Last July marked a pivotal moment for Russia’s financial landscape as the nation’s Parliament endorsed a two-year pilot program set to introduce Islamic banking to four key republics within the country: Bashkortostan, Chechnya, Dagestan, and Tatarstan.
This historic endeavour, slated to commence on September 1, has garnered international attention, with many wondering how Malaysia, renowned for its prominence in the global Islamic finance arena, can take the lead in guiding this transformative journey.
The four aforementioned republics, collectively representing a population of approximately 20 million Muslims, mirroring the demographic alignment that characterizes over half of Malaysia’s populace.
Malaysia’s distinguished position in the Islamic finance realm, particularly its robust presence in the Islamic capital market through the issuance of ṣukūk (Islamic bonds)—a domain that ranks among the world’s largest—has solidified its reputation as a prominent global leader in the sector.
This sentiment is reaffirmed by the 2022 ICD-Refinitiv report, which places Malaysia consistently at the top of the Islamic Finance Development Indicator (IFDI) rankings. For the record, IFDI evaluates five main indicators, which includes financial performance, governance, sustainability, knowledge, and awareness, positioning Malaysia at the pinnacle of Islamic finance progress.
The unfolding prospect of implementing the Islamic financial framework within Russia provides a not-to-be-missed opportunity for Malaysia’s Islamic financial industry players. This chance to seize a first-mover advantage beckons the exploration of three essential steps.
Primarily, we need to capitalize on Malaysia’s expertise and strengths, especially in nurturing human capital. Bolstering bilateral agreements and collaborations serves as the foundation, fostering knowledge exchange and collaborative initiatives in the realm of Islamic finance.
Seminars, workshops, and conferences offer platforms to educate Russian financial stakeholders, which includes the industry players, regulators, and academics about the principles and merits of Islamic finance.
An exemplary model entails strategic partnerships between renowned Malaysian institutions specializing in Islamic banking and finance, such as IIUM Institute of Islamic Banking and Finance (IIiBF) and INCEIF University, and Russian universities situated in Muslim-majority republics of Bashkortostan, Chechnya, Dagestan, and Tatarstan. Such alliances may bring about a host of cooperative endeavors, including student exchanges, joint research ventures, shared academic resources, and innovative seminars, all nurturing an environment conducive to the proliferation of Islamic finance.
A secondary course of action entails collaboration with Russian financial institutions to introduce Islamic banking windows and sharīʿah-compliant financial products through their existing operations.
Malaysia has, of course, a long-standing familiarity with the aforementioned strategy. Back in 1993, the nation witnessed the inception of the Interest Free Banking Scheme (SPTF) under the guidance of Bank Negara Malaysia (BNM). This pioneering move granted conventional banks the opportunity to establish Islamic windows within their operations, thus delving into the realm of Islamic banking by capitalizing on their pre-existing infrastructure and widespread network of branches.
In addition, embracing Islamic finance within conventional banking institutions represents a pragmatic approach, maximizing resource efficiency and minimizing operational costs. This strategy also extends the accessibility and familiarity of Islamic financial products to non-Muslims by leveraging existing financial structures to accommodate the preferences of both Muslim and non-Muslim segments of Russia’s populace.
The third pivotal avenue delves deeper into the realm of knowledge exchange, with a special focus on the augmentation of Islamic banking supervisory capabilities. This endeavor seeks to glean invaluable insights from Malaysia’s Islamic financial regulatory framework, led by Bank Negara Malaysia and Securities Commission Malaysia. These regulators oversee the dynamic domains of the Islamic banking industry and Islamic capital market respectively, demonstrating a harmonious synergy that propels Malaysia’s financial landscape forward.
Collaborative efforts could encompass the exchange of regulatory blueprints, guidelines, and best practices for overseeing Islamic financial institutions and operations. This harmonious exchange of regulatory wisdom serves as the cornerstone for seamless implementation and oversight of Islamic financial activities within Russia.
These three steps, though concise in nature, epitomize short-term measures well within the capabilities of Malaysia’s adept financial industry players, considering their successful track record in propelling the Islamic banking model across diverse regions in Africa and Central Asia.
However, the potential success of this pilot project unfurls an avenue for Malaysia to extend its influence, capitalizing on its expertise in ṣukūk issuance. Malaysian investment banks can emerge as advisors and/or arrangers in structuring ṣukūk within Russia, catalyzing investors’ interest and nurturing economic growth through ṣukūk-backed Russian development initiatives.
Furthermore, this strategic move introduces a range of investment possibilities to Malaysian investors. By adhering to sharīʿah principles, ṣukūk align with the principles of sharīʿah-compliant investments, resonating with those seeking ethically responsible investment avenues.
Additionally, Russia can tap into an expansive network of international sharīʿah-compliant fund managers well-versed in reputable Islamic financial practices, as exemplified by Malaysia. Collaborative endeavors could encompass structuring ṣukūk for Russian infrastructure projects, akin to Malaysia’s pioneering issuance of the world’s inaugural sustainability ṣukūk in 2021, where the underlying asset was a voucher representing travel entitlements through the public rail transport system.
In a culmination of these measures, Malaysia could become a guiding force propelling Russia’s Islamic financial sector, fostering enhanced cross-border investment and bolstering economic cooperation between the two nations.
By Dr Mohd Zaidi Md Zabri, Senior Lecturer at the Department of Finance, Faculty of Business and Economics, Universiti Malaya and Secretary of the International Council of Islamic Finance Educators (ICIFE)