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Can Islamic Finance Drive Banking Sector Development in Uzbekistan?

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Can Islamic Finance Drive Banking Sector Development in Uzbekistan?

Although there are challenges, such as a lack of legislation and expertise, Islamic finance may present new avenues for attracting investment.

Can Islamic Finance Drive Banking Sector Development in Uzbekistan?
Credit: Depositphotos

According to Mordor Intelligence, Islamic finance has been on the rise in recent years, with assets managed by Shariah-compliant financial institutions surpassing $4.2 trillion in 2022 (a 93 percent increase from 2015). S&P Global Ratings forecasts growth of approximately 10 percent in 2023, and assets are expected to reach $6 trillion by 2026.

Islamic finance refers to a financial system that operates in accordance with the principles of Islamic law, known as Shariah. It prohibits interest (usury) and promotes ethical and socially responsible financial transactions. Instead of traditional interest-based lending, Islamic finance utilizes various structures such as profit sharing, asset-backed financing, and risk-sharing mechanisms to create financial products that comply with Shariah principles. 

In Uzbekistan, there is a significant demand for Islamic finance. A 2020 UNDP study showed that 56 percent of individuals and 38 percent of businesses surveyed in Uzbekistan do not take loans due to religious beliefs. However, according to the same survey it was found that more than 60 percent of individuals and businesses do not have a full understanding of how products of Islamic finance work.

Promotion of Islamic Finance

In Uzbekistan, steps are being taken to attract Islamic finance, bilateral agreements with Islamic finance institutions are being concluded, and work is underway to introduce Islamic windows into traditional commercial banks.

In order to develop Islamic finance, Bank Ipak Yuli, Alokabank, Trustbank, Invest Finance Bank, Kapitalbank, Asakabank, Turonbank, Uzpromstroybank, Khamkorbank, and Asia Alliance bank have signed a cooperation agreement with the Islamic Corporation for the Development of the Private Sector. The financing is mainly in the form of providing banks with guarantees on Murabaha principles. Referred to as cost-plus financing, Murabaha is an Islamic financing structure in which the seller and buyer agree to the cost and markup of an asset. Simultaneously, several companies – such as Iman Invest, Alif Nasiya, and Uzum Nasiya – have also started working under Islamic finance principles.

In 2021, Uzbekistan’s Central Bank chair, Mamarizo Nurmurodov, stated that work is underway to open Islamic windows in 14 banks in the country. In the same year, the 46th annual meeting of the Board of Directors of the Islamic Development Bank (IsDB) was held in Tashkent, where 30 financial agreements worth $1.2 billion were signed between the IsDB and 10 partner countries. It was agreed that $330 million will be spent on the interests of Uzbekistan.

One of the positive changes for Islamic banking is the Uzbekistan 2030 strategy, which provides for the introduction of Islamic finance criteria and procedures in at least three commercial banks.

Challenges for Islamic Finance in Uzbekistan

However, the lack of legislation regulating Islamic financial products and services is a major obstacle. 

The Deposit Guarantee Fund ensures that deposits are protected in traditional banks only, which make it more difficult to attract financing to Islamic banking. In addition, the lack of necessary infrastructure in commercial banks for mutual settlements and application of Islamic principles in accounting also hinders the development of this area. It is important to note that Islamic finance requires a separate accounting approach from traditional banking practices. In order to utilize loans based on Islamic finance, it is necessary to attract resources that are given on Shariah principles; loans with interest on deposits are not in line with these principles. 

In addition to this, there is no Islamic finance law. For example, a bank can use the cash balances of Islamic companies in current accounts in interest-bearing transactions opened with that bank. Companies operating under Islamic finance norms are forced to deal with traditional banks under the Tanazul principle (the principle of exclusion instead of not dealing with Islamic finance at all). The same will happen with the introduction of single windows. The accounts of the two systems should be separated, and Islamic windows should not be financed from the income or deposits of commercial banks.

Effects of the Introduction of Islamic Finance

The introduction of Islamic banking in Uzbekistan could trigger a multifaceted surge in economic activity. The attraction for investors from the Islamic world is obvious, potentially attracting foreign investors and stimulating local infrastructure development projects. Estimates by the Islamic Development Bank suggest an annual inflow of up to $10 billion into Uzbekistan through Islamic banking. 

In addition, empirical evidence emphasizes the positive correlation between investment and GDP growth, especially in countries with significant Muslim populations. According to Ledhem and Mekidiche, examining the Turkish experience, an increase of 1 percent in Islamic finance median value will increase GDP by 4.97 percent in the median value. Research by Naz and Gulzar based on empirical calculations in countries with large Muslim populations shows that a 1 percent increase in Islamic bank financing can increase real GDP by 4.1 percent. 

Analysis based on the vector autoregression model shows that in the long term the implementation of Islamic investments can increase the GDP of Uzbekistan by 16.3 percent and thereby possibly create more than 2 million jobs. The Ministry of Investment, Industry and Trade estimates that the introduction of Islamic finance could increase budget revenues by $100 million.

In addition to profit-based products, the Islamic financial system can also offer such services as sadaqa (voluntary charity), zakat (compulsory tax levied on Muslims), and waqf (donation) to reduce poverty and foreign debt.

Foreign Experience: Strategies and Regulations

Many countries around the world are implementing effective steps to expand Islamic finance through development strategies and government regulations. The overall goal is to use Islamic finance as a tool to increase the overall economic activity of the state.

Kazakhstan adopted an Islamic finance Master Plan for 2020-2025. The master plan includes nine strategic initiatives, each of which is attached to action plans. The goal is to increase the share of Islamic finance assets in total financial assets to 3-5 percent by 2025. In Kazakhstan, the average annual growth of Islamic banks’ assets amounted to 30.3 percent against 12 percent of traditional banks.

Under Saudi Arabia’s Financial Sector Development Program, part of its Saudi Vision 2030 economic plan, the authorities aim to make Riyadh the world capital of Islamic finance by 2030. Saudi Arabia aims to attract $100 billion in foreign direct investment by 2030 as part of its economic diversification plans.

Islamic finance is one of the key areas mentioned in Malaysia’s 12th Economic Plan (2021-2025). In particular, it focuses on the regulation and supervision of Islamic financial institutions. The Central Bank’s Five-Year Financial Sector Blueprint 2022-2026 mentions the development of value-based finance through Islamic finance governance.

To support liquidity management of domestic Islamic banks, the Bank of England launched the Alternative Liquidity Facility (ALF) in December 2021. The ALF allowed British Islamic banks to hold an account with the central bank for use as a high-quality liquid asset. It is estimated that the ALF will further increase competition in the U.K. banking sector, and further strengthen the country as an international financial center for Islamic finance outside the Muslim world. 

According to The Banker, banks in Central Asia are already among the top 205 based on Islamic finance. In particular, banks in Kazakhstan (with Al Hilal Islamic Bank at 175th place and Zaman Bank at 189th place), Kyrgyzstan (Eco Islamic Bank at 191st place) and Tajikistan (Tawhidbank at 202nd place) are already fully or partially functioning organizations on the principles of Islamic finance. In Central Asia, Shariah-compliant assets are growing by 12.7 percent per year.


In conclusion, in light of the escalating instability of the global economy and the intensifying competition for financial resources, Islamic finance presents a promising alternative for attracting investments, promoting business activities, facilitating international trade, and addressing poverty. However, for Uzbekistan to fully harness the potential of Islamic finance, it’s imperative to introduce legal adjustments that facilitate its implementation. Additionally, establishing educational programs for bachelor’s and master’s degrees in Islamic finance is crucial, as expertise in this field is currently lacking. By making these strategic moves, Uzbekistan can effectively leverage Islamic finance to achieve economic growth and prosperity.