Islamic Finance: Transaction Support
Legal support of Islamic finance (Islamic banking) transactions
Islamic finance is the conduct of financial activities in compliance with established religious rules. On September 1, 2023, Federal Law No. 417-FZ “On conducting an experiment to establish special regulation in order to create the necessary conditions for carrying out partnership financing activities in certain constituent entities of the Russian Federation and on introducing amendments to certain legislative acts of the Russian Federation” came into force in Russia (hereinafter referred to as “Law No. 417-FZ”), according to which an experiment on partnership financing will be conducted in the territories of Chechnya, Dagestan, Bashkortostan and Tatarstan in compliance with Sharia rules.
The main condition for such interaction is the established ban on interest income. The banking sector receives income not from interest received on the use of funds, but from investment projects. At the same time, it is important to note that banks are prohibited from investing in prohibited areas of activity, such as the production of tobacco and alcohol products, weapons, ammunition, trade in such goods, as well as the gambling business.
Financial services according to Sharia rules in Russia partly contradict Russian legislation on banks and banking activities, and taking into account the adopted Law No. 417-FZ, the fulfillment of financial obligations and compliance with religious norms becomes possible. So far, this is only an experiment in territories where observance of religious norms is considered the most relevant, with a set period from September 1, 2023 to September 1, 2025.
The introduction of legislative norms in the field of Islamic banking makes it possible to carry out business activities and comply with religious rules. It is important to note that participants in the experiment, when making transactions (operations) while carrying out partnership financing activities, do not have the right to set remuneration expressed in the form of an interest rate. In this case, it is possible to establish remuneration in the form of a variable value, the value of which changes depending on the results of the specified transactions (operations).
To implement the experiment on partnership financing, participants are required to comply with a number of established rules:
- ensuring separate accounting of property attracted and placed by the experiment participant when carrying out partnership financing activities, if the experiment participant carries out other activities not related to partnership financing activities;
- the minimum amount of net assets of a participant in the experiment that is not a credit institution or a non-credit financial institution is established for the period of the experiment in the following amount:
– from September 1, 2023 – 10 million rubles;
– from January 1, 2024 – 15 million rubles.
- contribution of borrowed funds and pledged property to the authorized (share, share) capital of an experiment participant is not permitted;
- ensuring that the client is informed about the fact that information about the experiment participant has been entered into the register of experiment participants;
- there is an obligation to inform the Bank of Russia about changes in the information contained in the register of experiment participants in the manner and within the time frame established by the regulatory Directive of the Bank of Russia dated 08/11/2023 No. 6503-U “On maintaining by the Bank of Russia a register of experiment participants to establish special regulation in order to create necessary conditions for carrying out partnership financing activities”).
The regulation of the activities of the experiment participants, as well as control and supervision of the experiment participants’ compliance with the requirements of Law No. 417-FZ and the regulations issued in accordance with it when carrying out partnership financing activities is carried out by the Bank of Russia.
Participants in the experiment, which are credit institutions and non-credit financial institutions, are required to submit accounting (financial) statements to the Bank of Russia, as well as draw up and submit documents and other information provided for by Law No. 417-FZ, other federal laws and regulations of the Bank of Russia.
The form, timing, procedure for drawing up and submitting documents, reports (with the exception of accounting (financial) statements) and other information necessary for supervision of their activities by participants in the experiment are established by the Bank of Russia.
The specifics of the procedure for participants in the experiment to prepare accounting (financial) statements when carrying out partnership financing activities for credit institutions and non-credit financial institutions are reflected in the Bank of Russia Directive No. 6504-U dated August 14, 2023 “On the specifics of accounting for participants in the experiment that are non-credit financial institutions, in connection with their implementation of partner financing activities and the procedure for the preparation of accounting (financial) statements by participants in the experiment when carrying out partner financing activities for non-credit financial organizations”.
Taking into account the innovations introduced by Law No. 417-FZ, when implementing Islamic banking, it is important to comply with the already introduced legal norms, monitor changes in legislation in this area and promptly respond to amended legislation. This approach will avoid possible risks associated with Islamic banking.
- Providing advisory assistance in the field of Islamic banking
- Legal assistance to clients in partnership financing
- Legal examination of projects in the field of Islamic finance
- Representation of interests in projects in the field of Islamic banking