Islamic financial services more in demand for Russian retail customers

Complex sanctions by western countries at the end of March 2022 had temporary but strong effects in the first few days, weakening the Russian national currency (rate of the Russian rouble decreased more than 30%), volatized Russian stock markets and increased risks and uncertainty in the Russian financial sector. The annual rate of inflation in early April reached 17.49%.

In response, the Bank of Russia raised the key interest rate to 20% and limited the maximum sum of cash withdrawal in foreign currency from deposits in Russian banks to only US$10,000. Banks also stopped selling foreign currency to the population, and Russian exporters have to sell 100% of their income in foreign currency in the local market.

In addition to that, the Russian government requested all European countries — receivers of Russian gas, oil, coal and other raw materials — to make payment in Russian roubles. Such urgent and significant measures taken by the Russian government managed to stop the rapid growth of inflation, moved the rate of the Russian rouble back to the pre-sanctions level, increased supply of foreign currency and normalized foreign exchange and stock markets. On the 11th April, the Bank of Russia decreased the key interest rate to 17%, while on the 18th April, the moratorium to sell foreign currency to the population within Russia was removed.

However, these measures also had other consequences. The high level of interest rates made credits of conventional banks too expensive. Thus, the minimum average annual rate of consumer banking credits is around 25%. This decreased the demand of consumer credits and slowed down the sales of electronics and other consumer durables which caused big Russian electronic sellers to discontinue their installment payment programs with conventional banks.

Islamic financial companies with their?Murabahah-based financial programs managed to replace conventional banks and restore purchasing activity among consumers.

LaRiba Finance, an Islamic finance company in Dagestan, launched new joint?Shariah?compliant installment payment programs with Russian electronic sellers. Murad Aliskerov, the head of?LaRiba Finance, highlighted some advantages gained by electronic sellers when collaborating with Islamic financial companies. Firstly, Islamic financial companies are not so dependent on the rate of the central bank and thus could offer a low margin to customers.

Secondly, Islamic financial companies make payment to shopping malls the very next day after signing the contract, while conventional banks only pay after two weeks which is why local shopping centers add 10% to any spot price of product sold on conventional credit to customers.

Due to such conditions of conventional banks that are not acceptable to the majority of consumers, interest in Islamic financial models has increased. This provides hope for Islamic financial companies to become the main contributors of financial resources to retail customers in the nearest future and become strong competitors to conventional banks in the Russian market.

Dr Ilyas Zaripov is a member of the Participating Banking Working Group of the Central Bank of the Russian Federation and the head of the Islamic Finance Educational Program of the?Plekhanov Russian University?of?Economics. He can be contacted [email protected].