In a sign that Islam’s role in Azerbaijan may be slowly evolving, the country’s largest and only state-owned bank, the International Bank of Azerbaijan, plans this autumn to open a specialized branch offering limited Islamic banking services.
A prohibition on charging interest for loans is the major distinction between Islamic and Western-style banking. Instead of interest, Islamic banks take a stake in businesses to which they loan money, and share both the profit and loss with the client.
Several Azerbaijani banks already offer such loans, but Azerbaijani law does not authorize a full range of Islamic banking services. By setting up an Islamic banking services branch, the International Bank of Azerbaijan (IBA), as a state-owned financial institution, is sending signals that that situation could start to change.
IBA representatives emphasize that they will proceed at a deliberate pace. "It is clear that the introduction of the Islamic banking in Azerbaijan should be gradual and should not violate the constitution and banking legislation,” said Behnam Gurbanzade, head of the IBA’s working group on Islamic banking. “Azerbaijan is a secular country and banks work on classical schemes."
By the end of the month, the IBA will select a consulting firm to help it create its Islamic bank branch. Four prominent companies are vying for the contract --Ernst&Young/Baker McKenzie; PriceWaterHouse/Salans; Pinsent Masons/KPMG; and Ekvita/Islamic Finance Advisory Assurance Services.
The IBA is not alone in investigating the field of Islamic finance. In April, the mid-size, majority-Russian-owned Nikoil Bank started offering clients the ability to make interest-free deposits, which would then be invested into Sharia law-compliant business ventures. Potential clients are told that the program comes with a certificate of endorsement from a Dubai-based Islamic banking expert “and other known theologians.”
Another mid-sized bank, Amrahbank, partly owned by the Bahrain-based International Investment Bank, has announced plans to offer “Sharia-complaint financial products” to cash in on “the untapped Islamic banking market both in Azerbaijan and neighboring regions.”
So far, only one Azerbaijani bank, Kovsarbank, a small concern, attempted to offer a full range of Islamic banking services. In January, however, the Central Bank of Azerbaijan withdrew its license, claiming it was violating the law. The bank subsequently closed down.
Local economic experts believe that as long as loan interest rates stay above the 20-percent mark, Islamic banking could potentially gain market share at the expense of Western-style finance. “The average interest rate on commercial loans in Azerbaijan is currently 22 to 23 percent, and it is a big burden for businesses,” noted independent economic analyst Zohrab Ismayil. “Islamic banking also diminishes the risks of taking out loans.”
IBA Islamic banking specialist Gurbanzade believes that Sharia-compliant leasing (idjara va iktina), trade financing and mortgage operations could also be viable options for Azerbaijani banks. Other options include mudarab (investment partnership), musharak (share of profit and losses), and sukuk (Islamic bonds).
Economic Research Center President Gubad Ibadoglu also feels that such services have potential in Azerbaijan. But he underlines that a lack of competition in Azerbaijan’s banking sector and economy could hinder the rapid spread of Islamic banking. “It will make banks reluctant to invest into the business projects of small and medium independent businesses,” he said.
Economist Ismayil believes that government skittishness concerning Islam’s role in Azerbaijani society is a significant obstacle. President Ilham Aliyev’s administration is steadfastly secular and has taken steps in recent years to check the advance of Islamic cultural practices. Of late, however, the government has experienced some push-back from believers. Most notably, there have been several protests against an unofficial ban on wearing a hijab – a head-covering for Muslim women -- in public schools and universities. “The government considers Islamic banking a risk for the further spread of Islam in the country,” Ismayil said.
One religious rights activist, who also uses Islamic banking services, points out that a “large” number of Azerbaijanis have given up on traditional banks since they are not Sharia-compliant. “Islamic banking is one of the forms for believers to practice their faith,” said Ilgar Ibrahimoglu, head of DEVAM, a Baku-based religious rights’ defense group.
Despite the apparent uptick in interest, Azerbaijan’s Central Bank has cautioned that introducing Islamic banking requires careful and lengthy consideration. “This issue will be considered in the future,” CBA Governor Elman Rustamov said at a Baku banking conference in February. “Azerbaijan is a tolerant country and why not show tolerance in the banking sector? But, once again, currently legislation does not allow the establishment of full-scale Islamic banking.”
A CBA source, who did not want to be identified by name, told EurasiaNet.org that the Central Bank’s position remains firm, and top officials have no immediate plans to introduce legislative amendments to authorize full-scale Islamic banking. “The government believes that Azerbaijan should continue the ‘classic way’ of developing the banking sector,” the source said.
Shahin Abbasov is a freelance reporter based in Baku and a board member of the Open Society Assistance Foundation-Azerbaijan.