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The Model can be evaluated in the absolute (with respect to the set goals) and relative (compared with traditional credit unions) sense after a certain amount time set in advance (for example, 5 years) and providing monitoring is carried out on a regular basis.
Samir SEVIMOV
Master of Economics (Baku, Azerbaijan)
ISLAMIC FINANCE AND ITS USE IN AZERBAIJAN
Abstract
This article examines some theoretical and applied aspects of Islamic economics. The author underscores its fundamental differences from Western models and explores the foundations of the Islamic eco-
nomic system, the essence of loan interest and its influence on economic well-being. The question of the development of Islamic banking in Azerbaijan is seen through the prism of Islamic financial instruments.
I n t r o d u c t i o n
In economic theory, the economy is taken to mean the national economy of a given country or part thereof, including certain industries and lines of production. The theoretical foundations of Islamic economics were developed by such jurists as Abu ‘Ubaid al-Qasim ibn Sallam, Muhammad ibn ‘Abd al-Malik al-Baghdadi (better known as Ibn Zandjavaih), Muhammad ibn Muhammad al-Ghaz-ali, Ahmad ibn ‘Abd al-Halim al-Harrani (known as Ibn Taimiyyah) and others.
The Islamic economic model based on the principles of the Quran and the Sunnah (the body of Islamic custom and practice derived from the words and deeds of Prophet Muhammad) is aimed at achieving broad public welfare in contrast to the material well-being of individual members of society. Based on the free expression of the will of business entities, open competition and rejection of monopoly, this model is gradually finding its way into the traditional capitalist formation.
Specific Features of the Interest-Based Banking System
Banks are a key institution in the financial system of any country. They ensure the operation of the national payment system and act as financial intermediaries. From the standpoint of Islam, a banking system based on interest has several negative aspects.
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■ First, interest-based transactions violate the principle of economic justice. The borrower has to pay interest on a loan at a predetermined rate even if he has suffered losses or if the profit earned is disproportionate to the interest on the loan.
■ Second, the interest-based economic system is unstable. Due to interest charges, money fortunes rapidly increase at regular intervals of time, i.e., they grow exponentially. The period required to double the invested amount of money is 24 years when the interest rate is 3% per annum, 12 years when the rate is 6%, and 6 years when it is 12%. Even at 1% per annum, interest ensures growth that will double the initial amount in about 70 years. This means that in the long-term perspective payment of interest is impossible both mathematically and in practice. There is an insurmountable conflict between economic necessity and mathematical impossibility. It becomes clear that the interest rate mechanism is the main reason for the pathological growth of the economy with subsequent inevitable destruction of the latter. The “dead weight” of interest rates in periods of depression results in “ailing” industries, with negative consequences in the sphere of employment.
■ Third, the interest-based system is oriented not so much towards growth as towards protection from risk. In assuming obligations to depositors, banks are interested in guaranteed repayment of provided loans and interest on them. As a result, banks limit the range of borrowers to large companies or such organizations or persons as have proved to be sufficiently safe. If banks believe that such ways of investment are inadequate, they prefer to invest funds in government securities with guaranteed income. This excessive concern about the preservation of assets hinders growth, because such a system separates financial flows from large numbers of potential entrepreneurs, whose efforts could increase the gross national product but who are short of assets to meet bank requirements for creditworthiness. Excess supply of capital to well-known companies and restrictions on its supply to a large segment of the population also lead to growing inequality in property status and income.
■ Fourth, the interest-based system does not encourage innovation, especially at small enterprises. Large industrial firms and big landowners can afford to experiment with new technologies, because they have sufficient reserves in case their innovations do not generate the expected profits. Small enterprises are reluctant to implement new production methods using borrowed funds, because they have to ensure payment of interest and principal regardless of the results achieved, whereas their own funds are very limited. In agriculture, for example, small farmers do not apply new methods of cultivation precisely for this reason. This not only has an adverse effect on growth rates, but also increases income inequality.
■ Fifth, under the interest-based system, banks are only interested in enterprises capable of creating a flow of funds that would ensure interest payments. In other words, banks are interested in the profitability of their customers. At the same time, they pay insufficient attention to potential profits from projects and give priority to companies with considerable experience, which leads to disproportionate distribution of resources.
There is yet another important argument in favor of interest-free financing, shared by many Western economists. If investments in fixed or working capital are financed by bank loans, entrepreneurs seeking to ensure an acceptable rate of return are obliged to add a certain markup to the price of the final product in order to compensate for future interest payments. So, a kind of “superstructure” inevitably arises over the price, and consumers have to pay for it. As a result, in the process of economic exchange the whole of society and each of its members are “taxed” in favor of the bank. This amounts to misappropriation of a part of the value added, which in actual fact impoverishes all of us and leads to a waste of resources.
In view of these circumstances, Muslim experts in economics and banking have made a careful study of the possible ways of replacing loan interest as the basis for banking activity. They have de-
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veloped economic models of an interest-free economic system, analyzed the consequences of the abolition of interest for economic growth and income distribution, and provided a theoretical basis for Islamic banking.
The History of Islamic Banking
The first attempt to implement Islamic principles in banking was made in Egypt (Mit Ghamr Savings Bank) in 1963. It was a form of savings bank whose activity was based on profit and loss sharing. This experiment continued until 1967, when there were already nine banks of this kind operating in the country. They did not charge or pay interest, investing mainly in trade and industry by direct financing or jointly with other investors, while the profit received from the successful implementation of such projects was shared with depositors.
In 1974, the Organization of the Islamic Conference (OIC) founded the Islamic Development Bank (IDB), which initially served interstate purposes in providing capital for projects to develop the economy of OIC member countries. IDB operations are mainly based on Shari‘a principles. In the 1970s, many duly established Islamic banks came into existence in the Middle East, such as the Dubai Islamic Bank (1975), Faisal Islamic Bank of Sudan (1977), Faisal Islamic Bank of Egypt (1977), Bahrain Islamic Bank (1979), and also Islamic banks in the Philippines, Malaysia and India. Islamic banks have also been set up in Europe.
The first Islamic bank in the West, Islamic Finance House, was founded in Luxembourg in 1978. Major Western banks (ABN Amro, Societe Generale, Goldman Sachs, ING, Nomura Securities, JP Morgan Chase, and others) have long had divisions providing Islamic services. In July 1997, Citibank founded a subsidiary Citi Islamic Investment Bank in Bahrain with an initial capital of $20 million. Another major bank, HSBC, took the same path, setting up an institution called HSBC Amanah Finance, initially based in London and then in the United Arab Emirates. In 2006, Deutsche Bank opened an “Islamic window.” In June of the same year, Lloyds TSB began providing Islamic banking services in the territory of Britain. Today there are three finance companies in Britain operating in full compliance with Shari‘a rules: the Islamic Bank of Britain, the European Investment Islamic Bank, and the Bank of London and the Middle East.
The world leader in the amount of Shari‘a-compliant financial assets is Iran ($154.9 billion), followed by Saudi Arabia ($70.1 billion) and Malaysia ($65.2 billion). The top ten countries also include Kuwait, Bahrain, Pakistan, Lebanon and Turkey. Britain is ninth in the world in the amount of Shari‘a-compliant assets ($10.4 billion).
The world market of financial services consistent with the precepts of the Quran and Shari‘a rules has tripled in the past decade: from $150 billion in the mid-1990s to $531 billion in 2006. According to international rating agency Standard & Poor’s, the potential market for these services could be $4 trillion, over seven times its current size.1 In 2005, the total assets of Islamic investment funds reached $11 billion. The number of such funds has exceeded one hundred.2
Islamic Economic Categories
In order to understand the forms and methods of operation of Islamic economic institutions, it is necessary, in the first place, to examine the main categories of the Islamic economic model: mal, gharar, maysir, naqd and riba.
1 [http://www.rbcdaily.ru/2008/01/22/world/314863].
2 Islamic Capital Market Fact Finding Report 2006, IOSCO, available at [http://www.iosco.org/publications].
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First category: mal, or property. Islam regards the individual not as an absolute owner of a certain resource possessing market and social value, but as an agent entitled to manage these resources for a time in accordance with the will of Allah, their true owner. These resources should not be hoarded (kept idle) or be used for speculative purposes. The resources entrusted to an individual should be used prudently for the benefit of the “manager” and, as far as possible, for the benefit of the whole of society. In other words, material goods should serve people, and not the other way round.
In the light of the above, a mandatory tax on certain kinds of property (zakat) can be regarded both as a measure designed to fight the accumulation of idle assets (hoarding) and as a mechanism for the social protection of low-income strata of the population.
Second category: gharar, or risk. The various kinds of gharar can be divided into two groups:
(a) purchase and sale of goods that are not in the possession of the seller at the time of the conclusion of the contract (for example, the sale of unborn cattle);
(b) purchase and sale of goods without a complete specification of the terms (for example, when the parties make a deal without specifying the exact price, “at the current market price” or without specifying the time for the performance of contractual obligations).3
Consequently, gharar can be characterized as excessive risk. Shari‘a does not condemn risk in general; on the contrary, none of the parties may seek to protect themselves from possible risk-related losses at the expense of the other party. Uncertainty in the terms of the transaction increasing the degree of risk above the usual level is believed to be unjustified and is prohibited by Islam.
Third category: maysir, or speculation. This concept is close to the previous one and implies income received as a result of an accidental concurrence of circumstances, without inputs of capital or labor (for example, stakes in gambling games). Maysir also includes the movement of huge amounts of money for the purpose of one’s own expanded reproduction without producing real wealth, either tangible or intangible. Destructive flows of such speculative capital were observed during the 1997-1998 Asian crisis.
In investing their customers’ funds, professional investors (brokers) use financial instruments classified as maysir: futures, swaps, etc. In contrast to Shari‘a-compliant investments in shares, exchange goods or currency, investments in such instruments are a financial game, because money here is not involved in the production process and does not make society wealthier in real terms.
Fourth category: naqd, or money. As we have already noted, the Shari‘a attitude to the market of fictitious capital, to turning money into an independent quantity serving to augment the wealth of successful operators but of little benefit to society is completely (or almost completely) prohibitive. Islamic economics regards money as a medium of exchange, a measure of value and partly as a store of value. Paper money is seen only as an instrument without any value of its own, no different from, say, equipment at an enterprise. Money in the Islamic economic model cannot bring any fixed or guaranteed compensation. Islamic economics also draws a distinction between money and capital. But turning money into capital requires the active participation of the owner of monetary resources, i.e., he should get a part of the profit but certainly no interest.
Fifth category: riba, or increase (interest). There are two kinds of riba: nasiah (interest resulting from time delay, e.g., loan interest) and fadl (interest resulting from differences in
3 See: “Al-Gharar, Risk and Insurance,” International Journal of Islamic Financial Services, Vol. 1, No. 1, 1999, available at [www.islamic-finance.net]
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quantity, e.g., exchange of gold for gold in different quantities). According to Islam, exchange of gold for gold, silver for silver, wheat for wheat, dates for dates or salt for salt is permitted only in equal quantities and from hand to hand. As regards other articles of commerce, different schools of religious law have differed about the permissibility of their exchange in equal quantities.
The Quranic prohibition of riba determines the fundamental differences between the Judeo-Christian and Islamic economic systems. Whereas in Western economic models interest plays a decisive role in savings and is a key instrument of monetary policy, Islam regards credit as an act of compassion. Shari‘a encourages lending money to the needy without any compensation for the time value of money.
Islamic Banking Instruments
Islamic banks base their activities on Shari‘a principles and create their capital using liabilities. These can be customers’ funds on current, savings and investment accounts. Investment deposits represent different kinds of mudaraba, which will be examined below. As for current and savings accounts, they can take the form of qard hasan and amanah.
The Arabic expression qard hasan means “good loan.” It is a deposit implying the absence of any income, on the one hand, and allowing the use of the funds received, on the other. The word amanah means a “thing placed for safekeeping.” It is a kind of deposit which the bank is not entitled to use to create assets. In practice, banks more often use qard hasan accounts, rewarding their holders.
In order to earn profit, the bank conducts active operations based on two principles: the principle of profit and loss sharing and the debt principle.
The first of these two principles—proportional participation in profits and losses—is realized through mudaraba and musharaka.4
Mudaraba is a form of business partnership in which one of the parties invests capital, and the other (a manager called mudarib) is engaged in organizational, management, production and other kinds of activity. The profit earned is divided between the parties in a proportion agreed in advance. If the enterprise suffers losses, the burden of financial losses is borne by the investor alone. According to Shari‘a, the other party’s losses (uncompensated inputs of time and physical, mental and intellectual efforts) are just as significant as lost money. According to the principles of mudaraba, the investor does not interfere in the affairs of the enterprise: neither in management, production, sale nor accounting, although he is naturally entitled to control the activities of the enterprise. At the stage of coordination of the parties’ positions, the investor may formulate any conditions he thinks appropriate, and the business manager, if he agrees, will have to strictly comply with these conditions in the future.
The mudarib is not bound by obligations regarding losses, but can be brought to account if these losses are caused by his negligence or incompetent actions. Ideally, profit sharing should take place not on a calendar basis, but only upon the completion of the contract. In practice, however, this principle is not always taken into account, and contracts are concluded for a period. The contract may also be terminated ahead of time on the initiative of either party. The mudarib is also entitled to take part in the enterprise by investing his own funds.
Islamic banks often use an operating model developed on the basis of mudaraba. The bank accumulates depositors’ funds, concluding contracts with them and pledging to invest their funds in assets capable of earning income, but not guaranteeing such income. At the same time, the
4 See: Islamskie finansy v sovremennom mire: ekonomicheskie i pravovye aspekty, ed. by R.I. Bekkin, Umma, Moscow, 2004, pp. 60-61.
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bank operates as an investor, using depositors’ money to perform various Shari‘a-compliant operations.
Mudaraba can be restricted and unrestricted, i.e., the customer is entitled to determine the kind of assets in which his funds are to be invested or leave the matter to the bank’s discretion. Mudaraba can also be special and general, i.e., it is up to the customer to decide whether his funds will work separately from the funds of other depositors or be part of a common pool. An advantage of special mudaraba is lower risk associated with the bank’s total profit, while its shortcoming is lower profit in view of the limited amount of funds involved.
Musharaka is a form of business partnership with predetermined capital and with profit and loss sharing between the partners. Musharaka can be permanent and diminishing.5 Permanent mush-araka is where the partners’ shares in the company’s capital and profits do not change throughout its entire life cycle. In the event, the partners are allowed to sell their share. Theoretically, each partner may authorize the rest to manage his capital, but in practice, where an Islamic bank is the project manager, it plays an independent role in determining the project’s goals, the parameters of the production process, etc.
A distinctive feature of diminishing musharaka is that the bank from the very beginning declares its intention to withdraw from the business before the end of the company’s life cycle. In other words, the customer pledges to buy out the bank’s share either by lump-sum payment or by periodic payments.
The second principle of active operations is debt financing. The most popular form of financing is murabaha. Its advantage consists in the short-term nature of the operation, the right to demand security for the customer’s obligations and the high likelihood of profits.
The first stage of such cooperation is the conclusion of an agreement under which the bank undertakes to find the necessary goods in the market, and the customer undertakes to purchase these goods from the bank for a certain amount, either fixed or expressed as a percentage of the purchase price. In this case, the goods themselves are regarded as collateral for the bank. An important element of this agreement is the time and form of payment (cash or deferred payment, full amount or in installments). Thus, the bank makes profit according to the “cost plus” formula. Hence the conclusion that murabaha is a commercial finance operation in which the final price increases by the amount at which the bank assesses the service provided to the customer.
Another kind of debt financing is salam. It is the sale of goods for future delivery against cash payment and is rarely used in active operations. In practice, the procedure is as follows: the bank provides a credit in an amount equal to the price of the goods, and the customer undertakes to supply the goods by a specified time. The customer here is in a more advantageous position, because he obtains working capital without which his project would be impossible. The bank, for its part, has no particular need for these goods, but it can conclude a parallel contract of salam, this time as a supplier of goods. Salam is mainly used in agriculture and very rarely in industry.
The next kind of debt financing is istisna, which is designed to provide services, for the most part, to large-scale production. This kind of financing has much in common with salam, but in this case the subject of the contract does not exist at the time of its conclusion. A contract of istisna is valid where it stipulates the price of the goods to be produced and their basic characteristics. A major distinction between this kind of financing and salam is that payment for goods in istisna is not made in the form of a lump-sum prepayment but as works are performed by the producer of the goods. In case of the customer’s refusal, the bank concludes a parallel deal with the producers of goods or works (for example, construction works), paying for them at its own expense. The bank’s profit results from the difference between the price under the first contract and the price paid under
See: Islamskie finansy v sovremennom mire: ekonomicheskie i pravovye aspekty, p. 62.
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the second contract. In view of a high degree of risk, istisna (just as salam) has not gained wide currency.
Yet another kind of debt financing is ijara, which combines various kinds of leasing and rental. Leasing implies, so to speak, the renting out not of the goods themselves but of their useful properties. Ijara has two widespread forms: operating lease and lease with subsequent purchase.
Operating lease is an agreement between the bank and the customer under which the bank buys equipment from a producer and then leases it to the customer at his request. The term of the lease and the amount of lease payments are agreed in advance. In this case, the equipment remains in the ownership of the bank. This kind of lease is common in financing production, construction works, etc.
Lease with subsequent purchase differs from the above in that the customer undertakes to purchase the equipment by the end of the lease period at a price agreed with the bank, which includes the amount of previously made lease payments. In other words, the customer makes lease payments to the bank and partly pays off the cost of the equipment, and at the end of the term of the agreement becomes the rightful owner of the asset. Another option is where the customer makes lease payments alone, and at the end of the term purchases the equipment from the bank at an agreed price.
As we see from the above, the Islamic financial system is not speculative, but deals with investments in real production, which protects this system from financial crises and defaults. Due to a prudent investment policy, active financing of production, and attractive banking services, Islamic finance is acquiring an internal capacity for reproduction.
But the Islamic financial system has its problems as well. Its weak point is the low efficiency of mechanisms for promoting long-term investment. And if a single bank operating on this basis does not have a tangible effect on the economy, a whole system operating in this mode can cause significant damage to the process of economic growth. But although these problems do exist, Islamic banking should be seen as a fait accompli, as a kind of financial business with potential for development.
Liquidity management remains an important problem facing Islamic banks. It is known that any investor demonstrates a natural human quality: aversion to excessive risk. As experience shows, depositors of Islamic banks are still unprepared to invest funds at the risk of losing their initial investment. As a result, the resource base of Islamic banks is very short-term, with obvious consequences for their active operations.
The performance of conversion (forex) operations also meets with restrictions, because forex operations are mainly associated with futures risk. At present, currency trading is permitted in the spot market, with delivery of currency within 24 hours. But the dealer may be unable to enter the market immediately if the currency at his disposal does not interest potential customers.
The use of securities markets for proper management of Islamic bank liquidity is just as difficult. In effect, out of the wide range of securities Islamic banks can only handle shares. Debt instruments of corporate issuers (bonds, bills of exchange) structured in accordance with Shari‘a principles are today virtually absent. The same applies to government securities, the most reliable and popular instrument of bank liquidity management. Due to their concern over this situation, Islamic governments have combined their efforts to further institutionalize Islamic banking and improve the organizational environment for its operation.
In November 2001, Bahrain, Brunei, Indonesia, Malaysia, Sudan and the IDB signed an agreement establishing an International Islamic Financial Market (IIFM), which began functioning in August 2002. Its purpose is to resolve the problem of liquidity management in the sector and create new Islamic financial products.
A new organization called Liquidity Management Center (LMC) was established in February 2002. It is designed to set up large pools of assets acquired from governments, financial institutions
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and corporations, securitize them in the form of Islamic bonds (sukuk) and offer them to Islamic banks for investment of temporarily surplus funds. At the same time, the LMC ensures a secondary market for these securities, adding depth to this market and diversifying risks through a variety of assets and their sources.
Another problem is the lack of the necessary legal framework in many states. As noted above, Western banks sell money, while Islamic banks sell goods. The latter are thereby involved in the activities of their clients in the non-financial sector. This is a source of serious contradictions. For example, Art 5.4 of the Law of the Azerbaijan Republic on Banks and Banking Activity (1996) says: “Credit institutions are prohibited from engaging in production, commercial and insurance activities.” This means that an Islamic bank, in effect, has no opportunity to operate in accordance with Shari‘a rules. In order to organize legal activity, it is obliged to set up subsidiaries, entrusting them with the performance of certain operations. This is quite permissible, but highly ineffective from the standpoint of management. Islamic banks also encounter difficulties in creating liabilities. For example, the Civil Code of the Azerbaijan Republic obliges banks to pay interest on any deposit, which is why banks offer their clients only settlement and current accounts.
Use of Islamic Finance in Azerbaijan
Azerbaijan’s integration into the world community involves, among other things, the establishment of close political, economic and cultural ties with the Islamic world. Expanding cooperation with Islamic financial institutions, on the one hand, and an increase in the number of believers observing Shari‘a principles in daily practice have added urgency to the question of introducing Islamic banking in Azerbaijan. In 2006, a seminar on Islamic banking (corporate governance, transparency and disclosure) was held under a project of the World Bank’s International Finance Corporation. Representatives of 35 banks took part in this seminar.
The pioneer among Azerbaijan banks in implementing an Islamic finance model was the International Bank of Azerbaijan (IBA). The model was called “installment sale” and was implemented with a line of financing from the Islamic Corporation for the Development of the Private Sector, an IDB subsidiary. The corporation’s authorized capital is $1 billion, including an IDB stake of $500 million, with the rest to be contributed by the participating countries. Azerbaijan’s stake is $2.5 million. Participation in this corporation will enable the private sector to obtain, without government guarantees, credits of $2 million and over.6
It should be noted that the IDB is the most active initiator of the implementation of Islamic finance in Azerbaijan. In 2007, it expressed a desire to help establish the Caspian International Investment Company (CIIC), which operates according to religious canons. Its founders were the IDB (75%) and the Azerbaijan Investment Company (25%).
In my opinion, the citizens of Azerbaijan are very interested in Shari‘a-compliant banking products and services. Some people want this for purely religious reasons, and others regard the investment business as the most rapidly developing business which makes it possible to reduce risks associated with inflation and losses.
The most promising sectors of the economy for Islamic investors include information and communication technologies, transport and construction. At present, the first Shari‘a-compliant financial institution in the country is Kovsar Bank. It was founded as a commercial bank under the name of Universal Bank, and in 2001 was renamed by decision of its founders, with subsequent re-registration at the Ministry of Justice of Azerbaijan.7
[http://www.businesspress.ru/newspaper/article_mId_21960_aId_93245.html].
6
7 See: I. Mamedli, “Islamski banking v Azerbaidzhane,” Region Plus, 2007, p. 56.]
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Today there is a customer segment in Azerbaijan wishing to operate within the framework of Islamic finance. This is the consumer segment, and also small and medium entrepreneurs who are prepared to make deposits and obtain funds in accordance with Shari‘a rules. People are interested in consumer finance (consumer goods, cars, opening of savings accounts and participation of funds in permitted financing), in mortgage programs, education and research funding. In fact, this part of society can utilize amounts far exceeding the loan portfolios of many private banks in the territory of the country.
Drawing on the experience of different countries, the bank formulated three basic propositions necessary for work in Azerbaijan:
(a) to apply Islamic banking technologies without violating Azerbaijan legislation;
(b) to provide funds for social purposes by assisting disabled persons, pensioners and other low-income strata of the population;
(c) to set up an Advisory Council to perform the functions of a Shari‘a Board.
In 2002, Kovsar Bank obtained a license from the National Bank of Azerbaijan. It is a member of the General Council of Islamic Banks and Financial Institutions under the IDB, and also of the Auditing Association of Islamic Banks and Financial Institutions. The bank’s current activity is aimed to attract funds from individuals and legal entities by two main methods of Islamic banking: mudaraba and musharaka, and also by selling bank drafts. In investing funds, the bank uses traditional mechanisms.
The draft is analogous to sukuk. The customer issues a draft and sells it to the bank at face value, using the funds obtained to finance his activities. The purchase of the draft is documented as a repo, i.e., it is coupled with the conclusion of an agreement containing the customer’s obligation to repurchase the draft at a premium at maturity. The repurchase price is determined based on the market price of the goods and services produced by the customer and financed in this way prevailing at the time of the conclusion of these agreements plus the cost of the services provided by the bank.
At present, Kovsar Bank cannot conduct active operations in the form of murabaha, because Azerbaijan legislation prohibits banks from engaging directly in wholesale or retail trade, production, logistics, agriculture, mining or construction, and also from equity participation in these sectors.
In 2008, the Azerbaijan State Committee for Securities registered a prospectus for interest-free book entry bonds to be issued by Kovsar Bank in the near future.8 Their issue will be in compliance with the financial principles of Shari‘a. An investor purchasing these shares becomes an actual shareholder in the Kovsar Bank project for which the funds are raised. The bank is to issue 32 thousand bonds with a face value of AZN 200 each. In the event of successful and, most importantly, complete distribution of these securities, the bank will raise AZN 6.4 million, which could be one of the largest bond distributions in the country’s stock market.
One of the latest innovations in the Azerbaijan financial sector is a project being implemented by CJSC Unileasing. The main specific feature of this project, launched in February 2008, is that relations with customers in leasing transactions are interest-free. This leasing system will be applied to all products of the company, so that it will have an opportunity to finance construction equipment, transportation facilities, medical and industrial equipment and commercial real estate.9
Muslims make up a large part of the population in Azerbaijan, and there is every reason to believe that the development of Islamic banking will give new impetus to national economic development and help to put into circulation the savings of those who observe Shari‘a principles.
[http://www.ceo.az/businessobserver/finance/9093.html].
8
9 [www.unileasing.az/?id=108&page=islamic_leasing].
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C o n c l u s i o n
To summarize, let us say once again that the main specific feature of the Islamic economic model is greater emphasis on value orientations. The forms and methods of operation of Islamic financial institutions have been developed with due regard for the fact that people’s growing needs constantly come up against resource constraints. Rising income and price reductions in the Islamic model do not always lead to an increase in consumption, because this violates the Shari‘a principle of moderate consumption and prudent use of resources. The integration of Azerbaijan’s financial institutions into the world network of the Islamic Finance and Services Industry provides new opportunities for attracting foreign investment (primarily into the non-oil sector of the economy) and should be seen as an effective step towards a balanced development of different sectors of industry, agriculture and the services market.
