On the way to an Islamic mortgage

Date: 07.09.2010

On September 7, 2010 in the conference hall of Russian muftis Council the meeting of the Russian Association of experts in Islamic finance on "Mortgage financing in the Russian legal field using Islamic financial instruments" was held.

The meeting was attended by 30 experts, representatives of the legal and tax firms, banks and financial institutions, leading Russian universities and independent experts.

At the beginning of the meeting attendees are greeted by Rushan hazrat Abbyasov, the head of the International Department of the Russian Muftis Council, who reported on the work done over the past six months by RAEIF and informed about upcoming events, including the opening of the next course "Islamic finance" at the Moscow International Higher Business School (MIRBIS) as well as the beginning of similar and other educational programs in other universities of Russia, the arrival to Russia of General Secretary of the Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) Muhammad Nedal Ashshaar in September, under which is scheduled to meet with experts of RAEIF, as well as holding of the Second Moscow International halal exhibition on May 2011.

Presentations on the economic, legal and tax aspects of the implementation of the Islamic analogue of mortgages in Russia were made by Elena Nakaryakova (a specialist of real estate department of "Islamic Finance House" JSC), Alexander Kazakov (director of structured and syndicated finance and corporate decisions "Gazprombank" JSC), Alexei Kuznetsov (a partner at Ernst & Young) and the Rustam Vahitov (head of the group of international taxation "Pepeliaev Group").

The discussion was about the most commonly practiced variants in the mortgage financing options in Islamic financial institutions: Murabaha, Ijara, Musharaka.

Alexander Kazakov noted in his speech that the mortgage today is one of the most popular products, and at the same time the most difficult because of significant social component and the great risks.

Later he highlighted the advantages of the use of the mechanisms and the complexity of Murabaha, Ijara and Musharaka in financing mortgages for both financial institutions and the regulator and customers from the viewpoint of the balance, the registration of property rights, investment attractiveness and versatility of market access.

The lack of jurisprudence on new types of contracts can also be difficult moment, that can add an element of legal uncertainty and lead to increased costs.

According to the independent expert Andrey Zhuravlev, difficulty also can arise on storage real asset on the balance of the bank, for which a one year later, the Central Bank will require redundancy for non-core asset.

Alexei Kuznetsov spoke about tax implications of Ijara with subsequent transfer of ownership, in particular highlighting the aspects related to the amortization of the leased object, and the possibility of using tax deductions.

One of the options for the development of the market may be the use of companies that are not banking organizations, and perhaps the bank will work with organizations in tandem. Rustam Vahitov considered tax issues in mortgage financing using murabaha contract.

Experts agreed that the amendments to some legislative acts and regulations of the Central Bank would greatly facilitate the development of Islamic mortgages in Russia, but even without amending the implementations of such contracts are possible, but are likely to be at least equal to the cost of traditional mortgages, in due to high risks, lack of practice and unequal tax provisions for certain types of contracts.

The lowest number of problems will arise when using the murabaha structure, however, as noted by Andrey Zhuravlev, because Murabaha is very similar to a regular bank product, it’s very difficult to say that it is reborn on a purely Islamic products.

One of the factors contributing to the development, in this context, in the opinion of A. Kazakov, could become financial institutions, designed to develop financial markets, not only for profit.

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