The rapidly growing sector of Islamic finance, which was informally operating in the Russian Federation, has received endorsement from the government for the first time in legislation on 4 August 2023. Russian President Vladimir Putin signed Federal Law No. 417-FZ dated 04.08.2023, this law plans to introduce Islamic banking to assess its ‘feasibility’.
The 2-year pilot program, starting 1 September 2023, will take place in four of the Muslim majority regions of Russia, namely, Bashkortostan, Chechnya, Dagestan and Tatarstan. These areas have the most experience in Islamic finance already. The government and the Bank of Russia can agree to extend this program to other regions of the country.
According to Russian officials, the formal introduction of Islamic banking has been discussed since the financial crisis of 2008, and the Western sanctions imposed on Russia following the annexation of Crimea led to the Association of Russian Banks to propose Islamic banking in Russia and establishing a committee in the Central Bank to regulate its activities, the recent sanctions imposed due to the Ukrainian conflict has accelerated the development of the project.
The Islamic banking sector has an annual growth of 40% and is expected to reach $7.7 trillion worldwide by 2025 as per the Senior Vice President of Sberbank, Russia’s largest lender, Oleg Ganeev.
This move is part of improving Russia’s plans to improve their relationship with Muslim majority nations and attract investment from the Middle East and other countries with Shariah finance frameworks.
The state regulators are assessing the regulations required for this sector of the finance industry if successful. This opens up the potential for Middle Eastern and other Muslim majority nations’ legal professionals and regulators experienced in Islamic finance to be contracted in consulting the Russian regulatory bodies for the regulation of the industry.
This also brings forward the opportunity for established Islamic finance institutions such as the ones in the UAE to expand into the Russian market, which has a growing population of an estimated 25 million. However, only Russian entities are allowed to apply for a banking license in Russia, this would result in many joint ventures or even push for a revision in the rules and regulations to invite further investment from this Middle East and other Muslim nations to align with the aim of the program.