By TBY | Azerbaijan | Jun 07, 2015
Islamic financing is new to Azerbaijan, with only a select few banks offering services; however, it is now growing in popularity as people become more aware of its benefits.
Azerbaijan’s financial sector is becoming increasingly competitive, as many of the mid- and lower-tier financial institutions fight to stay in business. Banks, therefore, have to find innovative ways to appeal to their potential customers or rapidly lose business. One product that has, until recently, been out of favor in the financial sector is Islamic finance. Azerbaijan is a politically secular nation; however, the population is predominantly Muslim. With Islamic banks in the GCC having up to 25% of market share according to a Standard & Poor’s 2014 report, the possibility to make use of Islamic Financial services has increased and planned legislation could support its development.
Islamic finance has several elements that differ from standard services with its requirements based on sharia law. Every purchase must be based on assets that are tangible, interest is not allowed, and investment cannot be carried out in non-sharia compliant services, such as tobacco, alcohol, arms, gambling, and other non-halal goods. One of the most stringent guidelines is that all Islamic Finance Institutions (IFI) must have an established sharia advisory or supervisory board with experts who are specialized in fields of Islamic commercial law and Islamic finance. For Azerbaijan, a country where these Islamic finance projects are fairly unknown and untested, finding these specialists may not be an easy step.
Movement in the direction of developing Islamic financial services has increased in 2014. A new Islamic banking law is set to be put in place in 1H2015 and the International Bank of Azerbaijan (IBA), the country’s largest lender and one of the biggest banks, is planning to set up a completely separate sharia-compliant banking unit. IBA has so far invested $180 million into Islamic Finance in Azerbaijan, and this is set to reach $750 million if the aforementioned legislation is passed according to Bernardo Vizcaino at Reuters. IBA’s current plans also include offering similar Islamic financial services using its subsidiaries in Georgia, Russia, and Qatar.
In a country with a predominantly Muslim population, the question stands as to why Islamic finance, an important growth area in the MENA region, has not taken hold in Azerbaijan before. In reality, attempts have been made in the past but demand and interest from government authorities was nearly non-existent. Rufat Aslanli, the current Chairman of the State Committee for Securities (SCS), had said in 2010 that the need for Islamic financial services was limited. Enthusiasm had also been lacking from the Central Bank of Azerbaijan (CBAR) in 2010 with Chairman Elman Rustamov asserting a preference for traditional form of banking. Rena Melikova, the Director of CBAR’s legal department added that it was not a priority.
In the past, further concerns undoubtedly discouraged potential interest. Kauthar Bank, previously Universal Bank, had once been the only bank in Azerbaijan to offer Islamic financial services. Initially, it had not even been able to carry out all sharia-compliant services due to limiting legislation, and the end result was that the bank’s main processes were in securities operations. With the suspension of Kauthar Bank’s activity in 2010 due to a lack of share capital, Islamic finance in Azerbaijan was not in good shape. However, 2014 seems to have been somewhat of a turning point. Plans for new legislation, along with IBA’s new Islamic banking unit, suggest that the tide has turned. The fact that IBA is 50.2% owned by Azerbaijan’s Ministry of Finance is evidence that government authorities are warming to the new possibilities of Islamic finances. To add to that, Kauthar Bank was revived in 2014 as it raised its capital by AZN38 million to the minimum requirement of AZN50 million by releasing 190,000 shares, and its suspension was lifted.
TuranBank, one of the few banks that provides Islamic financial services in the country, is also optimistic about the outlook for sharia-compliant services. Working in close proximity with several Islamic financial institutions including the Islamic Development Bank (IDB), TuranBank has accelerated the development of sharia-compliant services. In an interview with TBY, Fuad Musayev, the Chairman of the Supervisory Board for TuranBank, said, “Overall, our model is a conventional banking model, yet it takes into account local needs where there is large amount of demand for Islamic banking products, and we want to have the ability to serve that segment of the market.” On a more personal note, he added, “Many people in Azerbaijan want to implement their personal values and beliefs in their day-to-day financial and investment activity.”
Optimism about the sector, planned government legislation, and the tentative revival of Kauthar Bank have demonstrated that Islamic financial services have significant potential. Stipulations of sharia-compliant services mean that full implementation will take time to achieve, while a lack of education and awareness of Islamic finance is likely to stunt development to a certain extent. However, Azerbaijan’s financial sector is, like the country itself, relatively young and the potential is there assuming that there is a dramatic increase in awareness. If the government also continues to demonstrate interest in supporting the development of Islamic finance, the sector has exciting possibilities.