(MENAFN - Arab News) The Muslim Central Asian countries (CIS) including Azerbaijan are fast opening up to the global Islamic finance market. After many years of brutal Soviet rule, Azerbaijan, the oil-rich Caspian country with a population of about 9 million and a member of the Jeddah-based Islamic Development Bank (IDB), is reaching out to Islamic finance, especially in the wake of the near collapse of the global conventional banking system as underlined by the credit crunch and the international financial crisis. More importantly, Baku - the capital - is in the process of reviewing its legislation with a view to introducing laws to facilitate Islamic banking in the country. Faig Mammdov, special adviser to the chairman of the International Bank of Azerbaijan (IBA), Jahangir Hajiyev, focuses on the current developments and future prospects for Islamic finance in the country and region.
What is the current state of Islamic finance in Azerbaijan?
At the moment there is no stand-alone Islamic bank in Azerbaijan because there is no legislation that could authorize or license such a bank. There are a number of products based on Islamic financial principles which are being offered by some banks in the country. But as a system of financial management, it is still in its infancy. There is no Islamic banking law yet in the country, but legislators are currently reviewing the existing banking and allied legislation to see how Islamic banking could best be incorporated and regulated in Azerbaijan. The Central Bank of Azerbaijan is also studying the experiences of other countries, including the UK, which has, over the last year or two, established Islamic banking in their jurisdictions.
Can you assess the level of demand for Islamic financial products in Azerbaijan?
Azerbaijan has a Muslim majority with a population of just under 9 million. It is also a major oil producer and exporter in the region. There has been a long Islamic microfinance tradition at a community level for many years, but there is definitely a demand these days for Islamic financial products such as Murabaha, Ijara and Sukuk. Being the largest bank in the country, IBA wants to lead the process of offering Shariah-compliant financial products in the country.
What is your current involvement in offering Islamic finance products to your customers?
Last year we signed a 20.5 million financing facility with the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the IDB Group. The proceeds of this facility are being used to disburse Shariah-compliant financing to small-and-medium-sized enterprises (SMEs) in Azerbaijan. We also have several such relationships with other Islamic financial institutions abroad, especially in the GCC (Gulf Cooperation Council) countries and Turkey. The bank is also currently involved in a study on the possibility of issuing a corporate Sukuk (Islamic bonds or securities), which would be the first one in the country. We hope to finish the study and consultation by this summer, and plan to issue a Sukuk sometime later this year with the help of overseas Islamic financial institutions including those in Saudi Arabia.
Do you have any plans to expand into the Middle East, especially given your nearness to Turkey?
Yes we are already expanding into the GCC countries. We recently opened a representative office in Dubai. In March this year, IBA Chairman Hajiyev led a delegation from the bank to Qatar. Following negotiations with the Central Bank of Qatar and the Qatar Financial Centre (QFC), the bank received approval to open an IBA branch in Doha and a license to establish a stand-alone subsidiary bank in Qatar with a capital of 10 million. We expect to open in Qatar not a conventional bank, but an institution which will exclusively operate in accordance with Islamic banking principles. We also have a branch in Moscow and in Georgia, which means that we can also service clients there who may wish to access Islamic finance in the near future.
How many other Azerbaijani banks are offering Islamic finance products?
There are some 43 banks in Azerbaijan. IBA is the largest with a capital of over 5 million; government agencies own 50.2 percent and the rest is owned by local corporations, individuals and some senior bank managers. The bank is earmarked for full eventual privatization.
How long do you think it will take for the Islamic banking legislation to be enacted?
We are moving one step at a time. We have already introduced certain Islamic financial products which do not conflict with our existing banking regulations. We want to demonstrate how Islamic financial products work in practice and in the real economy, and show their success to the government, the business sector, ordinary consumers and investors. This will pave the way for building a more complex structure including more sophisticated Islamic financial and capital market products. In this way, I believe, Islamic finance will flourish in Azerbaijan. It is an important educational process for all, and we welcome the cooperation of such institutions as the IDB.
Which products do you think will be popular in your market?
There is a huge demand for housing finance in particular. We are in the process of launching an Islamic mortgage based on Murabaha and Ijara contracts. They are the easiest to introduce under the current legislation. We are also in discussions with Turk Capital in Bahrain, an affiliate of Kuwait Turk Participation Bank in Istanbul, which in turn is a subsidiary of Kuwait Finance House (KFH). Turk Capital, in fact, has recently set up a joint Islamic investment and finance company in Azerbaijan with a government entity in Baku. IBA is also the largest trade finance bank in the country so we see a huge market for commodity Murabaha business in the future.
By Mushtak Parker