Nikolay Tsekhomsky: Islamic Banking to become Source of Investment in Russia
While a phrase such as “Islamic banking” sounds quite foreign to the majority of Russians, this concept is well-known in the East. It implies a closer relationship between banks financing projects and companies that implement them. In Russia, there are no regulatory standards enabling the development of this kind of business, but the Bank of Russia and the market players are working on filling this void.
What benefit does Islamic financing bring to the Russian economy, and how can VEB use this tool to help exporters? Moreover, what is the difference between “murabahah” and “ijarah”? The First Deputy Chairman of Vnesheconombank Nikolay Tsekhomsky sat down with RIA Novosti to answer these and other burning questions.
— How does VEB view the potential for Islamic banking to develop in Russia? Does VEB consider the development of this type of banking important and necessary, and if so, why? How can this influence the development of the Russian financial system?
— During the 2008-2009 crisis, Islamic partnership banking received the close attention of investors from all over the world, making clear the advantages of this model against the traditional one, with the former being more resistant to external shocks.
In particular, from 2008 the key segment of the Islamic financing market, the “sukuk” (Islamic bonds) market demonstrated high growth rates. By 2013, the sukuk market value increased more than fivefold.
In Russia, a keen interest in using partnership banking tools arose in 2014 in the light of the sectoral sanctions imposed by Western countries, which limited the access to the capital market for many Russian companies, including Vnesheconombank. Due to this, the strengthening of ties with Islamic countries in the trade, economy and investment sectors has become one of the more important directions for the development of our country, home to more than 20 million Muslims.
For Vnesheconombank, Islamic banking opens up new opportunities both for the funding of investment activities and for the support of Russian industrial exports.
We believe that the development of ethical finance practices will contribute to better development of the Russian economy and financial system. A new source of investment will give rise to the emergence of new financial institutions specializing in Islamic banking, which will promote the competition and rehabilitation of the banking sphere while offering new financial instruments to the market actors.
— Is VEB working on any Islamic banking projects? What are they and with which financial institutions is VEB cooperating?
— Our evaluation of funding certain projects depends on the requests we receive from our clients and are looking for investors in the Islamic financial market. We rapidly develop our contacts with financial institutions in the Organization of Islamic Cooperation (OIC) member countries and are in constant search for mutually beneficial cooperation.
This not only means the use of traditional Islamic financing instruments but also the solicitation of investors for collective investment funds, development of educational programs and sharing experience in the partnership finance sphere.
This is the path that we follow in the development of our liaisons with the key international financial institution in the Islamic world - the Islamic Development Bank group. Last May we signed a memorandum with this bank and agreed to further promote cooperation in the areas of consolidated financing of investment projects, support of export and import operations between our countries and the exchange of best practices.
One of our priority tasks now is to form a product matrix meeting the needs of our clients and investors from the OIC countries. In the near future we plan to use it to attract funding upon guarantee of Vnesheconombank and to explore the options for investor participation and co-investment of VEB projects.
— Does VEB intend to raise funds for new investment projects through Islamic banking?
— Certainly, that is one of our goals. We are making efforts to secure funds for new investment projects from financial institutions and OIC country investors using both traditional instruments and instruments of Islamic banking. VEB has numerous contacts with sovereign wealth funding and the largest banks of the UAE, Bahrain, Saudi Arabia, Malaysia and other countries.
— In the opinion of VEB, what has prevented the development of Islamic banking in Russia?
— The development of Islamic banking in Russia is to a large extent hindered by law and the absence of the necessary infrastructure and trained personnel. The Parliament and the Bank of Russia are already engaged in the improvement of the legal aspects.
We hope that all together we will be able to galvanize the developmental process. It is important that the laws (banking laws, tax laws and the Civil Code) make it possible to use the instruments of Islamic banking to the full measure. The present-day regulatory and legal framework is effective enough only for certain elements of sharia-compliant transactions.
Certainly, fund raising from investors based in the OIC countries is complicated by the imposed sectoral sanctions and the currently low level of the trade and economic cooperation between Russia and the OIC countries.
— Does VEB take part in the Bank of Russia's workgroup for the development of Islamic banking in Russia? What results can VEB expect from the establishment of this workgroup in 2017? Are there any consultations between VEB and the Central Bank regarding the development of such banking?
— VEB’s experts are included in the CB workgroup for partnership banking and the workgroup of the Federation Council. For example, Vnesheconombank took part in designing the road map for the development of Islamic finance in Russia.
The main result that is expected from the workgroup is bringing forward specific proposals and recommendations for the required legal changes. The idea is not to adopt new laws or regulations but to adjust the existing ones in such a way that the partnership banking instruments are, in essence, established as equal to traditional banking instruments, from the point of view of taxation as well.
— Earlier, VEB Chairman Sergey Gorkov said that the Islamic banking products related to the financing of investment projects have yet to be tested in Russia. What Islamic banking projects could be realized in partnership with VEB in 2017? Will VEB have any common projects with Sberbank in this area?
— We coordinate our work with Sberbank. We have a lot of common goals, including those connected with our legislative improvement efforts. In December 2016 in Bahrain, Sberbank and Vnesheconombank, together with its subsidiary VEB Leasing, represented Russia at the 23d World Islamic Banking Conference. The partnership of such high-profile financial institutions underscores the importance of the development of Islamic banking in Russia for our partners from the OIC countries.
Nevertheless, Vnesheconombank and Sberbank, as financial institutions, have different strategic goals, which helps explain our lack of competition in this area of business. Our goals imply, first of all, raising funds for the development of the bank’s investment activities and support of Russian industrial exports.
— Which Islamic banking products may find demand in Russia?
— Vnesheconombank, as a development institution, is focused primarily on the support of the Russian export industry and promotes the implementation of investment projects in Russia.
We consider using in our work those Islamic banking instruments that may be effectively integrated in the task structure of project financing (musharakah, mudarabah, istisna), trade financing (murabahah) and hire purchase (ijarah).
China’s best practices will help VEB avoid mistakes in its new strategy – first deputy chairman of state corporation
BEIJING, May 27 /PRIME/. In the course of their visit to China, Vnesheconombank’s representatives held a workshop at the China Development Bank. Our Chinese partners’ best practices in terms of risk management, human resources policy and lending could be used upon preparing a development strategy of state corporation, said VEB’s First Deputy Chairman Nikolai Tsekhomsky to RIA Novosti.
VEB’s delegation is in Beijing as part the Group of Twenty countries financial development institutions’ heads – D20 meeting.
“Our main goal here is to participate in the D20 meeting. But in addition to it, we decided to combine the useful with the useful and brought here a team that spent yesterday a whole day at the China Development Bank participating in a workshop. And it’s very interesting for us to listen to about our colleagues’ successes and failures and the ways of overcoming these failures maybe in the late 90s, reasons for these failures and the way they adjusted their strategy.
He reminded that now VEB was forming a new strategy that will be presented in late June.
“So, we are interested in any introductory information from the respected banks and especially from the China Development Bank which is one of the most successful development banks”, said the Deputy Chairman of the state corporation.
“We listened to very attentively about their risk management, their human resources policy and their lending policy. To my mind, we held a very useful workshop yesterday, our team members took a lot of notes. I think we can borrow something from them but in any case it was very useful”, added Mr. Tsekhomsky.