Due to religious beliefs, many Muslims cannot make use of traditional Western financial services. This becomes a serious problem in Islamic countries as economies cannot develop to help raise the standard of living for citizens, and integration with the global economy is constrained. Sharia-compliant Islamic finance has developed to fill this need over the last few decades.
In the North Caucasus, a predominantly Muslim area, Islamic finance is being further developed, encouraged by local governments such as the Chechen Republic.
“Sharia prohibits riba, or usury, defined as interest paid on all loans of money…Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam (“sinful and prohibited”),” writes Wikipedia.
The Sharia-compliant transactions are often routed through Western commodity trading desks where large contracts are written for specific payment terms to provide a return for investors but technically avoid interest payments. Islamic-controlled banks in the Gulf region are heavily involved in this activity. Iran is also well-versed and active in Islamic finance. Many of the world’s offshore financial jurisdictions see Islamic finance as a growth area and have developed the capability to support it.
The Chechen Republic, located in the North Caucasus of the Russian Federation is one jurisdiction that is keen to ramp up Islamic banking services for its population. With the overwhelming majority of its citizens adhering to Islam, the Chechen authorities are moving forward to provide this type of financial service, believing it will help stimulate economic growth for the formerly war-torn area.
With a market with almost one and a half million people, more than $7.5 billion of gross regional product and almost $3 billion of annual investment, Chechnya looks to become a center of Islam-based economic vitality, building on relationships with other Islamic nations. The largest Islamic finance markets remain Saudi Arabia, Iran and Malaysia, which together account for 65% of the global Islamic assets of $2.5 trillion.
The Chechen government provided this information regarding its growth plan — In this regard, the Ministry of Economic, Territorial Development and Trade of the Chechen Republic has developed a roadmap for the development of Islamic financial services in the Chechen Republic, which includes a number of events, including:
- Training qualified specialists in the field of Islamic finance, namely highly qualified economists, lawyers and certified Sharia experts to work in Islamic financial and insurance companies;
- Creation of a bank to serve companies offering Islamic financial services;
- The creation of Islamic financial companies providing a wide range of services: consumer finance, mortgages, leasing, project finance, deposits, insurance services;
- Development of the securities market (sukuk) on the principles of Islamic finance;
- Development of international cooperation in the field of Islamic finance, attracting investments from foreign investors and international financial companies and organizations.
The overall goal of implementing such a roadmap is to create a financial sector that provides services adapted to the needs of the region and implements a mechanism for transforming the savings of the population of the republic, the Russian Federation as a whole into investments in the economy and attracting foreign investments.
It is assumed that activities to create a bank and Islamic financial companies will be carried out with the active participation of private local and foreign investors who gain access to create a new market worth $ 2 billion with the prospect of expanding the business to the market of the Caucasus and the Russian Federation as a whole. According to various expert estimates, the potential Islamic financial market of the Russian Federation is from $25 billion to $105 billion and about 20 million people of the Muslim population. In addition, the market volume can be significantly higher due to the population who refuse to consume traditional financial services due to moral and ethical considerations.
Since much of Chechen economic activity comes from Gulf investment and tourism, development of the republic as a center of Islamic finance will obviously be a force multiplier in this effort.