Azerbaijan becoming regional center of Islamic banking

By Seymur Aliyev

Azerbaijan may soon become a regional Islamic financing center and play a significant role in boosting cooperation in Islamic banking with Persian Gulf and Central Asian countries. At the same time, interest in Islamic finance as a source of investment is high in the country.

Islamic financing is one of the fastest-growing segments of the global financial services industry worldwide.

The International Bank of Azerbaijan (IBA), the country's leading bank, has recently established an Islamic banking department, which is in the early stages of carrying out organizational and analytical work, IBA's Director for Islamic Banking, Behnam Gurbanzada, told AzerNews.

A decision has been passed to offer customers a number of Islamic banking services after overall studies of the domestic banking legislation. These services are Murahaba (transactions with precious metals), Mudaraba (deposit transactions), Vakala (financial services), Icara (leasing) and Qard-al-Hasan (customer service), Gurbanzada added.

The financial portfolio of the IBA department currently amounts to $54.5 million, he added.

Azerbaijan's Law on Banks allows Islamic banking only for trading operations with precious stones, precious metals, and securities, Gurbanzada emphasized.

Unlike traditional banking, the Islamic banking system operates under Sharia laws and the department does not allocate loans for the purposes banned by Islam, Gurbanzada said. Banned activity includes speculation in financial markets, financing the economy through methods of interest calculation and financing production, trade or services prohibited by Islam (producing alcohol, food containing pork, gambling, etc.)

Gurbanzada stressed that a scheme is being prepared for introducing the mentioned services to customers. The customers who wish to use Islamic banking products should have a good credit history, good solvency and must meet other economic and legal obligations, he added.

The global financial crisis, which started in 2008, put a lot of world banks working on the basis of traditional principles in a very difficult situation. Many banks could not weather overheating of the credit market and the mortgage crisis. However, banks operating under the principle of Islamic banking have managed to avoid the fate of their conventional peers.

The total share of Islamic capital in the world financial market is estimated at $1.3 billion. This system of interest-free financing is being implemented in more than 400 financial organizations in 74 countries worldwide.

The IBA is not alone in researching the field of Islamic finance. The mid-size, majority-Russian-owned Nikoil Bank has started offering its clients the option of placing interest-free deposits, which would then be invested into Sharia law-compliant business ventures.

Another local bank, Amrahbank, partly owned by the Bahrain-based International Investment Bank, has also announced plans to offer Sharia-complaint financial products to cash in on the untapped Islamic banking market both in Azerbaijan and neighboring regions.

Islamic banks have grown recently in the Muslim world but still account for a very small share of the global banking system.

Islamic banking has the same purpose as conventional banking: to make money for the banking institution by lending out capital. The basic principle of Islamic banking is based on risk-sharing, which is a component of trade rather than risk-transfer which we see in conventional banking. Islamic banking introduces concepts such as profit sharing, safekeeping, joint venture, cost plus, and leasing.