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ISLAMIC BANKING: pro et contra
The issues of Islamic banking integration in a business turnover of other countries, including Russia, are discussed not only at major public events but also in a blogosphere. Here are the views on this point of participants of a frank and occasionally critical internet-discussion, reasoned by the request of the organizers of the forthcoming International exposition «Moscow Halal Expo – 2015» to mass media with a proposal to become a media sponsor of the planned activities. Marina Nesterenko, First Deputy Editor-in-chief of “Banking” magazine, Jan Art, Editor-in-chief of information portal Bankir.ru, Madina Kalimullina, Head of Economic Department of Russia Muftis Council, Jamshid Muslimov, The Director of Consulting of the company «EFIX GROUP» and other participants took part in the discussion.
Jan Art: “Esteemed colleagues! We will refrain from the information support of event that promotes Islamic values in the field of finance and business organization in Moscow. Thank you for your understanding”.
Marina Nesterenko: “Dear Jan! What a pity that such a landmark electronic resource will not be among other information sponsors of the exhibition. I see nothing wrong in the fact that Islamic banking will become one of the areas of banking”.
Jan Art: Marina, did I condemn your choice? I wrote that the event is interesting, it has curious topic. Nevertheless, I am not willing to be supportive personally, as far as "too biased"; I am an adherent of the Christian model. In addition, practical application of the Islamic banking model in Ufa shows, in my opinion, that unfortunately it is more profanity than reality yet”.
Mikhail Ermakov: "There are various ranked advisers who have their ears very close to the ground of this feeble, in a practical sense, theme. Despite this fact, they will not come on the formal event”.
Maryna Nesterenko: "On the contrary CBR Deputy Chairman Alexander Torshin at the round-table conference in the State Duma devoted to Islamic banking, outlined the position of the Central Bank: the process has started, it is planned to create working group for making amendments to the relevant law, the terms are defined. Within this discussion, I would like to notice that the economies of all countries of the Gulf based on the use of Islamic banking and thriving. London and Hong Kong, as global financial centers (by no means the Muslim), nevertheless legalized the work of Islamic banks”.
Pay attention: they just won. While many of the tools of Islamic banking in Russia work fine, except for the loan interest. However, in the present services of Islamic banking are more expensive than conventional banking. Therefore, the challenge is to make them more affordable, as well as legitimate from the point of view of the banking law".
Mikhail Ermakov: “Marina, as far as some Islamic Banking experts have thought, the Gulf’s financial prosperity is not based on Islamic banking. If we are talking about the existing figures, the phenomenon of "Islamic window" is just all the rage.
Marina Nesterenko: To a certain extent, yes, but at the same time, in the Gulf states Islamic banking is the main financial instrument in addition they cooperate with the world financial system. I’m talking about the bank product line expanding besides another source of financing. I’ll give you an example from the tourist industry. In the December 2014 demand on Moscow hotel services decrease to 40-60%. The Ritz-Carlton, Aerostar, Sretenskaya Hotel Moscow closed this fall with additional demand from the side of tourists who prefer "Halal" standard service. These hotels passed certification as the result tourists from China, Malaysia, UAE, near abroad and Turkey, flooded into them. 60 hotels filed an application for certification to the “Halal” standard on “MITT” Expo and “InturMarket”. Certainly, there are a lot of pitfall and risks in the process of integration of Islamic banking. However, such activities will help us to discuss contentious issues. In this case, I would like to highlight some important information. Islamic banks as financial institutions use all banking instruments, besides some limitations fixed by the Sharia. Muslims don’t have any advantages. The Bank is not a mosque or the financial agent. There are some differences in regulations relating to lending rate and some others.
Jan Art: I have something to add in this case. Firstly, blocking “non-halal” can become the logical extension of following “halal” principles, can’t it? Secondly, there is a danger of appearance some disputes over Islamic banking. "Badr-Forte” used to be the only truly Islamic bank according to all the Russian banking history. The Bank of Russia revoked its license in 2006 due to the violations in the field of federal law #115.
Jamshid Muslimov: «Right they were! Anyway, it doesn’t mean that all Islamic is terrorist.
Jan Art: «Definetly! Unfortunately, the first experience showed how important is to be on the safe side”
Marina Nesterenko: «Except Badr-Forte there were separate Islamic banking operations in the BINBANK. The International Bank of Azerbaijan works very intensely for last two years. "Asia-Bank” starts work in this area. Pilot experimentз launching in the Republic of Tatarstan and the Chechen Republic. Generally, things already started to happen, but risks still exist. Sooner or later we will break the ice, the mechanism will work on the territory of several regions of Russia”.
Jan Art: «In fact, today Russian Islamic banking is just a profanation. The creation of banking reserves is out of all proportion to Islamic banking standards”.
Marina Nesterenko: “There are some successful experiences of law-making process by the example of our neighbours. Why should we accent on complete denial? Once electronic payment was also criticized. Nevertheless, less than 15 years passed and we can’t imagine our existence without it. Some specific of Islamic banking connected equally with traditional standards. Furthermore on this point is important to take into account the aspect of international collaboration”.
Jan Art: “The point is that “halal” money according to the canons of Islamic banking cannot be mixed within the flow of money involved in “classical” transactions and associated with a loan interest. The full autonomy “halal” cash flow in Russian banking system seems to be impossible. The question arises as to whether how to realize the process of deduction in reserve fund? Further, rejection of IFRS standards and existing RFRS. Than, a problem of “halal” tax system creation.
Marina Nesterenko: «Jan, you are absolutely right, cause all these questions spring up. In the august 2014 ARB pointed out all the inconsistencies and potential problems in the letter to CBR. I agree with you concerning the risks attended by using Islamic banking. Abuses may happen too. E.g., inspection found out a lot of abuses in Islamic bank of Dubai. However Russia is a part of modern global economy, where is impetuous development of Islamic banking. That’s why we shouldn’t lose any opportunities, to take risks”.
Jan Art: «We have some information from the experience of "the Ellipse Bank" in Ufa. Concerning the problem of flow division. Our colleagues told us that it is impossible to autonomy different flows”
Marina Nesterenko: “In Kazan in the trade and financial house "Amal" allocate a specific sub-account to solve this problem. The experience of Azerbaijani banks is very useful too”.
Anton Khusainov: «Maybe it seems to be dilettantish, but as far as I understand, Islamic banking doesn’t have the conception of loan interest. How do they make profit?”
Jamshid Muslimov: «Anton, Islamic banks practice equity participation».
Jan Art: «Nothing is as easy as it looks. I heard on the lobby interviews of Islamic Finance summit in Kazan how bankers responded to businessmen: "My friend, the slogan about the lack of loan interest… Only hollow words! In reality I can finance you only at interest”».
Anton Khusainov: “What does it mean – the equity participation in the borrower’s profit? What if it is just a domestic loan?”
Jan Art: “A personal loan should be granted without interest only, but if the loan is for business, then you should use the basic tenet of the equity participation”
Jamshid Muslimov: “In Islamic banking there is not a loan, there is an investment. The loan should be interest-free, as it considered as a tool of help, not as a source of income. Islamic banking invested in projects or production”
Jan Art: “I would like to concentrate your attention on the next important point - the Islamic Bank cannot accept deposits from the population according interest”.
Anton Khusainov: “In General, if I understood you correctly, Islamic banking is focused on the corporate client? Are individuals encouraged to keep cash in different cellars and caves (e.g. Ali Baba)?
Jamshid Muslimov: “Anton, individuals open investment accounts. In consent, their money invest in different projects. The Bank is some kind of intermediary”.
Madina Kalimullina, The Head of Economic Department of Russia Muftis Council: «I would like to explain some key propositions:
1. Inherently, Islamic banking is not the classical banking business. It is investment, trading (commercial?) activity, project financing. Thus the question of the presense of interest is no longer relevant.
2. About 45 years ago the alternative to historically established economic and financial system arose. Then an attempt was made to combine the investment company and the Bank. This model is developing and improving.
3. I guess no one would argue with the fact that to embed into the economic system (formed on a percentage as payment for the provision of money) a totally different system is difficult, even almost impossible. There are isssues of control, ethical, liquidity management, insurance, reserve, etc. The mindset of Bank employees differ as far as the logic of operations. Therefore, there is an opinion of Islamic bankers that it is easier to teach people not related to non-banking sector, to engage in Islamic finance operations than to retrain bankers. It is the "financial effect of the groove”.
4. Islamic banks still discuss the issues of improving business standards at international conferences
5. There are successful Islamic financial (non-banking) organizations in Russia. They work both the public and the business. However, nowadays it is impossible to engage the Islamic finance operations in the mechanism of banking. Therefore, the examples of banks "Badr-Forte Bank" or "Ellipse" cannot exemplify as a basis for evaluation.
6. The essence of banking is not in the definition of "Islamic" but in the prohibition of loan interest. This approach consistent with world religions and the views of many philosophers, scientists, economists. Sure, the epithet "Islamic" caught on, but this does not mean that such activity is made only for Muslims. Today many such banks are not referred as Islamic, and are called participation banks and alternative Finance.
7. To be subjected to criticism is useful, because it gives some motivation for development.
Jan Art: «You are absolutely right, Madina. Especially as you noticed: there are problems in correlation of Islamic and classical banking forms. From previous experience of “Badr-Forte” and “Ellipse” we see the essential problems and should try to find their decisions.
Murad Aleskerov: «The target audience of Islamic banking is Muslims. It does not mean that clients should be only Muslims. For example, if you open a lingerie shop, then your target audience is women, but that does not mean that the husband cannot come and buy a dress for his wife”
Jan Art: «Moreover, as we know Turkey is predominantly Muslim country. However, classical banking works there the same way as Islamic banking. Then it face an issue of Islamic banking system’s use: not to serve Muslim social needs but to be useful for market. Therein lies a problem. There are many points to have in view. Representative example: equity participation in profits conducive to origin of hostile takeovers. CA simple example: the principle of operation of Islamic banking (equity in earnings) in the Russian realities contributes to the risk of the hostile takeover of business
Murad Aleskerov: “Yan, let’s try to argue our statements. If you are talking about hostile takeovers then give concrete confirmed facts”.
Jan Art: «My statement is based on the today’s Russian reality: there is no protection for the rights of shareholders, businessmen. A long story…
Jamshid Muslimov: «If we talk about the possible risk of the hostile takeover, then we should ban everything. This is not an argument. The raiders will find a way to capture without Islamic banking”.
Jan Art: In any case, glad for publishing this post. The conversation was substantive and correct especially for such sensitive topic. Actually, I was waiting for more negativity. Positive content and form of this discussion makes me willing to listen to the arguments of the proponents of Islamic banking”.
Marina Nesterenko: “I'm glad that the letter from us to Jan result in such discussion. For our turn we (the "Banking” magazine) are the partner of the IV International forum "Islamic financial market and the real economy", which is going to be held on May 21 at “Crocus” during the exhibition HALAL EXPO and we invite other disputants”.