Russia is embarking on its inaugural foray into Islamic banking with a two-year pilot program scheduled to commence on September 1. The nation’s sizeable Muslim population, estimated at up to 25 million, has witnessed the presence of Islamic financial institutions previously; however, this marks the first official endorsement under Russian legislation. President Vladimir Putin ratified the law on August 4, thereby paving the way for Islamic banking’s assessment of “feasibility.”

The pilot initiative will take place in four Muslim-majority republics: Tatarstan, Bashkortostan, Chechnya, and Dagestan. These regions already possess substantial experience in Islamic finance. Should the pilot program succeed, the intention is to extend the new regulation across the entire country.

Islamic banking operates within the framework of Shariah, the Islamic legal system that proscribes transactions involving usury or interest charges. In contrast to conventional finance, which is debt-centric and places the onus of risk and responsibility on the client, Islamic banking is rooted in assets. Profit and risk are shared between the financial institution and the client, akin to a partnership.

Madina Kalimullina, the executive secretary of the Russian Association of Experts in Islamic Finance, highlighted that Islamic finance advocates partnership-based relationships, a contrast to the conventional model. Additionally, Islamic banking avoids funding sectors deemed detrimental to society, such as alcohol, tobacco, and gambling.

A fundamental distinction lies in Islamic banking’s prohibition of financing speculation, financial derivatives, or transactions without genuine assets, which were implicated in the previous global financial crisis. Oleg Ganeev, senior vice president of Sberbank, Russia’s largest lender, noted that the Islamic banking sector boasts an annual growth rate of 40 percent and is projected to attain a value of $7.7 trillion by 2025.

Kalimullina outlined that while the Islamic finance market requires regulation and investor protection, it cannot avail itself of state support programs for mortgage financing and small-to-medium enterprises due to their reliance on interest-bearing loans—a contravention of Shariah. The recently passed law partially addresses these issues, with the experiment expected to pave the way for further conditions fostering Islamic finance growth.

Discussion of Islamic banking in Russia dates back to the 2008 financial crisis when banks sought alternatives to alleviate liquidity shortages. Following Russia’s annexation of Crimea in 2014, and the ensuing impact of Western sanctions, the proposal gained momentum. The Association of Russian Banks advocated for Islamic banking’s introduction, leading to the establishment of a Central Bank committee for Shariah bank regulation.

The ongoing Ukraine conflict and Western economic pressures have accelerated Russia’s shift toward Islamic banking. Russia’s economy, largely sustained by energy revenues, has been relatively immune to Western sanctions. The experiment is poised to attract foreign investment from regions with established Shariah finance frameworks, steering Russia’s economy towards the East.

Kalimullina expressed optimism that the program would foster asset-based financing and risk-sharing partnership relations. The initiative is anticipated to particularly benefit small and medium-sized enterprises, which often face under-financing. Islamic finance’s focus on real economic productsimg-align-s with financing the genuine economy.