Guide To Islamic Finance in Russia

Part I: Infrastructure
in Russia
2009
Guide to Islamic Finance
IFC LINOVA – Islamic Finance Consulting IFC LINOVA – Islamic Finance Consulting IFC LINOVA – Islamic Finance Consulting
About the Guide
IFC LINOVA – Islamic Finance Consulting

This Islamic Finance Guide in Russia is the result of
research work by specialists of IFC Linova, corroborated in
practice and expressed for the first time during the
International Islamic Business and Finance Summit held in
June 25-26, 2009. The work is based on the experience
gained by the Company’s staff at the Islamic Development
Bank, international banks, Bank of Russia, other major
Russian telecommunications and manufacturing companies.
This publication is in copyright. No reproduction in any form

is allowed without the permission of the author.
© IFC Linova LLC 2009

2 Guide to Islamic Finance

Table of Contents

Welcoming Address
1. Russia – general information 7
2. Social environment 8
3. Legal environment 10
4. Taxes 11
5. Financial infrastructure 12
6. Investments 14
7. Banking 15
8. Waqf 17
9. Leasing 19
10. Insurance 20
11. Trade Financing 21
12. Microfinance 22
13. Regulators 24
14. Cooperation 25
Contact Information 26


Welcoming Address

This is the first part of the introduction into
Islamic business and finance in Russia – a brief
description of the infrastructure, within the
framework of which we see the further
development of Islamic business in the Russian
Federation. It is a practical manual on basics of
Islamic financial system with focus on legal,
taxation and financial infrastructure issues
(investment, banking, waqf, leasing and
insurance).
This Guide to Islamic Finance in Russia is the

result of two-year research work by IFC Linova,
expressed for the first time during the
International Islamic Business and Finance
Summit held in June 25-26, 2009.
The work is aimed at specialists in Islamic

economics, companies interested in alternative

investments, and those wishing to diversify
their investments. It can also be interesting for
university lecturers, economics, law and
theology students, and for many others who are
involved in this field.
IFC Linova wishes you to enjoy the Guide and

make use of it in the process of developing new
lines of your business, implementation of
commercial projects, and building long-term
relationships with representatives of Islamic
businesses.
This Guide will give you some answers on the

possibility of developing Islamic business and
finance in the territory of Russia, help you to
see in a new light the alternative economic
system, understand methods of Islamic finance
and start using them in practice.
Linar Yakupov
General Director
IFC Linova LLC

Russia – General Information
The growing interest of foreign investors in Russia, which is

among the world’s 10 largest economies, appears to be
reasonable, as Russia, being the 3d trade partner of the European
Union and its main energy provider, also plays a leading role in
the international arena.
Russia has investment grade ratings, which are supported by its

strong and liquid state balance sheet. At the end of 2008 its
national debt made up less than 10% of GDP, and the sovereign
wealth funds had about USD 225 billion. Gold and foreign
currency reserves of Russia are the world’s third largest.
Russia has a good external liquidity level, which according to

Fitch Ratings, stands at 284% in 2009. At the end of 2008 Russia’s
position as a net external creditor accounted for 39% of current
earnings in foreign currency. GDP per capita was over the median
level for countries having “BBB” rating.

Russia’s gold and foreign currency reserves have considerably
decreased - by 35% (USD 210 billion), from the highest level of
USD 596.6 billion at the end of July 2008 to 386.5 billion as of
January 23, 2009. However, Russia’s gold and foreign currency
reserves are the third largest in the world, coming after China
(with A+ rating) and Japan (with AA rating).
Around 200 shares are being rated on the main two trading
platforms of the Russian Federation - MICEX and RTS. There is a
sector of innovative and developing companies on MICEX, and
new companies segment on RTS (RTS START). Mutual investment
funds assets make up 2.5% of GDP, assets of non-government
pension funds – 1.2% of GDP, and assets of insurance companies –
0.9% of GDP.
Actively involved in financial markets are less than 1 million

people. Three major international agencies and several national
rating agencies operate in Russia. There are some limits on the

use of foreign currency in the territory of Russia. IFRS are
obligatory to all the banks.
In general the Russian economy continues to diversify its sector’s

structure, relying less and less on raw materials sector. One of
the most dynamic is the financial sector, which takes advantages
of the real sector’s growing demand on financial services. And
the financial sector growth results, in its turn, in a more
effective attraction of investments and economic growth.

Social Environment

Observer status in the Organization of Islamic Conference (OIC),
granted to Russia in 2005, allowed to improve its position on the
international, political, cultural and economic arenas. To date
the main partners of Russia in the OIC are Malaysia, Turkey,
Kazakhstan, Uzbekistan, Azerbaijan, Egypt and Kyrgyzstan.
Russia’s share in the total foreign trade turnover of OIC member
states accounts for 2.4%, which shows active development of
contacts between Russia and the Islamic world.
Muslims, as the main users of Islamic financial services, make up

15% of the Russian population, that means 22 million citizens who
are interested in the Islamic industry because of their inner
beliefs. However, the number of halal producers is small to meet
the needs of all the Muslims. For example, according to
www.halalpages.ru, there are only 12 halal producers of different
meat and bakery products for almost 2 million Muslims in
Tatarstan (10% of total meat products produced here, with 10-
15% growth), 25 cafes, 80 grocery stores, 13 clothing stores, 5
beauty salons and 1 clinic.

The growing Russian halal market needs Sharia-compliant
financial and investment institutions. Return of the Muslim
population to their traditions and the growing desire to live and
work in compliance with Islam, growth of the number of Muslims
who are actively practicing their religion, interest of the
traditional financial business in Islamic finance, rationality and
attractiveness of the classic forms of financing for business - all
give momentum to the development of Islamic finance.
In addition to publications of “Doing business in Russia” series,

the following issues are considered to be important for foreign
investors interested in establishing Islamic financial institutions.

Legal Base

Russian legislation facilitates investments by non-residents and
introduces considerable benefits and guarantees for foreign
investors.
Russian corporate law provides for the development of equity

finance institute. Equity agreements, participation agreements,
and agreements on company’s legal incapacity and operating
period facilitate the effective use of special purpose vehicles
(SPV) in commerce.
Along with generally recognized rules of making international

deals, Sharia compliance should be stipulated in contracts with
Russian contractors as an obligatory condition of doing business.
Contractual jurisdiction makes it possible for foreign companies

to reduce their risks choosing an optimal jurisdiction. A legal case
can be considered by the International commercial arbitration at
the Chamber of Commerce and Industry of Russia, if there is an

appropriate stipulation in the contract.
Another advantage of corporate, financial and contractual laws of

Russia is their regulation character, which is mainly optional and
allows parties to structure most effective forms of interaction.

Taxes

Taxation is an important issue, concerning the implementation of
Sharia-compliant deals. It is about convenient operation of
Islamic finance system within a certain jurisdiction in accordance
with laws of the countries, where the deals are made.
On the microeconomic level, relevance of taxation issues consists

in the ability to implement Sharia-compliant deals and having
positive socio-economic effect.
Financial experts examine taxation issues according to

advantages and disadvantages of two types of deals: compliant
and not compliant with Sharia.
In practice, an Islamic financing deal is made between the

parties, where at least one of them can not disregard Sharia
norms. Therefore these parties do not consider advantages and
disadvantages between traditional and Islamic forms of financing,
including taxation issues, as this is not relevant.

Russia supports international agreements on avoidance of double
taxation (77 countries), allowing to select a country with an
appropriate tax regime for closing a deal.
Depending on the structure of a deal and amount of tax

payments, either the Russian partner’s jurisdiction or that of a
foreign partner can be chosen, including of a subsidiary company
registered in the territory with preferential taxation.
In the process of taxation optimization it is advisable to take into

account not only interests of the parties of a deal, but interests
of the state of principal place of business, which consist in
expected budget receipts from certain business activities. This
does not necessarily mean the regulator’s loyalty but does
contribute to a positive business reputation.

Financial Infrastructure

Business partnership Social partnership
Participation
Charity donations
Equity participation financing
Public property
Debt financing
Investment Financial
Charity

activities activities
Investment companies Banks (investment, Zakat funds

Direct investment corporate) Waqf funds
funds Non-bank credit Islamic business and
Mutual investment organizations finance development
funds Leasing companies fund
Credit cooperatives Charity fund
Mutual insurance management companies
companies (takaful)
Reinsurance companies
(Retakaful)
Trade financing SPV
Government regulation

Investments

An Investment Company can play a role of the basis of the Islamic
finance group. Its activities are aimed at establishing a fund,
bank, trade financing company, microfinance institution, leasing
and insurance companies, as well as making direct investments in
infrastructure projects in the territory of Russia.
Like the Investment Company, the mutual investment fund

accumulates funds of individuals and legal entities, in order to
co-finance business projects organized by the Investment
Company.
Sharia-compliant investing is realized in the form of Musharaka

and Mudaraba contracts. This is actually project financing, i.e.
direct participation of an investor in the capital –preparation of
feasibility studies, attraction of investors, support and
implementation of investment projects.
Essential part of investing in infrastructure projects is an institute

of private and public partnership, and mutual investment funds.
The Law “On the order of foreign investments having strategic
importance for the national security of the Russian Federation”
restricts foreign investments to 42 “strategic” sectors.
Except for direct investing, Sharia-compliant equity financing is

also possible via securities market of Russia – primarily Sukuk
(state, municipal, corporate), and foreign securities (Sukuk),
interest-free bills, which are in the aggregate investment-
attractive financial instruments.
The securities legislation allows the generation of returns on

bonds, like a shareholder return, i.e. acquisition of a property
right to share profits with the issuer according to results of its
activities.
Taking into account the fact that Russian banks do not have
proper experience in issuing sukuk, it makes sense to use this

financing instrument, as a temporary measure, with participation
of foreign banks.

Banking

The Russian banking system is based on interest, mitigation of
risks through insurance of deposits and establishment of reserves
to secure loans, and high risk deals.
According to the Civil Code of Russia, the Law on banks, and Acts
of the Bank of Russia, a borrower, who has received a bank loan,
has to not only return the debt, but also pay interest on it.
Deposits are made with banks in order to save money and
generate profits in the form of interest. A bank has to charge
interest on loans and pay interest on deposits.
The regulator does not divide Russian banks clearly into

commercial, savings, investment, mortgage or corporate, but
introduces universal requirements. Bank owners choose a bank
type they want, including mixed.
Russian legislation enables the establishment of an Islamic bank,

which, excluding credit and deposit functions, can also perform

the following banking operations:
• Bank account services;
• Encashment and cash services;
• Foreign currency exchange;
• Bank guarantees;
• Money transfer services to individuals;
• Fiduciary management of cash and other property;
• Operations with precious metals/stones;
• Storage of documents and valuables;
• Professional activities on securities market.
Taking into account regulatory restrictions, an Islamic bank can

operate without deposits and loans, but with project financing
and investment accounts as an investment and clearing bank.
The fact that non-cash payments make up no more than 75% of all
cash transactions, shows the commercial attractiveness of
clearing and settlement transactions.
Prohibition of direct participation of banks in production,

trading, and insurance activities makes it possible for them to
focus on musharaka, mudaraba and wadiah contracts, leaving
murabaha and salam transactions to trade financing companies,
including subsidiary companies, as the banking law does not
introduce any quantity restrictions in terms of participation

Banking

A bank can place funds raised in compliance with Sharia through
investments – buying shares or Islamic bonds (sukuk).
Banks can both buy and sell securities. Additional income can
be generated through intermediary financing – assistance by
issuance and placement of securities.
Banks can use the following forms of equity and debt financing in
compliance with Sharia:
• Share acquisition in the authorized capital of the SPV;
• Encouragement of purchasing by customers stocks or equity
shares in the authorized capital of the SPV;
• Origination and issuance of Islamic bonds (full or partial);
• Encouragement of purchasing by customers securities (shares and
sukuk) of Russian or foreign issuers, including through a bank-
managed mutual fund;

Participants of the Russian Islamic financial system, special
purpose vehicles or other legal entities, individuals, foreign
companies interested in receiving Islamic banking services in the
territory of the Russian Federation are expected to be clients of
the Bank.
The idea of establishing an Islamic bank is supported by statistics

– income of credit organizations managed by non-residents
amounted to 37.8 billion roubles in the 1st half of 2009, while
income of all Russian credit organizations to 6.8 billion roubles
only.
Among the factors having positive implications on activities of

banks managed by non-residents are worth mentioning:
availability of western sources of financing, quality risk
management, banking technology and corporate governance.
On the 1st of July 2009, 12.1% of the Russian banking sector

assets were concentrated in banks with foreign participation? but
they had 21.4% of all loans, deposits and other funds placed, with
6.3% in deposits.

Waqf

Waqf is a constituent part of public finance, the system that
consists in voluntary and equitable distribution of profits and
invests in social projects.
Waqf fund uses charity donations – assets transferred to the fund

by Muslims or Islamic companies on a voluntary basis – to meet
the needs of the Ummah.
Thus, the idea of Waqf consists in attracting and accumulating

assets in a specialized fund, for commercial use in the interests
of the Muslim community.
That is, instead of one-time direct charity, a business entity is

created that multiplies its profits on a continuous basis - this
appears to be preferential in the long-term period.
Among other things, there can be established interaction

between the Waqf fund, the Investment Company and the bank,
for the fund to purchase a share in a socially important project
consistent with its aims within a Musharaka contract.

Leasing

A leasing Company provides financial services leasing assets to
legal entities in compliance with Islamic law.
The leasing legislation allows to develop financing business model

in compliance with Sharia. Developing Russian economy and its
industrial and construction potential contribute to the
profitability of an Islamic leasing company, being even more
attractive for clients-entrepreneurs, than traditional leasing
services based on bank loans.
One of the key issues should be appropriate financing of the

leasing company, which can be done through the investment
Company, the bank, or sukuk issuance. The leasing company can
also cooperate with a Waqf company, credit and insurance
organizations.
Leasing is essential for successful operation of the Investment

Company in implementing infrastructure projects, where

equipment and special technology can be required purchased
through Ijara contract.

Insurance

Due to specificities of the Russian Law, traditional insurers can
not provide takaful services to their customers. However,
considering the importance of insurance as a financial institution,
it is possible for interested companies to establish mutual
insurance companies, which are subject to licensing but are less
regulated – this allows to develop takaful in Russia even now.
According to the Russian law mutual insurance companies can

reinsure their risks (claim payment risks) through a reinsurance
company, including international companies having portfolios of
developed takaful solutions.
This makes it possible to create a two-level insurance system,

where a mutual insurance company acts as a front office of a
retakaful company and issues insurance policies and other
documentation, pays insurance claims, ensures there are no
violations and fraudulent actions in the process.

For example, the retakaful company searches for entrepreneurs
interested in establishing mutual insurance companies, provides
them with documentation and teaching staff, coordinates their
work, handles funds attracted by the mutual insurance company
and increases them, pays insurance claims, determines general
insurance conditions, and develops a business model. Reward of
the retakaful Company is its share in insurance premiums (as a
fee) and the profit generated from the performance of its funds
(collected money).
Development of takaful industry in Russia appears to be

attractive not only to insurers but also to large international
takaful players accounting for about 20, which is more than
enough.

20
Trade Financing

A trade financing house (trade financing company) is a
networking platform for Russian and foreign entrepreneurs to
implement joint Sharia-compliant business projects.
The trade financing house is an instrument of non-bank financing

of manufacturing, agricultural, trade, distribution and logistic
projects, mainly, but not exclusively, through salama and
murabaha contracts
The mechanism of interaction where an investor establishes a SPV

(trade financing house) for implementation of commercial
projects appears to be optimal for participants of trade
financing.
A trade company (initiator), interested in doing business without

using credit resources, is invited to take part in the establishment
of a trade financing house as a shareholder or a fiduciary.

In this case, the relations between the SPV and the trade
company can be structured as a murabaha contract, where the
trade financing house (rabb-ul mal) finances trade deals, and the
fiduciary (mudarib) fulfills them for a fee, in accordance with the
Civil Code of Russia.
Manufacturing financing consists in consecutive implementation

of salam and murabaha deals to finance the whole production
cycle.
For example, the trade financing house pays for and buys
produced feedstock (corn, metal, oil products), transfers or sells
it to a plant, and then buys back finished goods to sells them to a
trading chain.
As this activity turns quick and is highly demanded, and returns

on trade financing account for 20% on average, Islamic trade

financing house appears to be a relevant and investment
attractive financial instrument.

21
Microfinance
Microfinance is represented by a credit cooperative, which pools

funds in order to provide financial and investment services to its
members – individuals and legal entities.
Economic activities of a credit cooperative, as in case of other

financial institutions, have 2 lines: raising of funds (contributions
of members, external borrowings, sponsorship, etc.) and
placement of the funds (loans to members, external investments).
According to the prohibitions under Sharia, members of a

cooperative – shareholders and borrowers – are actually parties of
its investment activities, who share both profits and losses with it.
Taking into account restrictions on types of activities of a credit

cooperative, which may not extend loans, but to members of the
cooperative, may not have a share in the authorized capital of
business companies or partnerships, issue or buy emissive
securities, trade or produce – the main Islamic finance instruments

used by a cooperative would be mudaraba, salam, wadiah yad
damanah, ijara, and sukuk.
According to the aims of a cooperative, contributions of the

members can be structured in the way of raising funds into their
personal accounts within the cooperative (wadiah) and subsequent
fiduciary management of the funds by the cooperative
(mudaraba). External borrowing is processed as mudaraba or waqf
contracts.
The cooperative uses funds virtually placed under its management

to provide interest-free social loans (qard ul hassan) to its
members, invest and finance activities of its members – legal
entities (murabaha, salam, ijara).
Participation of a cooperative in economically advantageous

projects of external companies can be done though issuance of
state or municipal bonds (sukuk) under specific projects of an

issuer.
The way out is outsourcing of the greater part of cooperative’s

functions, which is encouraged by the current legislation, making
it possible for nonmembers to perform functions of executive,
credit, investment, and supervising bodies.

22
Regulators

A Sharia board can be established in the form of an independent
non-profit organization or partnership, which examines Sharia
compliance of commercial projects, business solutions, and
financial instruments being developed. The Sharia board includes
a Sharia arbitration court and an auditing unit supervising
compliance of current activities of the Company with the
adopted business model.
Sharia arbitration court is required to settle economic disputes

between entrepreneurs who participate in implementation of
Sharia-compliant business projects. Establishment of a Sharia
arbitration court and the contractual character of commercial
relationships enables the integration of Sharia in the Russian legal
system as a universally recognized practice of business
intercourse.
Educational Centers provide assistance to regulators, in particular

the Russian Centre of Islamic Economics and Finance, which was

established in 2008 and operates under the Russian Islamic
University. It organizes monthly courses on basics of Islamic
finance, international thematic seminars on certain aspects of
Islamic finance based on models of Middle East and Southeast
Asia countries, also conducts researches on theoretical issues of
Islamic economics.

24
Cooperation

The team of IFC Linova consists of professionals with skills and
experience in attracting strategic/financial investors via
establishment of joint companies, as well as in structuring such
deals.
IFC Linova staff has experience of working at international and

Russian financial and government institutions, and understands
clearly the process of decision-making by regulators and investors
in establishing financial companies with a foreign capital.
IFC Linova has contacts with a range of major Islamic financial

institutions, such as IDB, ICD, IFSB, international consulting
companies, making it possible to solve additional issues
connected with implementation of projects on optimal terms and
conditions.
IFC Linova uses integrated approach to implemented projects,

including conduct of pre-investment investigations, consultation

on organizational and legal issues, taxation, appraisal,
management consulting and financial engineering .

25
Contact Information
3, Lavrentieva, Kazan, 420126, Republic of

Tatarstan, Russian Federation
Tel.: +7 (843) 567-60-66, 567-60-08
Fax: +7 (843) 567-60-89
www.linova.ru
Linar Yakupov
General Director
IFC Linova LLC
Tel.: +7 (843) 567-60-08
E-mail: office@linova.ru
Emil Gilmanov
Director of Financial Products

Development Department
тел.: +7 (843) 567-60-08
e-mail: e.gilmanov@linova.ru
Rashid Nizamiev
Director of Corporate
Finance Department
Tel.: +7 (843) 567-60-08
E-mail: rashid@linova.ru
Dmitri Shlyakhtin
Director of Legal Department
Tel.: +7 (843) 567-60-08
E-mail: dmitri@linova.ru

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Part I: Infrastructure

IFC LINOVA – Islamic Finance Consulting

This publication is in copyright. No reproduction in any form

© IFC Linova LLC 2009

IFC LINOVA – Islamic Finance Consulting

2 Guide to Islamic Finance

IFC LINOVA – Islamic Finance Consulting

IFC LINOVA – Islamic Finance Consulting

3 Guide to Islamic Finance

IFC LINOVA – Islamic Finance Consulting

This Guide to Islamic Finance in Russia is the

The work is aimed at specialists in Islamic

IFC LINOVA – Islamic Finance Consulting

IFC Linova wishes you to enjoy the Guide and

This Guide will give you some answers on the

5 Guide to Islamic Finance

IFC LINOVA – Islamic Finance Consulting

Russia has investment grade ratings, which are supported by its

Russia has a good external liquidity level, which according to

IFC LINOVA – Islamic Finance Consulting

Actively involved in financial markets are less than 1 million

rating agencies operate in Russia. There are some limits on the

In general the Russian economy continues to diversify its sector’s

7 Guide to Islamic Finance

IFC LINOVA – Islamic Finance Consulting

Muslims, as the main users of Islamic financial services, make up

IFC LINOVA – Islamic Finance Consulting

In addition to publications of “Doing business in Russia” series,

8 Guide to Islamic Finance

IFC LINOVA – Islamic Finance Consulting

Russian corporate law provides for the development of equity

Along with generally recognized rules of making international

Contractual jurisdiction makes it possible for foreign companies

IFC LINOVA – Islamic Finance Consulting

Another advantage of corporate, financial and contractual laws of

IFC LINOVA – Islamic Finance Consulting

10 Guide to Islamic Finance

IFC LINOVA – Islamic Finance Consulting

On the microeconomic level, relevance of taxation issues consists

Financial experts examine taxation issues according to

In practice, an Islamic financing deal is made between the

IFC LINOVA – Islamic Finance Consulting

Depending on the structure of a deal and amount of tax

In the process of taxation optimization it is advisable to take into

11 Guide to Islamic Finance

IFC LINOVA – Islamic Finance Consulting

IFC LINOVA – Islamic Finance Consulting

Investment companies Banks (investment, Zakat funds

12 Guide to Islamic Finance

IFC LINOVA – Islamic Finance Consulting

Like the Investment Company, the mutual investment fund

Sharia-compliant investing is realized in the form of Musharaka

Essential part of investing in infrastructure projects is an institute

IFC LINOVA – Islamic Finance Consulting

Except for direct investing, Sharia-compliant equity financing is

The securities legislation allows the generation of returns on

proper experience in issuing sukuk, it makes sense to use this

14 Guide to Islamic Finance