In a bid to rescue Russian economy, member of the Russian parliament, Duma, have submitted a draft bill to support Islamic finance, amid increasing sanctions from the West.
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"During a period of a practically total economic blockade from Europe and the US, our banks must find new ways to attract investment," Dmitry Savelyev, who sits on the Duma's financial markets committee, told Reuters on Saturday, March 21.
Russia has been facing increasing financial sanction imposed by European countries over its role in the Ukraine crisis.
With large firms denied access to international capital markets, a collapse in oil prices has further contributed to a slowdown in the economy, which is expected to contract by at least 3 percent this year.
Trying to open new markets, the draft law was sent to parliament's lower house, the State Duma, this week to propose allowing banks to engage in trade activities, a concept central to many of the structures used in sharia-compliant financial products.
The bill is regarded as a first step to spur development of a sector which has posted double-digit growth in several Gulf and Southeast Asian countries, but which has struggled to get off the ground in Russia.
The draft law must pass three readings in the Duma before it moves to the upper house and then to President Vladimir Putin's desk to be signed into law.
Hit by sanctions, state development bank Vnesheconombank and VTB Bank have sought to build their Islamic finance know-how in a bid to develop new funding sources.
"This is where recent sanctions became a kind of catalyst, an extra push, to further look at the economic perspective in the relationship between Russia and OIC (Organisation of Islamic Cooperation) countries," said Linar Yakupov, the head of the Association of Regional Investment Agencies of the Russian Federation.
Islamic finance could attract foreign investment and also mobilise funds from Russia's 20 million Muslims, Yakupov added.
New Alternative
Awaiting political will, the new bill needs political will to allow the Islamic financial system.
"It is theoretically and technically possible for the government to prepare a law on Islamic banking, but it all depends on political will," said Murad Aliskerov, chief executive of LaRiba Finance, an Islamic financial company based in Russia's Dagestan republic.
"Islamic banks could have a huge social impact and act as an alternative to traditional banks."
A feasibility study is now under way between a consortium of Russian and Malaysian investors to create a standalone Islamic bank or an Islamic unit within a Russian lender, Yakupov said.
The study would be ready by September, allowing the sides to draw up concrete details for creating such an entity and assess which laws would have to be changed, he said.
Companies are also keen to explore Islamic bonds (sukuk) as alternative financing tools, with Russia's Tatarstan republic hosting an industry summit next month focused primarily on such instruments.
The impact could extend to former Soviet republics in central Asia after a similar proposal was pushed to create a regional working group to coordinate Islamic finance efforts with countries such as Kazakhstan, Tajikistan and Kyrgyzstan.
Islam forbids Muslims from usury, receiving or paying interest on loans.
Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.
Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.
