Islamic Banking as optimal solution for Azerbaijani banks
Islamic banking every day attracts more attention, and Islamic banks have extended their activities outside the Persian Gulf. It is not surprising that on the backdrop of the global financial crisis, the commercial banks are beginning to display keen interest in the Islamic finance system because it confidently demonstrated resilience to the crisis and maintained growth. Amongst the CIS countries, first Kazakhstan made an initiative to introduce Islamic banking.
Today, many Azerbaijani banks are already considering the possibility of introducing such a system, since for banks this means firstly opening access to new sources of funding, creating a new customer base, as well as receiving advantages compared with banks that do not use such a system.
With regards to the investment potential, the Islamic banks have long shown the world their capabilities, and the involvement of such investments in the banking sector of Azerbaijan and their subsequent injection into the economy, of course, is one of the most important incentives for both government and the banks of Azerbaijan.
Azerbaijan is a country where the majority of the population adheres to the principles of Islam, so the presence of banks, which are able to coordinate the existing norms of national legislation with the norms of Sharia, would lead to the issue that the part of the population, who do not trust their money in the ordinary commercial banks, will trust them in Islamic bank.
And, of course, one of the most important factors for the Azerbaijani market is now top ranking. After becoming the first, the bank will get a number of advantages and it will significantly approve its position in the market.
So what differs Islamic banks from commercial? The most important difference of these banks from the ordinary commercial banks is that in their activities, they adhere to the requirements of Islam, under which loans with the lending rates are prohibited. Islamic banks profits from their activities, but at the same time, they use such financial instruments for their profit, which allow observing this condition. This mechanism works through the investment fundamentals of business of the Islamic banks.
The business activities are financed at the expense of depositors, after which the bank and the entrepreneur share the profits. Thus, the need for a lending rate disappears. In turn, the profit of the investor and bank will depend only on the profitability and success of entrepreneurial activity, which was invested.
However, full financing of the Islamic banking in Azerbaijan requires an adequate legislative framework, so today one of the concerns of interested Azerbaijani banks is to develop proposals and submit them to the Central Bank of the country.
Despite this, the legal framework available in the country allows providing some products of 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 banks not willing to completely switch to Islamic banking - this is "Islamic window". "Islamic window" is a definite structure under the bank, engaged in activities upon the rules of Islam, and its financial statements are separate from other departments of the bank. Introducing legislation in Azerbaijan must increase interest in "Islamic windows", because they will allow traditional banks to partly introduce Islamic banking.
Today, the world's largest banks open "Islamic windows", which in fact testifies the growing interest in the Islamic banking, the process of introducing Islamic banking in a Muslim country such as Azerbaijan is becoming an increasingly important and relevant.
Today in Azerbaijan the International Bank of Azerbaijan, Kauthar Bank, Amrah Bank, Texnika Bank display an interest to introduce Islamic banking.
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" soon.
Yet there is no legal framework in Azerbaijan to manage the development of this sector. The Central Bank of Azerbaijan (CBA) is continuing to examine the implementation of the principles of Islamic banking, which is planned to be considered as part of an overall strategy of the banking system, and evaluation on how it is profitable for Azerbaijan's economy.
The Central Bank prefers classical form of the banking sector. According to the CBA chairman Elman Rustamov, the Azerbaijani mentality is successful as it combines features of both modernism and the European and national traits. "However, there is a search, since any model should be tested," said Rustamov. If the national mentality requires this form of banking, that question 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.