Islamic Finance 2016: annual results for Russian market
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Islamic Finance 2016: annual results for Russian market
Many events that had a direct or indirect, positive or negative influence on the Islamic financial market in Russia happened in 2016, including development of stronger relationships with the Islamic Development Bank, partnership banking mechanism studies conducted by the Central Bank of Russia, the biggest Russian banks’ statements about their entry to the Islamic financial market, opening of new Islamic financial companies, and at the same time a currency crisis, general stagnation of the country’s economy, restructurisation of the banking market.
We decided to analyse the current condition of the market and possible consequences of all these events and preconditions for the market. Some market players, namely representatives of Russian Islamic financial companies from Kazan and Makhachkala, as well as the Russian association of experts in Islamic finance helped us gain the insight.
Stable earning capacity
Earning capacity of investors of Russian Islamic financial companies was 10-18% per annum depending on the investment amount and contract duration. Under these conditions the average earning capacity of the Amal Financial House is 10,10% per annum, and that of La-Riba Finance is 14% per annum.
These two companies can be considered flagships and indicators of the Islamic financial market development in the country. Despite a relatively small portfolio as compared to the banking sector, both companies, which started working in 2011, are showing a stable growth in terms of the number of customers and the asset value. However, the companies differ in development strategy, positioning, list of services, average transaction value and characteristics of customer database. The La-Riba Finance company mostly provides services at the customer installments market using the murabaha financial tool, with the average transaction value being around RUB 100,000. Having expanded its customer database by 32% in 2016, the company feels confident in Dagestan and is not planning to enter other regions.
Photo: employees of La-Riba Finance offering installment services to shopping mall visitors
The Amal Financial House is more focused on financing legal entities through leasing services by means of ijara muntuhia bittamlik and product installments. The Amal Financial House also provides funding for the individuals intending to buy a house. At the same time the company gradually, at a very slow pace, expands its presence in other regions, namely in those adjacent to Tatarstan. The company is also envisaging providing services at the Moscow market. According to Timur Khairetdinov, representative of the Amal Financial House in Moscow, the interest in such services is quite high in the capital, but the customers are selected very carefully, therefore the number of real deals is currently low.
Islamic financial company’s client description
While entering Islamic financial market, many companies focus primarily on legal entities. For example, the only Islamic bank in Kazakhstan, Al-Hilal, has been working only with legal entities up to the present moment. As for Sberbank, during the first stage of implementation of Islamic financial deals it is planning to acquire a share in the capital of leasing companies, through which it will provide funding for equipment and transport purchase by companies and individuals. On the whole, individuals prevail among the customers of Islamic financial companies in Russia. The Partnership Banking Centre is no exception. Individuals account for over 80% of the PBC customers. However, according to Roman Abdullin, director of the Partnership banking development department of Tatagroprombank LLC, over the last months the number of legal bodies has increased, and the ratio started to level off.
The reason for a relatively small number of companies among the Islamic financial companies' clients is quite clear — the issue is in the Russian business itself. Many investment platforms and funds mention the fact that the country is lacking good investment projects. Moreover, the number of smoothly running companies, especially in the SME sector, is decreasing, and this situation is common for many regions of the country. Getting approval for financing in an Islamic financial company is even more difficult than in a usual bank: apart from financial data screening and credit reputation, the applying company has to go through two other stages — screening for shariah (ethical) business aspect and checking the object of financing in terms of its physical existence. Islamic finance deals only with the real sector of economy and provides financing only for real tangible assets.
Photo: In Islamic financial companies the process of buying and subsequent selling of a product or equipment that the customer needs is strictly monitored (photo taken from the Amal Financial House's page in social networks).
This characteristic feature of Islamic finance was highlighted by A.Yu. Simanovsky, advisor of the chairman of the Bank of Russia, head of the working group on partnership banking, during his speech at the financial regulators’ session at the IFN Forum CIS, which took place on 14 March in Astana: “Partnership finance is based on economy, on production. This attracts us as regulators, because one of the issues is providing loans to companies that do not have real activity. This is a phenomenon that the Bank of Russia has been fighting with for a long time”.
Market is growing against all odds
Despite the fact that two last years were rather difficult for the country's financial sector in general, market players are assessing their results in a positive way and are striving for further growth.
“We see the results of our activity during 2016 in a positive way. Despite the general negative economic situation in the country, according to the year-end results the company has grown and kept earning funds for investors”, — said the general director of the Amal Financial House, Rashid Nizameyev.
Photo: office of the Amal Financial House in Kazan
“In 2016 we improved almost all key performance indicators of our financial activity. We managed to occupy a certain niche in retail finance, to expand the tariff range and to improve our software for recording financial operations and petty cash management”, — says Murad Aliskerov, head of La-Riba Finance.
The Partnership Banking Centre is also satisfied with the results of its first year. In particular, Roman Abdullin noted that “they formed an extensive product range with some products that are revolutionary for the Russian market; established strong relationships with the Islamic Development bank”. “We are in close cooperation with the working group under the Central Bank regarding the Road map. Many clauses of the Road map pertaining to our competence were accomplished before the scheduled date or within the time specified”.
Currency crisis and banking upheavals
The issues regarding the rouble exchange value along with the general economic decline could not but have an impact on the Islamic financial companies’ activity. On the whole this resulted in a growing number of clients’ funding applications, but the quality of applications plummeted. According to the director of Amal, due to a lower number of good-quality applications for financing the company sometimes faced an underuse of funds. One of the deterrents for the Partnerhsip Banking Centre development was the licence revocation from Tatfondbank, which hit hard the whole market of Tatarstan. However, the failure of the TFB group had a slight impact on the activity of the Partnerhsip Banking Centre. “We are a branch of Tatagroprombank LLC, which is indirectly included in the group of banks that suffered from the situation in the banking sector. The Centre managed to overcome potential difficulties thanks to rigorous following partnership principles in its work, such as abandoning operations with a high level of risk and operations involving uncertainty. This helped us honour all our commitments to our clients”, — commented Roman Abdullin, director of the Partnership Banking Development department of Tatagroprombank LLC.
Photo is a courtesy of the Partnership Banking Centre
The Amal Financial House could not stay uninfluenced by upheavals at the banking market, but the company’s management took necessary measures in due time. In 2016 the Bulgar bank, which was the company’s partner in providing banking services, faced some financial difficulties, and in January 2017 its licence was terminated. “The first thing we did was to transfer money to a different bank that was reliable from our point of view. This way Amal’s activity was not affected by this situation”, — said Rashid Nizameyev.
The La-Riba Finance took the currency and banking crisis in its stride. According to its policy, the company doesn’t work with banking windows, therefore it is not directly affected by the condition of the banking market. “The currency crisis translated for us into a certain anxiety of some depositors regarding depreciation of their money. We proposed to such clients to take back their deposits in advance, although it was not mentioned in the signed agreement”, — noted Murad Aliskerov. He said that there were no massive withdrawals by investors.
Market is waiting for new players
In 2016 two new Islamic financial companies opened in Russia: the Partnership Banking Centre under Tatagroprombank in Kazan and the Saada trust partnership in Makhachkala. The PBC was opened with the participation of the Tatarstan president Rustam Minnikhanov and positioned itself as a pilot project on partnership banking development and elaboration of further legislative amendments based on its performance. However, over one year due to a number of reasons the Partnership Banking Centre (it was opened in March 2016) could not keep up with its main potential rivals, e.g. the Amal Financial House, let alone becoming the leader.
The Saada trust partnership mentioned that the main event of the year 2016 for the company was opening an Islamic window from the commercial bank MVS Bank LLC, which allowed to expand its service range. According to the absence of any performance indicators, the company is currently at the initial stage of development.
Thus, no strong players with a substantial investment portfolio have emerged at the Russian Islamic financial market. Sberbank’s statements about its entry to the Islamic financial market are yet to be put into practice, although the first deal for financing a leasing company was conducted by Sberbank in the beginning of 2017, as mentioned by the advisor of the first deputy chairman of Sberbank, Behnam Gurbanzade, at the Gaidar Forum. We asked some market players to assess the prospects of increasing competition at the Islamic financial market. The opinions mostly coincided – almost all of them think that the competition at the market will not become stronger in the nearest future.
Rashid Nizameyev, general director of the Amal Financial House: “We think that in the nearest year nothing will change in terms of competition at the Islamic financial market of Russia”. The executives of the Saada trust partnership concurred.
Murad Aliskerov expressed the hope that the competition would increase and new players would come to the market. In order to involve more companies, during a session of the Russian Association of Experts in Islamic Finance Murad Aliskerov even voiced his readiness to provide consulting support for all those willing to open an Islamic financial company.
Photo: year-end meeting of RAEIF experts in Plekhanov Russian University of Economics in 2016
The management of the Partnership Banking Centre is the most optimistic about the increased competition: “We see that the Islamic financial market in Russia is constantly developing. We see new companies willing to get involved in partnership banking or considering this dimension for the future. This is why we can confidently say that the competition will increase gradually, expanding the existing market and improving the products’ convenience and quality for end users”, — said Roman Abdullin.
In search of right amendments
The question of the new agenda deals with legislative amendments. Regulators have not explained their stance as to how the legislative base for Islamic (partnership) banks and Islamic financial companies’ work will look like, and whether there will be any amendments at all. Some work complexities of the Islamic financial market are common for microfinance companies in general. At the 22nd Financial Services Quality Forum in Ufa, during a session on microfinance market, the participants discussed the problem that was also relevant for the Islamic financial sector: transaction taxes have to be paid at the moment when the deal is concluded, although the payment is expected in the future and there is a risk of default.
The market participants are unanimous about the need for amendments at least in the tax legislation, but are not expecting any changes in this area in the nearest future.
The following events related to Islamic finance took place in 2016:
- 14 January 2016 – session on Islamic finance at the Gaidar forum
- 24 February 2016 г. – Expert discussion of the RAEIF in the Financial University under the Government of the Russian Federation
- 15 March 2016 г. - IFN Forum Russia in Moscow
- 24 March 2016 г. – opening the Partnership Banking Centre under Tatagroprombank LLC in Tatarstan
- 19-20 May 2016 - Kazan Summit 2016 in Kazan
- 27 May 2016 г. – signing of memorandums on understanding between Islamic Development Bank, Central Bank of Russia, Vneshekonombank, Sberbank and Tatfondbank.
- 6-7 June – session on fund raising for small and medium enterprises with participation of Islamic Development Bank experts within the framework of Moscow Halal Expo 2016
- 1 November 2016 г. – publication of 2nd Russian edition of “Introduction to Islamic Finance” by mufti Taqi Usmani (with support of AK BARS Bank)
- November 2016 – beginning of a special course on Islamic finance in the in Plekhanov Russian University of Economics
- 1 December 2016 – inter-university conference on “Partnership banking: issues of legal regulation and protection of participants’ rights, implementation prospects” in Kutafin Moscow State Law University
- 16 December 2016 г. – year-end meeting of RAEIF experts
- 22 December 2016 г. – winter course on Islamic economics and law in Kazan Federal University
During the year the Working group on partnership banking under the Central Bank of the Russian Federation continued its work. Apart from that, 57 shariah standards of the Accounting and Auditing Organization for Islamic Financial Institutions have been translated into Russian (under the agreement signed between the Russia Muftis Council and the AAOIFI).
The work was accomplished with the support of the Russian Association of Experts in Islamic Finance. The standards are expected to be published in the 2nd quarter of 2017.