Baku, Azerbaijan, July 28
By Azad Hasanli – Trend:
Azerbaijan’s economic development can get a powerful momentum against the backdrop of the growing demand for Islamic financial instruments in the country.
During the first half of this year, Azerbaijan has already signed four different Islamic financing agreements. The agreements were signed between Azerbaijan’s Ministry of Economy and Islamic Development Bank, the Al Huda Center of Islamic Banking and Islamic Economics and the Azerbaijan Center for Research of Economic Resources, the Islamic Corporation for the Development of the Private Sector and the Hi-Tech Park of the Azerbaijan National Academy of Sciences (ANAS), as well as between the Islamic Corporation for the Development of the Private Sector and the “Cooperation of Azerbaijan and Arab Countries” Public Association.
These agreements provide for an analysis of the banking legislation and studying the opportunities of introducing the Islamic banking principles and financial instruments in Azerbaijan, and also contribute to examining the global experience in the Islamic financing, attracting investments, etc.
Such interest to Islamic financing, on the part of both the government and private sector in Azerbaijan, is quite logical. Over the past two years, Azerbaijan’s economy has faced global challenges. And to cope with these challenges, various reforms have been implemented, strategic road maps have been developed and huge work has been done in general to neutralize the negative processes and improve the investment climate and business environment.
Introduction of the Islamic financing tools in Azerbaijan is a logical development of the reforms that will expand the opportunities to attract additional capital and stabilize the economy. Shari'a-based financing has a number of advantages: its orientation at the real sector of economy; fair risks distribution between the investor and borrower; interest-free loans; zakat that Islamic banks can pay by implementing micro-projects for the poor, which also increases the social significance of the Islamic financing.
Enforcement of the relevant legislation in Azerbaijan will also promote coming of the Islamic banks into the country. Lately Baku has been actively developing ties with Arab countries. However, to develop a full-scale cooperation with the Middle East, Azerbaijan lacks the legislation that is based on the Islamic finance principles. Such legislation will allow Islamic banks to work more actively in Azerbaijan and provide the country with effective tools to support the overall development of the economy.
For example, the Islamic bonds called sukuk could help raise funds to finance various projects, not only from the domestic market, but also from that of Arab countries.
Another tool – waqf or awqaf – could help implement social projects. Waqf is a property that is transferred for religious or charitable purposes. A mandatory condition is that such property should generate benefit or income, and be non-expendable, and therefore, money cannot be transferred as waqf. The waqf transfer can be free of charge when the owner of the property, for example the government, loses its rights over the property. However, there is another option, under which the primary owner after having transferred the property to another person, receives a part of income that can be generated by the transferred property.
The use of another tool – takaful, an Islamic insurance system – can help strengthen the social protection of citizens and become a source of additional income. Takaful is different from traditional insurance in that it operates according to the principles of solidarity. Contributions made by the clients of a takaful company are pooled into a common fund, which is used to pay insurance compensation in case of insured events. In addition, the operator (a takaful company) invests this money in business of different companies. At the end of the year, the total profit, net costs and payments are distributed among the insured.
As of today, the volume of assets in the Islamic financial instruments market ranges from $2 trillion to $3 trillion. Effectiveness of the Islamic financial instruments has been also proved by the fact that financial companies of many non-Muslim countries, such as Great Britain, Australia, China, Switzerland and others, are actively using the Islamic finance tools. The Islamic financial instruments can open up new opportunities for Azerbaijan to support development of the economy and increase the well-being of its people. Emergence of Islamic banks in the country can give a powerful impetus to development of the economy and attract additional capital from both the Arab countries and local market.
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Azad Hasanli is a Trend commentator, follow him on Twitter: @AzadHasanli