Islamic finance struggles toward mainstream in Azerbaijan

Tue Oct 16, 2012 12:51am EDT
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By Lada Evgrashina and Margarita Antidze

BAKU/TBILISI (Reuters) - When a businessman in Muslim-majority Azerbaijan wanted a bank loan that complied with Islamic principles, until a few years ago he had to negotiate it under the table.

The government's fear of political Islam forced banks to conduct "guerrilla Islamic finance" in which sharia-compliant deals were hidden under the appearance of conventional banking, says Fuad Aliyev, a scholar at Johns Hopkins University's Central Asia-Caucasus Institute in Washington DC.

Now several banks in Azerbaijan openly offer a limited range of services based on Islamic principles including bans on interest and pure monetary speculation. The country's largest bank, majority-owned by the state, has opened an "Islamic window" providing finance to small companies.

Yet the government of the former Soviet state has remained reluctant to take a key step: creating a law to regulate the industry, which could allow commercial banks to expand their operations and issue sukuk or Islamic bonds.

Islamic finance was born in its modern form in the 1970s, catering mainly to Muslims in the Gulf and southeast Asia. Over the past decade its growth has accelerated as economies in those regions have boomed.

Its slow, incomplete growth in Azerbaijan, where an estimated 93 percent of the 9 million people are Muslim, reflects fear that Islamic finance could encourage Islamist politics, bankers and analysts say.

But the government of President Ilham Aliyev cannot ignore the opportunity to cater for Gulf investors to the south.

"If a regulatory framework is developed and if Islamic finance is included into curricula (of local universities), there will be huge development of the industry in Azerbaijan," said Mahir Humbatov, an expert in Islamic banking at the Centre for Strategic Studies in Baku.   Continued...