Azerbaijan looks to expand Islamic finance

By bne IntelliNews September 2, 2009

Mahir Humbatov in Baku -

Though there is currently no stand-alone Islamic bank in Azerbaijan due to a lack of legislation that could authorize or license such a lender, there is huge potential for Islamic banking in the country.

An increasing number of Azerbaijanis are exploring ways to introduce Islamic banking into the country, within the existing legal and normative framework. Despite some progress in the sector, these activities are "hidden" under the forms of conventional system.

Some elements of Islamic finance have already been introduced into Azerbaijan by Kovsar Bank, which positions itself as an Islamic bank even though officially it's just a conventional bank that happens to have interest-free products. Actually, it's the only stand-alone bank in Azerbaijan and the rest of the Commonwealth of Independent States that operates according to the principles of Shariah. At the moment, it has only four offerings - investment accounts based on mudarabah (investment partnership), loans to businesses based on musharakah (profit and loss sharing), loans for retail and corporate clients by purchase and sale of bills of exchange analogous to sukuk (islamic bonds), and consumer loans based on ijara wa iqtina (islamic leasing). Due to restrictions on banks' trading activity stipulated in Azerbaijani legislation, Kauthar cannot base any of its operations on the murabaha (purchase and resale) principle.

There has also been some collaboration of local banks with the Islamic Corporation for the Development of the Private Sector (ICD) - a subsidiary of the Islamic Development Bank Group. Beginning from 2006, the ICD has allocated credit lines to the tune of $17m to Azeri banks such as IBA, Unibank, Bank Standard, Rabitabank, Turanbank and Azerdemiryolbank for financing small businesses, or others through ijara wa iqtina (islamic leasing) and ijara thumma al bai' (lease/buyback transactions). These operations do not contradict Azerbaijani legislation and could be "hidden" under the accepted terms of conventional banking. Even the multilateral financial institution, the Islamic Development Bank (IDB), which leads the spreading of Islamic banking and finance in the world, last year proposed to the government to allocate credit lines to local banks amounting to $20m.

Recognised potential

To discover the Islamic finance potential in Azerbaijan, in March 2008 the Azerbaijan Investment Company, which is fully owned by the government, and the ICD established the Caspian International Investment Company (CIIC), which operates according to Shariah. The ICD has a 75% stake in the company, with the remaining 25% owned by AIC. As the CIIC is not technically a banking institution, it is easier to implement investment activities and projects based on Islamic financial principles, although it is not allowed to render banking services or collect deposits. The main objective of the CIIC is to attract foreign investment to Azerbaijan and to develop the non-oil sector of the country. It is expected that in the near future the chartered capital of the company will increase to $70m from the current $4m. Through its two key shareholders, the CIIC enjoys the full support of the government and international financial institutions. In parallel to its current activities in the country, in June the ICD established an ijara-leasing company with capital of $5m.

A sign of how interested the IDB is in the region, it held its 34th annual board meeting in Turkmenistan this year and will hold the next in Azerbaijan in 2010.

In addition to the IDB, other Islamic financial institutions interested in Azerbaijan's developing economy include Kuwait Finance House, which in March established a company similar to CIIC with the AIC. Kuwait Finance House has a majority shareholding of 75% in the new entity and AIC a 25% stake. The chartered capital announced is $500,000, but is expected to increase to $20m. The company's purpose is to attract investment to the country's non-oil sector.

Moreover, in June 2008, Bahrain International Investment Bank purchased a 49% stake in Amrahbank. Amrahbank was to be converted into a fully-fledged Shariah-compliant bank. However, this initiative has yet to be put into practice due to some hurdles that need to be overcome first.

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