, 5 Bekkin, 14, 24, 118 Aguls, 71, 75, 78 Bhat, 28 Ainley, 53 Black Sea, 8 Alawode, 40, 41 Aldakhni, 42 C Aldhoni, 30 Aldohni, 28, 30, 48, 55 Camille Paldi, 59 Algeria, 57, 59 Caspian Sea, 8 Al-Ghazali, 144 Chechen, 66, 81 Al-Jarhi, 22 Chechen Wars, 81 Amal, 16 Chechens, 8, 71, 77 Andrei Juravliov, 19, 121, 137 Chechnya, 8, 9, 67, 71, 81, 82, Andrei Kozlov, 15 141, 150 assets, 4, 9, 36, 38, 39, 43, 45, Christian, 54, 59, 146 58, 98, 104, 122, 125, 126, Christine Lagarde, 57 131, 134, 136, 150 Chuvash, 66 Avars, 8, 71, 75, 77 Cirkassians, 74 Azerbaijani, 74, 77 CIS region, 17 Azeris, 8 Communist, 72, 77, 79 Aziz, 30, 32, 35, 145 consumers, 5, 36, 87, 90, 92, 120, 126, 156 B consumption, 3, 97, 100, 101, 102, 103, 123, 126 Baaraka Group, 29
163 164 conventional banking, 1, 43, 46, 48, 64, 81, 89, 91, 93, 50, 55, 64, 118, 155 94, 95, 97, 99, 100, 103, conventional Banking, 33, 35 104, 105, 107, 108, 109, crisis, 37, 51, 76, 90, 93, 94, 112, 113, 114, 117, 122, 95, 99, 100, 103, 104, 105, 130, 131, 140, 144, 146, 107, 109, 113, 123, 126, 147, 150, 151, 152, 153 131 economic turmoils, 107 Egypt, 4, 22, 29, 33, 147 D Eldar Yakhin, 117, 118 El-Naggar, 22 Dagestan, 8, 9, 16, 17, 67, 71, equity, 3, 46, 59, 111, 137 74, 75, 141, 149, 150 Ercanbrack, 55 Dar Al-Maal Al-Islami ethical financial product, 46 (DMI), 29 Ethical Standards, 117 Darghinians, 8 Ethnic, 32, 65, 77 Dargins, 71, 75, 77 ethnic groups, 10, 65, 71, 74, Dawam Rahardjo, 22 75 debt, 3, 6, 39, 50, 62, 88, 92, ethnics groups, 71 101, 108, 110, 111, 147 euro, 11, 61, 62 demand, 18, 24, 36, 38, 45, Euronext, 58 50, 58, 62, 63, 86, 93, 96, Europe, 7, 10, 11, 20, 47, 48, 100, 101, 108, 109, 112, 49, 50, 51, 53, 56, 58, 60, 113, 116, 118, 125, 133, 62, 63, 64, 68, 72, 77, 81, 137 94, 99, 116, 139 Demand, 45, 84, 86, 87, 116 Eurozone, 59 Denmark, 43, 49 extremism, 81, 82, 83 Dmitriy Medvedev, 94 extremists, 82 Dollar, 126 double taxation regime, 55 F Dubai Islamic Bank, 4, 29 Dudley, 47 Faisal Islamic Bank, 29 Dusuki and Abdullah, 32, 34 Fazlan & Mohammad, 31 fertility, 10, 12, 13, 23, 69 E financial crisis, 15, 41, 49, 50, 89, 93, 104 economic, 2, 3, 7, 17, 19, 20, Financial intermediation, 2 21, 26, 28, 30, 31, 39, 41,
165 financial literacy, 18, 86, 87, I 88, 89, 90, 91, 92, 113 France, 11, 48, 51, 56, 57, 58, Idris, 21 59, 62, 139 Ilyas Zaripov, 21 fundamentalism, 80, 82, 83 Imaeva, 86, 87 Furqany, 40 Imam Abubakr Al Jassas, 1 IMF, 38, 41, 49, 97, 101, 102, G 105, 110 Gaynutdin, 68 Indonesia, 22, 32, 34, 147 GDP, 93, 95, 96, 97, 98, 99, informal Islamic groups, 82 101, 102, 104, 108, 127, Ingushetia, 8, 9, 67, 71, 84 128, 129, 140 interest, 1, 2, 3, 4, 5, 15, 17, GDP growth, 93, 96, 99, 101, 24, 26, 28, 31, 35, 37, 38, 104 46, 49, 50, 55, 61, 86, 94, Germany, 11, 20, 48, 51, 59, 97, 105, 108, 123, 125, 131, 60, 61, 62, 63 132, 135, 136, 140, 152 Gordon Hahn, 82 investments, 17, 35, 37, 44, government regulatory, 54 100, 101, 135, 136, 146, Grewa, 51 156 Grewal, 51, 56, 63, 139 Islam teaching, 70 Gulf States, 29 Islamic banking, 4, 5, 18, 19, 21, 22, 24, 26, 27, 28, 30, H 31, 32, 33, 34, 35, 36, 37, 39, 42, 47, 48, 49, 50, 51, halal, 1, 49, 120, 122 52, 53, 55, 116, 117, 122, Haron, 32 130, 131, 133, 138, 140, Hasan, 34 141, 142, 145, 146, 148, Hegazy, 33 150, 152, 153, 156, 157 Henry Kissinger, 68 Islamic banks, 1, 5, 18, 20, home financing, 58 22, 26, 27, 28, 31, 35, 36, households, 28, 87, 88, 101, 39, 41, 43, 44, 47, 50, 51, 103, 106, 107, 113, 114, 53, 131, 144, 145, 151, 157 121, 123 Islamic Development Bank, 4, Husain, 51 142, 152 Islamic Economics, 1, 3, 16, 32, 34, 39, 130
166 Islamic finance, 4, 5, 7, 15, Kemerovo, 14 21, 24, 27, 29, 36, 37, 39, Keynesian, 123, 124, 125, 126 40, 41, 42, 43, 45, 47, 48, Khattak and Rehman, 33 50, 51, 52, 53, 54, 56, 57, Kirkpatrick, 31 58, 59, 61, 62, 63, 64, 116, Klapper, 89, 90, 92, 93 117, 121, 122, 131, 132, Kumyks, 71, 75, 78 133, 134, 135, 136, 137, Kuveyt Turk Participation 139, 140, 141, 145, 146, Bank, 62 147, 148, 149, 150, 151, Kuwait Finance Department, 153 29 Islamic Financial House, 16 Islamic financial services, 24, L 40, 56, 117, 137, 153 Islamic welfare societies, 27 La Bella and Malyaev, 24 Islamism, 80, 83 labor costs, 112 Izhevsk, 16 Laks, 71, 75, 78 LaRiba-Finance, 16 J legislative acts, 84 Leonid Sukiyainen, 24 Jewish, 59 Lezghins, 71, 75, 78 Jews, 2 liquidity, 45, 46, 51, 53, 59 loans, 2, 4, 85, 87, 92, 93, 96, K 100, 107, 108 Loghod, 43 Kabardians, 8 Luxembourg, 49 Kabardinians, 74, 75, 77 Kabardino-Balkaria, 9, 67, 71, M 72, 75 Karachaevo-Cherkessia, 74, macro economic, 2 75, 84 macro-economic, 26, 64, 116 Karachai, 9, 74, 75, 78 Madina Kalimullina, 19 Karachai-Cherkessia, 9 Malaysia, 21, 22, 23, 29, 30, Kareem and Afiff, 32 32, 34, 35, 36, 40, 41, 43, Karim and Afiff, 33 47, 55, 145, 147, 151 Kazakhs, 8, 74, 77 Manzoor, Aqeel and Sattar, Kazakhstan, 13, 139 21 Kazan, 15, 16, 80 Marimuthu, 32, 33, 34
167 market, 5, 16, 30, 35, 40, 43, 45, 46, 47, 48, 52, 54, 57, Napier, 21 59, 61, 62, 63, 88, 92, 97, Naser, 33 99, 107, 117, 120, 122, 125, neo-revivalist, 29 134, 135, 146, 147, 148, Nigeria, 29, 47 151, 153 Nizhnekamsk, 16 Martin, 41, 42 Nogai, 71, 75, 78 Martin Čihák & Hesse, 42 Non traditional, 83 Mau, 102 non-Muslim, 10, 32, 35, 36, mazhab, 77, 83 37, 43, 46, 47, 48, 49, 69, Metawa and Almossawi, 31 145, 153 Middle East, 29, 36, 42, 44, North Africa, 48, 59 48, 52, 53, 56, 66, 122, 146, North Caucasus, 80, 81, 82, 151, 155 132, 141, 150, 151 Mikhail Delyagin, 81 North Ossetia, 8, 67 Mit Ghamr, 4, 22, 29 Northern Ireland, 53 money, 1, 7, 16, 17, 24, 42, Notten, 107, 108 58, 60, 103, 105, 107, 113, 123, 126, 130, 131, 138, O 147, 150 Morocco, 57, 59 obstacle, 18, 24, 65, 114, 130, mortgage, 5, 6, 15, 55, 61, 132, 134 108 oil wealth, 29, 46 Moscow, 15, 16, 65, 66, 67, Oliker, 69 68, 79, 82, 83, 85, 86, 87, Oman, 47 101, 106, 122, 125, 147, Othmen and Owen, 32 150 Moslem, 2, 27, 37, 122 P mosque, 7, 118 Murtazin, 76 Pakistan, 1, 6, 21, 29, 33, 34, Musharakah, 5 39 Muslim population, 9, 10, 12, Paolo Curiel and Ibrahim 14, 45, 46, 47, 49, 51, 53, Mardam-Bey, 44 54, 56, 59, 63, 65, 66, 74, Paris EUROPLACE, 57 116, 118, 120, 153 politics, 22, 26, 64 population, 7, 9, 10, 11, 12, N 18, 34, 53, 59, 60, 65, 67,
168 68, 69, 70, 71, 72, 74, 84, 125, 126, 127, 131, 132, 85, 87, 88, 92, 100, 103, 133, 134, 136, 137, 138, 108, 112, 113, 116, 117, 139, 140, 141, 142, 146, 120, 122, 123, 138, 140, 147, 148, 149, 150, 151, 157 153, 155, 156, 157, 158 populations, 9, 69, 123, 130 Russian cross, 67 psychological attachment, 31 Russian Empire, 80 Russian Ethnics, 67 R Russian Federation, 10, 25, 65, 66, 71, 75, 79, 85, 86, radicalism, 81, 83 87, 88, 91, 96, 97, 101, 102, recession, 93, 97, 101, 113, 105, 127, 133, 138, 140, 125, 126 146, 148, 157 Regulatory, 38, 45, 55, 58 Russian Forte Bank, 14 Religion, 11, 12, 21, 30, 31, Russian Muftiy Council, 121 33, 120 Rutuls, 71, 75, 78 religious reasons, 32, 40 Renat Bekkin, 14, 19, 118 S Riba, 1, 3, 27, 136 risk, 31, 35, 37, 39, 41, 45, 88, Salafism, 80, 83 105, 108, 126, 131, 135 sanctions, 94, 95, 98, 99, 100, Rodney Willson, 21 101, 113, 133, 140, 146, Roman Konigsberg, 152 155 Roman Silantyev, 7 Sarwer, Ramzan and Ahmad, Rosstat, 118, 120 39 rubles, 105, 106, 122 saving behaviour, 116, 123 Russia, 7, 8, 9, 10, 11, 12, 13, savings, 4, 40, 61, 88, 103, 14, 15, 17, 18, 19, 20, 21, 104, 105, 106, 107, 113, 24, 25, 26, 64, 65, 66, 68, 124, 125, 126 69, 70, 71, 72, 75, 76, 77, Saxony-Anhalt, 62 79, 80, 81, 82, 83, 84, 85, Sberbank, 124, 140 86, 87, 88, 90, 91, 92, 93, Shari‘ah, 4 94, 95, 96, 97, 98, 99, 100, Sharia compliance, 14 101, 102, 103, 104, 105, Sharia law, 118 107, 108, 109, 110, 112, sharia-compliant, 44, 46, 139, 113, 114, 116, 117, 118, 147, 149, 150 120, 121, 122, 123, 124, Shvetsov, 133
169 Siddiqi, 38, 39 U Singapore, 22, 36, 38, 145 social networks, 107 Ukrainian, 66, 125 Solé, 37, 38 ummah, 70, 71, 80 Soviet Union, 7, 14, 24, 26, underdeveloped, 57, 102 64, 65, 80, 83, 118, 155 United Kingdom, 7, 10, 11, Standard and Poor, 45, 147 20, 36, 47, 48, 51, 52, 53, State Duma, 133, 139, 147, 54, 55, 64, 131 148, 149 United States, 36, 94, 96, 99 sukuk, 36, 55, 58, 62 Usury, 117 Sukuk-al-ijara, 133 Surah Al-'Imra>n, 2 V Surah Al-Ru>m, 2 Surah An-Nisa, 2 Vali Ahmet Sadur, 71 Vladimir Putin, 66, 98 T Volga-Urals, 71
Tabasarans, 71, 75, 78 W Tabash and Dhankar, 39 takaful, 27 Wahhabis, 84 Tatar Islam, 80 Wahhabism, 80, 81, 83 Tatars, 8, 65, 71, 74, 75, 77, Washington Post, 68 80, 81 welfare-oriented, 144 Tatarstan, 8, 10, 67, 68, 71, Western banking, 35, 37, 131 77, 79, 81, 132, 140, 141, Wilson, 22, 53 142, 146, 148, 150, 152, World Bank, 37, 40, 41, 85, 153 86, 87, 88, 89, 90, 91, 94, terrorist, 83 95, 96, 97, 114, 124, 127 traditional Islam, 77, 83 Tsakhurs, 71, 75, 78 Y Tunisia, 57, 59 Turkey, 47, 60, 63, 102 Yudayeva, 88
Z
zakah, 2, 24, 118
170