Trend Commentator: Islamic banking as optimal solution for Azerbaijani banks

Azerbaijan, Baku, June 9 / Trend /

Trend Commentator Narmina Ismayilova

Islamic banking each day attracts more attention, and Islamic banks extended their activities far beyond the Gulf. It is not surprising that the commercial banks against a background of the global financial crisis begin to show a keen interest in the Islamic financial system because it is enough confidently demonstrated resistance to the crisis and preserved growth rate. Among the CIS countries the first Kazakhstan expressed initiative to introduce Islamic banking.

At present, many Azerbaijani banks are already considering the possibility of introducing such a system, as for banks first of all this means opening access to new sources of funding, creating a new vast customer base, as well as receiving benefits compared to banks that do not use such a system.

Regarding to investment potential, the Islamic banks have already shown their capabilities, that's why the involvement of such investments in Azerbaijan's banking sector with their subsequent pouring into the economy, of course, is one of the most important impetuses for both government and the Azerbaijani banks.

Azerbaijan is a country, where the majority of the population adheres to the principles of Islam, so the presence of banks, which can coordinate the standards of the country's existing legislation with sharia norms, will cause the fact that a part of the population, who have not trusted ordinary commercial banks with their money, will trust Islamic bank.

Of course, one of the most important factors for the Azerbaijani market is now a precedence factor. After becoming the first bank will get a number of advantages and it will significantly approve its position on the market.

So what distinguishes the Islamic banks from commercial ones? The most important difference between these banks and the ordinary commercial banks are the fact that they adhere to the requirements of Islam in their activities, under which loans with loan interest is prohibited. Islamic bank receives profit from its activities, but at the same time uses such financial instruments for its receipt, which allows observing this term. This mechanism works through the investment bases of business of Islamic bank.

Financing of business activities is realized at the expense of depositors of a bank, after which the bank and entrepreneur share the profits. Thus, the need for a loan interest disappears. In turn, receiving the remuneration by the depositor and the bank will depend only on the profitability and success of entrepreneurial activity, in which was invested.

However, the legal basis is needed for full funding of Islamic banking in Azerbaijan, so now one of the concerns of interested Azerbaijani banks is to develop proposals and submit them to the country's Central Bank.

Despite this, legal framework existing in the country allows introducing some products of the Islamic banking, which, in turn, has enabled some banks to start providing a limited range of Islamic banking services to its customers.

Also there is an optimal way for those banks not willing to completely transfer to the Islamic banking, this is "Islamic window". "Islamic window" is a certain structure under a bank, engaged in activities according to the Islam norms, and its financial accountabilities are conducted separately from the rest branches of the bank. I believe that on the introduction of the relevant legislation in Azerbaijan will increase interest in "Islamic windows", because they will allow the traditional banks already existing in the country partly to introduce the Islamic banking.

Today, when the world's largest banks open "Islamic windows", which, in essence, is proof of the growing interest in the Islamic banking, the process of introducing the Islamic banking in a Muslim country such as Azerbaijan is becoming more important and urgent.

At present, the Azerbaijani banks, which have shown interest in the introduction of the Islamic banking include the International Bank of Azerbaijan, Kauthar Bank, Amrah Bank, Texnika Bank.
Kauthar Bank already provides Islamic banking services under the existing banking laws. Amrah Bank has just started to implement such a system, and the IBA is planning to introduce "Islamic window" in the near future.  

There is no legal framework regulating the development of this area in Azerbaijan yet. The Central Bank of Azerbaijan (CBA) is continuing to examine the implementation of the principles of the slamic banking, which is planned to consider within overall strategy of the banking system, and evaluation of it.

The Central Bank prefers classical form of the banking secto development. According to the CBA chairman Elman Rustamov, the Azerbaijani mentality is very successful, as it unites both features of modernism and the European, as well as national traits. "However, search is underway, as any model should be tested", Rustamov said. He said that if the national mentality requires this form of banking service, then this issue will be considered.

Islamic Development Bank also offered to the Central Bank of Azerbaijan to assist in the establishment of an Islamic bank in the country.

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