Three state-linked Russian banks aim to introduce a number of Islamic financial products this year that could increase pressure for Russian authorities to create a legal framework facilitating the industry.
Russian banks' balance sheets have been strained by an economic crisis and Western-imposed sanctions, encouraging efforts to develop sharia-compliant finance to attract investors from the Gulf and southeast Asia.
But Russia does not have a large Muslim population to provide a ready-made customer base; only about 20 million of its roughly 145 million people are Muslims. So progress rests on a handful of pilot projects and the willingness of regulators to pass legislation that would make Islamic finance cost-effective.
Those efforts received a boost last month when Russian lenders Vnesheconombank , Sberbank and Tatfondbank signed agreements with the Islamic Development Bank (IDB)to support their initiatives.
Russia's central bank has signed a similar agreement with the Saudi-based IDB, a multilateral lender which is one of the world's largest issuers of Islamic bonds.
"There is now political will for Islamic finance to develop in Russia. The ice has broken and people now understand that Islamic banking products can be in demand," said Maxim Osintsev, an executive director at Sberbank's corporate and investment banking division.
Sberbank, the country's largest lender by assets, aims to help to raise between $200 million and $300 million for a client this year via Islamic finance, which complies with religious principles such as a ban on interest payments, Osintsev said.
The IDB is backing those efforts, assigning teams to support each institution with legal and regulatory advice, said Ahmed Fayed Al Gebali, director of the IDB's Islamic financial services department.
Taxation issues are often an obstacle to Islamic finance deals, which can attract double or triple tax duties since they require multiple transfers of underlying assets.
"Legislation is a major issue -- there is still no definition of Islamic finance in the Russian legal system," Linar Yakupov, head of the Association of Regional Investment Agencies of the Russian Federation, said.
"These new efforts will create new impetus. It's a step forward but there is still more to do."
State development bank Vnesheconombank could be first to reach the market as it is governed under a different federal law than other local banks, allowing it to avoid tax hurdles.
Vnesheconombank has identified structures it can use to support export-import deals and project financing with a pilot transaction of around $100 million planned for the autumn, the bank said in response to Reuters questions.
There is also a desire to raise funds from Russia's Muslim population and from countries in the Commonwealth of Independent States (CIS) which have large Muslim populations.
In March, Tatfondbank opened a participation banking centre in the Tatarstan capital of Kazan which it aims to develop further with support from the IDB, the bank said. Participation banking does not use interest.
Tatfondbank said its corporate clients would soon have access to Islamic project financing and it planned to set up correspondent banking links with firms in CIS countries.
Beyond the three banks, there is growing interest from around 20 other financial institutions in Russia, said Yakupov, also president of the Kazan-based Islamic Business and Finance Development Fund (IBFD).
The IBFD is working with asset managers to introduce Islamic mutual funds that would channel money into Russian companies, including those in halal industries such as food preparation. It aims to launch a fund by the end of the year, Yakupov said.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.