IBA issues Europe’s first Islamic card

By Gulgiz Dadashova

The International Bank of Azerbaijan -- a major state-owned bank holding at least 40 percent of all bank assets in the country -- has become the first among European banks to introduce the Islamic card on September 25.

IBA Islamic Banking Department head Behnam Gurbanzade said that the Qibla card, which complies with the rules of Islamic banking, will be released into circulation in the near future. The cost of the card is 40 manats.

Qibla in Islam is the direction facing the Kaaba in Mecca to which Muslims turn during their prayers and carry out a number of rituals.

Qibla (orientation) is essential in the construction of mosques and other places of worship in many religions, as well as in the daily lives of Muslims, and serves as a symbol of the unity of all Muslims.

This debit card, equipped with an electronic compass indicating the direction of Mecca, was issued in conjunction with MasterCard Platinum. The card holder will be able to cash funds in the account, as well as pay for various goods and services.

A Qibla card will be issued as a debit card, but it can also be used with a limit on the debt issued by the bank. Extension of the limit is discussed with the card holder at the end of the debt repayment period. The debt repaid by the card holder is entered into the card's balance and thus the debt limit is restored.

The only 'Islamic window' in Azerbaijan, created by the International Bank of Azerbaijan in 2003, has already begun serving customers. The amount of assets attracted from Islamic financing sources has reached $60-70 million. At the same time, Islamic leasing products are actively offered via the Joint Leasing Company, one of the co-founders of the IBA.

The range of services offered by the bank includes such products of Islamic banking as Ijara, an analogue of traditional leasing, Vakala deposit, an equivalent of a conventional deposit, Islamic bank cards, and opening of Gard Hassan accounts.

The above-said products of the IBA have undergone certification in independent Sharia financial and legal advisory company Dar al Sharia, founded by Dubai Islamic Bank in accordance with international practices.

The IBA was established in 1992 as a successor of the Azerbaijani branch of Vnesheconombank. The IBA holds a leading position in the domestic banking sector. The main shareholder of the bank is the Azerbaijani government, which owns a 50.2 percent stake, and 49.8 percent is owned by private individuals and legal entities.

As of July 1, 2013, the total capital of the IBA amounted to 765.56 million manats, which is 61.4 percent over the figure posted on July 1, 2012.

The authorized capital of the IBA currently amounts to 368 million manats.

Islamic banking legislation

In order to create legislative framework for Islamic banking, the IBA jointly with international financial institutions is preparing proposals for amendments to the banking legislation.

Behnam Gurbanzade said a mission of the Islamic Development Bank (IDB) is expected to visit Baku in November to hold consultations with the government of Azerbaijan and establish a working group to develop the legal framework for the implementation and application of Islamic banking in the country.

The working group, Gurbanzade said, will include representatives of the Central Bank of Azerbaijan (CBA), IDB, IBA, the Ministries of Economic Development, Finance and Taxes.

According to him, the proposals envision the elimination of the ban on commercial banking activities, as stipulated by the law "On Banks", and the lifting of double taxation on VAT on banks' trading activities.

"An IDB consultant will be hired in November and we plan to send the proposals to the parliament by May," Gurbanzade said.

"I hope that the necessary legal framework will be created in the near future, and it will give a new impetus to the development of Islamic banking in Azerbaijan," he said.

Experts believe that the application of the "Islamic window" in Azerbaijan will affect positively the development of Islamic banking in the country. They suggest that as long as loan interest rates remain above the 20-percent mark, Islamic banking could gain a market share.

Initially, the IBA consultancy, a consortium of companies Salans, KPMG, Pinsent Masons and Dar al Shariah, was engaged in developing changes in domestic legislation to expand the use of Islamic banking services.

The consultancy has already prepared its own vision and recommendations, and a further phase of the project will be implemented jointly with the CBA and the IDB, as this financial institution is a leader of Islamic banking worldwide.

Given that this is a political issue, involvement of private companies in this process was not deemed necessary. As a member of the IDB, Azerbaijan will resolve this issue at the national level.

The consortium also assisted the IBA in the creation of specialized entities for the provision of Islamic banking products and services.

Prohibition of charging interest for loans is the major distinction between Islamic and Western-style banking. Instead of interest, Islamic banks take a stake in businesses to which they loan money and share both the profit and loss with the client.

There is a special order of taxation of Islamic financial instruments, forms and methods of regulation of Islamic banks, along with the procedure for the issuance and circulation of Islamic securities and the requirements of Islamic investment funds in the world.

Banned activity includes speculation in financial markets, financing the economy through methods of interest calculation and financing production, trade or services prohibited by Islam, such as producing alcohol, food containing pork, gambling, etc.

New investments

Behnam Gurbanzade said the IBA is developing projects to attract investments to the country from Islamic financial markets.

"Currently, a variety of projects in this sector are being prepared and discussed, and relations with foreign partners established. Some of the projects have already been submitted for consideration byforeign investors," he said.

Referring to the results achieved in this field, Gurbanzade emphasized an agreement worth $20 million signed in 2012 with the Islamic Corporation for the Development of the Private Sector (ICD) on 'Murabaha', as well as a major deal worth $100 million with several UAE banks on attracting syndicated 'Murabaha' .

"The IBA activities in the field of Islamic banking are not confined to attracting investment. Some other directions are: access to domestic and foreign markets and intensifying activity there, active participation in international economic platforms, as well as work to improve the legal framework, taking into account the norms of Islamic banking to avoid double taxation," he said.

Gurbanzade did not rule out the possibility of creating a separate bank for Islamic banking, noting that currently the bank will be limited to a single department.

"After the approval of relevant legislative framework to regulate the establishment of Islamic banking, the creation of a separate bank will become a necessity, and by that time the IBA Islamic Banking Department will be able to contribute to the economy and the financial system of Azerbaijan," he said.

Currently the share of Islamic banking in the IBA credit portfolio is 5 percent, and to date about $200 million has been allocated for financing trade, business and large infrastructure projects.

"Although we use some deposit and leasing products, we have the scheme and structure, we cannot apply Islamic banking services completely due to the lack of relevant legal framework. With full use of the mechanism of Islamic banking, we expect significant benefits not only for Azerbaijan but also for the region and the CIS countries, as Azerbaijan is defined as a platform for Islamic banking in the CIS," Gurbanzade said.

He went on to say that a training center for Islamic banking has been established under the department. Its main purpose is to inform and advise commercial banks that are interested in the application of Islamic banking.

"So far, the IBA has not received formal requests to advise on Islamic banking, but Amrahbank, TuranBank and Bank Standard are taking interest in it. Also, Ansar Leasing is successfully operating. I think that combining the efforts, we can ensure the development of Islamic banking as the customer segment is already there and we only need to develop relevant products," Gurbanzade said.

The IBA is not alone in studying the field of Islamic finance. Earlier, the Russian-owned Nikoil Bank started offering its clients the opportunity to make interest-free deposits, which would then be invested into Sharia law-compliant business ventures.

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

Also, Kovsarbank has attempted to offer a full range of Islamic banking services in Azerbijan. However, the CBA withdrew its license, saying it was violating the law and citing a small portfolio. The bank subsequently closed down.