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ISLAMIC
FINANCIAL
SERVICES AND
BANKING IN
UZBEKISTAN AND
CENTRAL ASIA
MURTOZAKHUJAEV SULTONKHON
MUNAVVARKHUJA UGLI
Business Administration, STARS
International University in Tashkent
sultonkhonmurtozakhujaev@gmail.com
Yoqubova Nigora Nizomiddinovna
STARS International University
in Tashkent Senior Teacher
eshmurodovanigora707@gmail.com
Abstract:
This article examines the problems related to Islamic banking and finance,
working on the basis of Islamic law, and presents opportunities and obstacles of Islamic
banking in Central Asia and Uzbekistan.
Key words:
Islamic Financial, Islamic law, SDG, World Bank, Musharakah, Mudarabah,
Sukuk issues, AAOIFI, IFSB, IIFM, Emerging Market, Islamic Retail Banking, Islamic Mi-
cro-Financing, Eco Islamic Bank, National Bank, GDB, OIC member countries, Al-Hilal Bank.
WHAT IS THE ISLAMIC FINANCE AND BANKING?
Islamic Financial system is an integral system in which all financial activities are
carried out based on Islamic law (Sharia) with risks and profits shared amongst
all parties, while justice and fairness are ensured in any related transaction. It fa-
cilitates the flow of money within the economy, boosts economic activity, and
prevents the concentration of capital in fewer hands. Uzbekistan is a country in
Central Asia with an emerging economy with great human capital, an openness to
micro-investments, and a high encouragement of small and medium businesses.
Small and medium enterprises represent 70 percent of the economic landscape
and 78 percent of the employment rate in the country. However, small and medi-
um-sized enterprises are facing many challenges such as the high-interest rates
and complicated loan requirements. Similarly, many Muslim citizens in Uzbekistan
with capital in hand, are facing difficulties in dealing with banks in terms of invest-
ment activities due to the interest rates involved. The latter implies that individuals
and enterprises do not get sufficient financing for boosting and maintaining their
cash flows and revenue growth. Therefore, there is an essential need to under-
stand the prospects of implementing a solid and integral Islamic Financial System
in a country with a Muslim majority population.
https://doi.org/10.47689/STARS.university-pp177-188
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This report attempts to explore the opportunities and to propose the necessary
steps and procedures for implementing a solid Islamic banking and finance system
in the Republic of Uzbekistan.
The report’s first section begins with a summary of the country’s current finan-
cial system, including information on how small, medium-sized, and large busi-
nesses can get credit, how they contribute to the nation’s economy, and what ma-
jor obstacles they face. The second section lists many Islamic finance instruments
and the conditions necessary for their use, with a focus on those that Islamic fi-
nance institutions around the globe use without exception. Also covered by the
author are the tools that may be used operationally in Uzbekistan and the legal
situation of the country’s future Islamic finance sector. The final section of the re-
search examines the potential applications of Islamic finance to the SDGs and the
integration of Islamic social finance elements into Uzbekistan’s financial system
(waqf, zakat, crowdfunding). The last section includes a descriptive analysis based
on surveys that examine Uzbek populations’ (individuals, businesses, and banks)
preferences and demand for Islamic finance instruments, as well as the difficulties
they face in obtaining the funding they require from the nation’s current financial
institutions. The recommendations drawn from the study are included at the end
of the report. The debate over Islamic finance’s origins and method of operation
is active and always evolving. To fully develop the concept of a financial system
based entirely on the real economy, some scholars contend that a world order
based on the Qur’an is necessary (Choudhury, 2007). Instead, proponents like
Yerlan Baitaulet, the chairman of the Association of Islamic Bankers in Kazakhstan,
see the development of Islamic finance as a new branch of contemporary finance
ethical banking
PRINCIPLES OF ISLAMIC FINANCE
Islamic finance is an equity-based, asset-backed, ethical, sustainable, environ-
mentally, and socially responsible finance. It promotes risk sharing, connects the
financial sector with the real economy, and emphasizes financial inclusion and so-
cial welfare (World Bank, 2015). Iqbal (1997) defined Islamic finance as a system
that aims to make an actual and moral distribution of resources and promotes
social fairness in a society. The main principles of Islamic Finance include the
prohibition of interest and late payment fees; avoidance of excess uncertainty
in financial transactions; financing linked to real assets; partnership and returns
linked to risk; prohibition of investing in unethical businesses (e.g., alcohol pro-
duction, etc.). Islamic finance contracts fall under one of the following categories:
Profit-and loss sharing (PLS), sale-based contracts, and fee-based instruments.
PLS financing is considered the closest to the spirit of Islamic finance compared
to sale-based and fee-based instruments. The key principles of PLS based fi-
nancing are equity and participation, and it is linked to real economic activities
to assist the equitable distribution of income. There are two types of PLC financ-
ing models: Musharakah and Mudarabah. Sale-Based products are widely used
in practice by Islamic financial institutions. These products are used to finance
consumer and corporate credit, rental, and manufacturing. These products are
Murabahah, Ijara, Salam, and Istisna. Fee-Based Products include Wakalah, Kaf-
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alah, or Ju’alah and are offered by Islamic banks as an auxiliary to Murabaha and
Mudaraba transactions. Fee-based products are also used for bank transfers,
letters of credit and guarantees, credit cards, etc. These instruments serve as the
basic building blocks for developing a wide array of more complex financial in-
struments, suggesting that there is a great potential for financial innovation and
expansion in Islamic financial markets
The discussion about the foundation of Islamic finance and its mode of opera-
tion is open and further developing. Some scholars claim the need for a Qur’anic
based world-order to fully develop the idea of a purely real-economy-grounded
financial system (Choudhury, 2007). On the contrary, practitioners like the head
of the Association of Islamic Bankers in Kazakhstan, Yerlan Baitaulet, envision the
establishment of Islamic finance as a further branch of modern ethical banking.
Such disputes notwithstanding, a number of principles for the practice of Islamic
finance have been confirmed over time. They are based on ideas of Islamic eco-
nomics, a rather systemic div of rules for economic engagement in compliance
with the Shari’a, and they all aim to contribute to the development of “asabiyya”
(social cohesion) in society. Next to “zakat”, a tax on wealth to provide for the
needs of the poor and one of the five pillars of Islam, basic concepts in Islamic
finance include the exclusion of “gharam”, an excessive risk or uncertainty and
related speculative action, and “riba”, literally translated with “excess”, “addition”
or “interest” (Hakim, 2007). In Islamic finance, riba stands for the prohibition of
interest on loans. Riba, or more correctly “usury” – as the term for specific finan-
cial interest – leads to “excess compensation without due consideration, and must
be forbidden according to Shari’a law. Instead, Islamic economics proposes to
counter the negative effects of such arrangements by balancing out losses and
profits in business activities. This sharing of risks, called “mudarabah”, is expected
to contribute to a more just economy. Further principles resemble 5 the criteria
developed in several branches of ethical banking, like the ban on investments into
gambling or any other activity that must be considered “haram”.
Of more importance are special forms of contracts that have been developed
under Islamic finance and that today are used by Islamic banks and other Islamic
financial institutions to circumvent the very strong economic incentive that inter-
est plays in conventional banking. Following the general principle outlined above,
as a contract form “mudarabah” is a profit- and loss-sharing agreement in which
the bank provides financial capital, and the partner provides knowledge and skills.
“Murabaha”
is a form of a fiduciary sale, where the bank obtains a certain good and
sells it to the buyer, the bank’s client, with a profit. In such a transaction Islamic law
demands that all information of costs in the transaction is being honestly declared
and that it be rooted in real commodity trade, not only financial. The bank must
buy the good, for example, a house, and sell it further to the buyer with the added
margin. Another form of an Islamic financial operation is “musharakah”, a joint ven-
ture in which parties agree in advance on profit sharing and where potential losses
are divided according to the shares of the contribution made by each participant.
Many more financial instruments have been developed for Islamic banking for ex-
ample: “Sukuk” as a special Sharia conform bond, the Islamic lease “ijarah”, or “bai
salaam”, a form of financing for deferred commodity exchange. In general, all fi-
nancial instruments in Islamic banking aim to master the challenge to compensate
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for the time value of money in financial transactions without resorting to interest
and yet guarantee the rooting of any transaction in the real economy.
Islamic name that basically runs on interest. Such discussions, as much as they
are conducted among practitioners, scholars, and theologians, nevertheless mat-
ter for the expansion of Islamic finance and the development of Islamic banking
practices in the countries of Central Asia. Uzbekistan and its neighbors are con-
sidered fertile ground for future successful Islamic business, yet they also demand
new debates and efforts, like the establishment of Sharia councils, for instance, to
define appropriate understandings of Islamic practices within their own societal
contexts. For the most part, such considerations seem to be only in their initiation
phase in all countries today, where the first institutional developments have been
set off only in the last years.
SUKUK (ISLAMIC BONDS)
Sukuk is an interest-free bond that generates returns for investors based on
the principles of Islamic Law. Unlike a conventional bondholder, a Sukuk hold-
er is granted ownership in the asset or business being financed, and the return
is tied to the performance of the underlying assets Sukuk has emerged as the
second largest component of Islamic Finance which is gaining immense pop-
ularity and acceptance not only among the Muslim majority countries but also
among the countries where Muslims are in minorities (COMCEC, 2018). Govern-
ments have started acknowledging the significance of Sukuk instruments, mainly
in financing infrastructural development projects, and more started issuing Sukuk
(mainly sovereign Sukuk) for financing their infrastructure development projects.
For instance, in 2017, Nigeria issued its first Sovereign Sukuk amounting
USD 277 million (COMCEC, 2018). The proceeds from this Sukuk issuance were
used to finance the road construction and rehabilitation work. Additionally, a
new class of Sukuk instruments termed “Green Sukuk” emerged whereby pro-
ceeds from the issuance of such Sukuk are channeled into environmental projects.
A Green Sukuk is one of the most innovative Islamic finance instruments
which support SDGs in the long run. Malaysia showed a leading role in social-
ly responsible investing (SRI) and green finance, by introducing several ini-
tiatives to support the green agenda. The Securities Commission (SC) of Ma-
laysia formulated the SRI Sukuk Framework in 2014 and issued the first green
Sukuk in 2017. Through green finance Sukuk, the Malaysian government aimed to
meet its target of generating 7,200 MW of renewable energy by 2020 (of which
2,080 MW is to be contributed by solar energy). In March 2018, the Indonesian
government issued Green Sukuk worth USD 1.25 billion (Ramadan and Widenings,
2019) with the aim to fund the sustainable development of climate-oriented green
projects. The issuance of green bonds increased globally to an aggregate value of
approximately USD 258 billion in 2019 with green Sukuk accounting for USD 7.9
billion. The optimism surrounding green finance generally has extended to social
financing which is likely to gain greater prominence as part of the COVID-19 re-
covery. In April 2020 the UNDP emphasized that Zakat and Sukuk can be used
as a part of the pandemic response plan. Like its counterparts, Uzbekistan could
also use Sukuk for raising funds to finance infrastructure, environmental, as well as
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commercial projects. However, Uzbekistan needs to establish a proper legal envi-
ronment to enable the development of Islamic finance in the country.
1. The most important building block for the development of Islamic Finance
is the legal framework which currently does not exist in Uzbekistan. To explicitly
recognize Islamic Finance and banking in the legal framework, it is envisaged that
a separate legislative act is enacted.
2. Regulations and Guidelines on Sukuk issuances shall be proposed in order to
clear the confusion and even eliminate the inconsistencies, improve transparency
and disclosures and crystallize the scope and mandate of Islamic Financial Insti-
tutions.
3. Implement international best practices and be at par with the latest global
regulatory standards. One way is to adopt prudential standards and guidelines is-
sued by the international standard settings bodies like AAOIFI, IFSB, and IIFM. The
standards issued by AAOIFI shall be reviewed in light of local legal and regulatory
frameworks and shall be adopted.
4. Select appropriate projects to finance through Sukuk and attract foreign in-
vestors. For example, in infrastructure or renewable energy.
5. Conducting job training by inviting industry people and sending candidates
abroad for an internship in Islamic Finance and trading Islamic Securities in order
to use these above-discussed Islamic financial contracts effectively in Uzbekistan,
it is of utmost importance that Islamic financial laws coexist with the convention-
al financial laws. All matters pertaining to Islamic financial institutions should be
dealt with by Islamic financial laws including dispute management.
PARTNERSHIP SPECIFIC ISLAMIC CONTRACTS
Musharakah: According to Usmani (1998) the term Musharakah in Arabic means
sharing. The basic tenet of Musharakah contract is like a partnership contract in
English law, wherein two or more partners come together to form an enterprise
by pooling funds, materials, and intellectual property. Regarding profit and loss
sharing, unlike modern partnership contracts, the profit rate is determined at the
time of concluding a contract. The profit is shared among the partners based on
the agreed profit rate. In case of loss incurred, each partner will share the loss ac-
cording to the ratio of individual capital invested to the business. Mudarabah is a
unique way of partnership facilitated in Islamic finance, wherein one partner pro-
vides all the funds required to start a business and the other partner invests those
funds in a profitable venture through efficient and effective management. The
fund provider is called Rabb al-mal (owner of the funds) and the manager of the
funds is called
Mudarib
. The profit will be shared according to the pre-determined
ratio agreed at the time of concluding the partnership contract, whereas in case
of loss Rabb al-mal would have to bear all the loss.
THE STATUS OF THE ISLAMIC FINANCE SECTOR
WITH ITS LEGISLATIVE FRAMEWORK IN UZBEKISTAN
The recent phenomenal growth in Islamic banking underpinned the need for
greater innovation and flexibility to facilitate wider acceptance of Islamic prod-
ucts and services. The Islamic finance industry contains a number of institutions
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including commercial and investment banks, investment and insurance compa-
nies, e-commerce, asset managers, brokers, and dealers. Total assets of the Islam-
ic finance industry grew by a CAGR of 6 percent to reach USD 2.44 trillion within
5 years from 2012 to 2017. Saudi Arabia, Iran, and Malaysia top the market with
65 percent (USD 1.6 trillion) share of Islamic finance assets. Among 56 countries,
Nigeria, Cyprus, and Australia experienced the fastest growth in 2017. Banking is
the main area of Islamic Finance contributing 71 percent or USD 1.72 trillion to the
industry’s assets with 41 countries having Islamic banking regulations. Commercial
banking also remains the main contributor to the growth of the Islamic banking
sector. This is due to the new openings of Islamic finance institutions in different
countries. For instance, in recent years the Islamic finance industry has started to
develop in CIS countries. Kazakhstan, Kyrgyzstan, Azerbaijan, and recently Tajiki-
stan have established their Islamic banking regulations. However, Uzbekistan has
not even begun the process of working on its legal framework. As a part of Uz-
bekistan’s reforms aimed at attracting Muslim investors from other countries, the
government started working on establishing Sharia compliant products including
Sukuk and introducing the Islamic insurance sector. However, the Government has
not achieved much progress in introducing the IF legal framework in the country,
and this is hindering the development of the IF sector in the country. It is believed
that if the Government agrees to step up its efforts, organizations like Is DB will
extend their support in formulating a legal framework for the country and under-
taking projects of various natures that will develop the IF industry.
TAJIKISTAN: A MARKET WITH PROMISES FOR ISLAMIC FINANCE
One would expect the Republic of Tajikistan to be an attractive place for Is-
lamic forms of finance, considering the significant role Islam occupies in society.
A short summary of macro indicators provides evidence to this claim: contrary to
Kazakhstan or Kyrgyzstan, only a small percentage of non-Muslim minorities live
in the country, making Tajikistan for most parts a Muslim society; the Islamic Re-
naissance Party the only Islamic party legally operating in Central Asia as of today,
which makes Islam politically relevant in public life (Heathershaw & Roche, 2011);
Tajikistan has strong connections to linguistically close Iran and seeks to broaden
its relations to Pakistan, both nations with Islamic finance principles officially oc-
cupying a central place in the states’ doctrines. Irrespective of such favorable in-
dications, Islamic financing has been very poorly developed in Tajikistan. Like the
other states in Central Asia, Tajikistan joined the Islamic Development Bank Group
after independence, even if a bit later in 1996 for reasons of the ongoing civil war.
Since then the country had received financial support to invest in infrastructural
projects, especially power generation and transportation. According to some fig-
ures, 212 Mill. US$ were allocated to projects in the republic, other estimates count
up to 500 Mill. US$ in funding for Tajikistan (DeCordier, 2012, & Trend, 2011). Fur-
ther support was delivered by Islamic relief organizations from abroad to ease the
burden of the civil war. The Saudi Arabian “Saudi Ali Gatha” and the Iranian
“Im-
dad”
both engaged in charitable activities and, according to De Cordier (2012), are
still running projects in Tajikistan. The cooperation between Tajikistan and the IDB
further developed in November 2011, when both sides signed an agreement on
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Technical Assistance. This agreement foresaw the introduction of Islamic banking
in the republic and pursued the goal to have the first institute operating by 2013.
As of 2012, no registered Islamic finance institute was offering its services in Tajik-
istan. The legal framework has been under examination and changes to relevant
laws have been discussed. In October 2012 the National Bank of Tajikistan signed
an agreement with Zaid Ibrahim & Co, a Malaysian consulter and the biggest law
firm in the Kingdom, to assist in drafting a law “On Islamic banking in the Republic
of Tajikistan”. With the political leadership expressing its interest in establishing
Islamic finance institutes in the republic, some observers expected the first Islamic
bank to emerge in 2013. Most likely this bank would be a “window” of an already
established bank in Tajikistan since the market itself still is carrying too many risks
for investors abroad. Efforts to spread Islamic finance instruments have been un-
dertaken already for quite some time in Tajikistan. One driving force behind such
initiatives so far has been the GIZ, the leading German development agency. In
training and seminars with interested parties, among other staff from the National
Bank, members of the “Association of Micro-Finance Institutes of Tajikistan”, or
representatives from governmental bodies, the GIZ was informed about Islam-
ic principles of doing business and financing. In a conversation with the author,
one expert told about some selected forms of Islamic financing already being
practiced in Tajikistan. Especially depositing with micro crediting institutes was
an instrument being tested in Tajikistan since 2011. This market entry for Islamic
finance principles is reasonable considering the high number of micro-financing
agencies operating in the republic. A report from 2010 counts 116 such agencies,
dealing with depositing, loan-organizing and loan-funding and having more than
150.000 clients. Therefore, such structural advantages and the agreements for the
further promotion of principles of Islamic financing will most likely contribute to
improving conditions for the establishment of Islamic banking in Tajikistan in 16
the near future.
KYRGYZSTAN: EMERGING MARKET FOR ISLAMIC
RETAIL BANKING AND ISLAMIC MICRO-FINANCING
Kyrgyzstan has been in the news and a subject of extended debates in po-
litical sciences for its unconventional developments in the last two decades.
The often-chaotic events, with two revolutions in six years, swift changes from
open to closed political regimes, and endless demonstrations and strikes, al-
most inevitably had their impact on the emergence of Islamic finance in the re-
public. Yet, parallel to the developments in Kazakhstan attempts to set up Is-
lamic finance got a boost in the years 2008 and 2009. The history of Islamic fi-
nance in Kyrgyzstan is strongly connected with the Islamic Development Bank.
The republic was the first country in Central Asia to join the IDB in 1993, follow-
ing the liberal agenda of then president Askar Akaev. However, despite this ear-
ly engagement, investments by the Bank in Kyrgyzstan have been the lowest
among the Central Asian countries, amounting to only 159 Mill. US$ until mid-2012.
For comparison, Kyrgyzstan is ranked third in EBRD investments; and holds the
reputation to be a rather open country to foreign aid. The question for the re-
served approach of the IDB notwithstanding, investments in recent years, since
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2006, have been increasing. Most of the funding went into infrastructural projects,
especially transportation, yet increasingly the support of a new system of Islam-
ic banking was given priority. In June 2012 the IDB and the Kyrgyz government
signed an agreement for technical assistance worth 193.000 US$ for “further de-
velopment of Islamic financial services in the country”. This new engagement in
the facilitation of Islamic financing in the Kyrgyz Republic can be traced back to
a memorandum, signed by the Kyrgyz government, the IDB, and the “
Ecobank”,
a commercial bank operating in Kyrgyzstan in May 2006. This agreement owed
much to the personal initiative of the head of the IDB in Kyrgyzstan back then,
Shamil Murtazaliev, who laid out four steps for transforming Bishkek into an Is-
lamic financial hub in Central Asia. It also opened the doors to new legislation
which provided one of the most advanced legal regulation systems for Islamic
financing business in the region in the following years (Osmonalieva, 2012; Ali-
yev, 2012, & Eurasianet, 2011). Following the memorandum president Bakiev, who
had come to power after the ouster of Askar Akaev during the Tulip Revolution,
signed a decree in July 2006 “On the Pilot Project of Introduction of Islamic Fi-
nancing Principles in the Kyrgyz Republic”. This decree enabled the National Bank
of Kyrgyzstan to move forward with establishing new rules for Islamic finance in-
stitutes. Already in October 2006 the National Bank adopted a statute for Islamic
financing principles, stating in detail conditions for Islamic banking instruments
like
Mudarabah, ijara, Murabaha, “Sharika” (musharakah), or “istisna’a”
(deferred
production sale). Finally, on 13 December 2006 the National Bank was entitled
to hand out licensees to Islamic finance institutes operating in Kyrgyzstan. This
leading role of the National Bank was further consolidated with two laws adopted
by the parliament in March 2009 that made changes to the law “On the Nation-
al Bank of the Kyrgyz Republic “and to the law “On banks and bank operations
in the Kyrgyz Republic”. Now the National Bank stipulated in Article 4 as one of
its major functions the regulations of financial operations, including operations in
line with the principles of Islamic banking. In addition, the bank had been entitled
to formulate normative regulations to further organize the market for Islamic fi-
nance in the republic. In September 2009 the government took the decision to
prepare the market for the introduction of Islamic securities in the form of Sukuk
and takaful. Such groundbreaking work had its effects when government repre-
sentatives in Kyrgyzstan concluded talks with consultants from the IDB and in-
vestors from Malaysia to set up an Islamic insurance company in the republic. To
open up Islamic financing for the fast-growing microfinance sector in the republic
the National Bank adopted further resolutions, allowing such institutes to offer
micro-credit lines in the form of Mudarabah, musharakah, ijara, and others. The
establishment of Islamic financial institutes in Kyrgyzstan was closely related to
the stipulations of the memorandum in 2006. Not only was Murtazaliev head of
the IDB; before he had acquired the former Kyrgyz branch of the Russian Credit
Bank in 1997 and had it renamed Ecobank. Based on the memorandum, Ecobank
became the first pilot project for Islamic banking in the republic and was even-
tually renamed Eco Islamic Bank in July 2010. Eco Islamic Bank provides a good
case study for examining the opportunities and challenges to Islamic financing in
the Kyrgyz Republic. Since 2007 the bank has been prospering, opening branch-
es in all major cities across the country and gaining market shares. For 2011 the
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yearly audit revealed assets of more than 2,3 Bill. sum (48 Mill. US$) and reported
a net profit of more than 60 Mill. sum (1,2 Mill. US$) (Marka Audit, Bishkek, 2012).
Most of the deposit holders in Eco Islamic Bank are former clients of the branch
of the Russian institute, yet the bank management was able not only to keep this
mostly non-Muslim clientèle but to expand its base of customers. In 2010 the bank
managed to sign 2.274 agreements with customers, in total worth 867 Mill. sum
(19 million US$). Eco Islamic Bank is not only engaging in typical Islamic bank-
ing operations but also cares about the expansion of knowledge 14 connected
with Islamic finance. It opened the educational center
“Barakat”
, where the bank
trains future staff and invites cooperation. For example, in December
2009 representatives from financial institutes and supervisory bodies from Ta-
jikistan visited Barakat to receive training in the principles of Islamic financ-
ing. Furthermore, and independent of
“Eco Islamic Bank”
, a small corporate in-
vestment firm, called
“Muslim
” started operating in March 2012 in Bishkek and
two micro-credit institutes in Kyrgyzstan are handing out loans in compliance
with Sharia law. In interviews with the author, representatives of the Nation-
al Bank also confirmed that microcredit companies are testing the new regu-
lations, with two firms,
“Companion invest”
and
“Kausar”
covering the South
and the North of the country respectively. More firms were entering the mar-
ket in 2011.Kyrgyzstan has proven a promising market for Islamic finance prod-
ucts, with 5% market share in the retail sector in 2012, and with predictions of
10%-12% in 2015, following here the generally positive development of Islamic
banking on a global scale.
ISLAMIC FINANCE AND THE STATE IN CENTRAL ASIA
Summarizing the state of development of Islamic financing in the five Central
Asian republics, some conclusions, even if preliminary at this stage of the research,
can be drawn. To be clear, considering the gap in empirical research into informal
practices of almsgiving and the works of Muslim charity organizations in the region,
it is almost impossible to generalize about the relevance of ideas of Islamic finance,
its principles like
asabiyya
or the prohibition of usury, to the population in the re-
gion. Also, the selected initiatives to establish banking institutes and micro-credit
agencies do not add much to our knowledge due to their short existence. As of
today, Central Asia is far from affording Islamic finance the importance and 19
corresponding institutional settings like those in the Muslim nations of the Persian
Gulf, or in Iran, Pakistan, or Malaysia. Irrespective of that, the case studies allow us
to hypothesize about the relationship between Islamic business practices and the
state in Central Asia and therefore about economic action and state reaction in
general in the region. In Kazakhstan, the central state is an important factor. Here
lies the capacity to boost Islamic finance or to limit it to selected infrastructural
projects. In interviews with experts the state is being identified as the key decision
maker, yet, as the case studies show, also by means of initiative taking it holds the
key position. The young history of Islamic finance in the republic tells of lobbyists,
who concentrate their work on sound new legislation and who try to reach out
to political decision-makers, and of private banks to wait for approval from the
presidential administration. The central state in Kazakhstan makes the initiative to
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form commissions, invite experts from abroad, and supervise investment projects
that carry the label Islamic. In sum, the central state distinguishes itself in Kazakh-
stan by its ability to control the development of Islamic banking. The absence of
a developed retail market for Islamic finance, for example with
Al-Hilal Bank,
as
well as the non-existence of microcredit agencies in this sector stays in contrast
to the number of state organs involved in the process of Islamic finance evolu-
tion in Kazakhstan. The National Bank, the Financial Market Supervision Agency,
the presidential administration, the Development Bank of Kazakhstan, and several
ministries in recent years in various degrees participated in the preparation of new
legislation as well as guiding and controlling the introduction of Islamic finance
mechanisms into the market. Taking Islamic finance as an indicator, the central
state’s actions in Kazakhstan fit well into descriptions of a typical developmental
state. In Kyrgyzstan, the central state less so than in Kazakhstan can take the atti-
tude of obstruction but it is the condition for progressive developments in Islamic
finance. Here the question of particular interest for the future is, to what extent
the positive impulse can be sustained in the context of constant political changes.
The challenge to Islamic finance expansion is to master changing political alliances
and insecure state institutional settings. What was initiated due to personal rela-
tions between President Bakiev and banker Murtazaliev in 2006, and resulted in
the National Bank becoming the driving regulatory force behind Islamic banking,
so far has been only halfheartedly supported since the April revolution in 2010.
Constant government dismissals represent the generally weak state in Kyrgyz-
stan and they carry the risk of a sudden change in personnel and the marginal-
ization of supporting networks. However, Islamic finance seems not to rely solely
on state support for its development in the republic. Initiatives mostly come from
actors from non-government sectors. Banker Murtazaliev stands for a type of en-
trepreneur who calculates the risks of unstable state support against the open
liberal economic context. In that sense, Eco Islamic Bank is the first example of
privately organized Islamic banking in Central Asia and its followers are indicative
of a favorable socio-economic context for doing Islamic business in Kyrgyzstan,
against the background of a weak state and a chaotic institutional setting. Tajiki-
stan seems to be in a position similar to that of Kyrgyzstan, yet some trends in Is-
lamic finance development make the picture more complex. First, despite the ad-
vantageous condition of Muslim society, the initiative to establish Islamic finance
institutes in the republic has been taken by development agencies and less so by
entrepreneurs from within Tajik business circles. And second, disregarding the
comparable stable context of the political regime in Tajikistan, the first steps to
reform the corresponding legislation were made only very recently. In sum, in Ta-
jikistan domestic actors seem rather hesitant to introduce Islamic banking. Since
the institutional setting with concentrated decision-making power, developed re-
lations with other Muslim countries, and experiences with micro-credit companies
must be considered rather supportive, there is reason to believe that this caution
is rooted in political considerations. In fact, Tajikistan’s struggle against alleged
Islamist groups, the competition of Rahmon’s regime with the Islamic Renaissance
Party, and the attempt to attract the big powers’ attention feed a discourse that
warns of an imminent Islamist threat (Schmitz & Wolters, 2012). Following this
argument Islamic finance in Tajikistan falls victim to the extended employment
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187
of a discourse that serves regime stabilization in the first place but casts a gen-
eral suspicion on any outright expressions of unconventional Islamic practices.
Such political considerations certainly play a role in Uzbekistan too, but here a
comparison to developments in Kazakhstan reveals considerably more insight.
Both Uzbekistan and Turkmenistan created platforms to discuss Islamic finance
and showed top-level commitment to international cooperation. This central state
action shows the intention to benefit from the new relations with investors from
Muslim countries. Yet it also discloses the weak control capacities of the central
states in both republics, when such intentions do not translate into lasting reforms,
into new market segments being made.
OPPORTUNITIES AND IMPEDIMENTS TO THE
OPERATION OF ISLAMIC BANKS IN UZBEKISTAN
Bankers were given open-ended questions on how Islamic banks could con-
tribute to economic development in Uzbekistan. 12 banks stated that Islamic
banks would diversify funding sources and give interest-free loans to SMEs;
Investment funds would be attracted from Muslim countries (from OIC mem-
ber countries); the public would increase its confidence in banks; idle funds on
hand of public and businesses would be invested in permissible
(halal)
projects/
products through banks which will increase healthy competition among finan-
cial institutions and contribute to the GDP of the country; it will help to alleviate
poverty by mobilizing funds appropriately; there will be justice in the financial
transactions; literacy on Islamic finance products among public and bankers will
also expand. Some banks also stated that according to their research 30 percent
of the population does not use conventional banks’ services due to religious
reasons and they believe that if Islamic banks start operating here this gap will
be narrowed down. According to an ADB study, 30% of the population did not
use traditional banking loans due to their religious beliefs, and the opening of
Islamic banks would fill this gap. Obstacles: Banks were also asked about the
biggest obstacles and problems for the introduction of Islamic banking in Uz-
bekistan. The respondents stated the biggest problem was the lack of a legis-
lative framework regulating Islamic finance products and services and that the
current legislation of banking and taxation was not adapted for banks operating
based on Islamic law principles. They also pointed out the inconsistency of local
tax and banking legislation with the nature of Islamic finance operations, and
the difficulty of processing Islamic products in the existing banking software
systems. It was also recommended that the new legislation on Islamic banking
and finance be made along with regulations covering Islamic insurance. Anoth-
er obstacle that the country faces is insufficient expertise in the Islamic finance
area. Suggestions by Banks: Banking legislation should be amended in a short
period of time to establish Islamic banking and finance operations in Uzbekistan;
Cooperation with developed countries and Islamic banks should be enhanced to
attract international funding; AAOIFI-certificates to be introduced, and bankers
in the field of Islamic banking and finance should be trained; Through the imple-
mentation of Islamic finance, the country will be able to introduce new types of
financing instruments for the financial and banking sector, analyze foreign expe-
Global dunyoda ilm-fan va ta‘limdagi innovatsion
rivojlanishning zamonaviy trendlari 15 dekabr, 2022 yil.
188
rience, reduce their shortcomings and risks, and effectively develop the sector
in the short run. At the same time, the formation of partnership skills between
the parties will be achieved. To introduce partnership-based or ethical (Islamic)
financing in the Republic of Uzbekistan, it is necessary to form a corresponding
legal and regulatory framework which, in turn, will allow the country to receive
additional capital and offer alternative financing mechanisms to the population.
REFERENCES:
1. Damir B. (2022), The Ways of Developing Islamic Finance in Uzbekistan.
International
2. Conference on Developments in Education.
3. Alexander W. (2022), Islamic Finance in the States of Central Asia. PFH Press.
Marc L. (2022), Working with Islamic Finance. Investopedia Press.
