Can Islamic Finance Drive Banking Sector Development in Uzbekistan? – The Diplomat

In line with Mordor Intelligence, Islamic finance has been on the rise in recent times, with belongings managed by Shariah-compliant monetary establishments surpassing $4.2 trillion in 2022 (a 93 % improve from 2015). S&P International Scores forecasts development of roughly 10 % in 2023, and belongings are anticipated to achieve $6 trillion by 2026.

Islamic finance refers to a monetary system that operates in accordance with the rules of Islamic legislation, often known as Shariah. It prohibits curiosity (usury) and promotes moral and socially accountable monetary transactions. As an alternative of conventional interest-based lending, Islamic finance makes use of varied buildings corresponding to revenue sharing, asset-backed financing, and risk-sharing mechanisms to create monetary merchandise that adjust to Shariah rules. 

In Uzbekistan, there’s a important demand for Islamic finance. A 2020 UNDP research confirmed that 56 % of people and 38 % of companies surveyed in Uzbekistan don’t take loans on account of non secular beliefs. Nonetheless, based on the identical survey it was discovered that greater than 60 % of people and companies wouldn’t have a full understanding of how merchandise of Islamic finance work.

Promotion of Islamic Finance

In Uzbekistan, steps are being taken to draw Islamic finance, bilateral agreements with Islamic finance establishments are being concluded, and work is underway to introduce Islamic home windows into conventional business banks.

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As a way to develop Islamic finance, Financial institution Ipak Yuli, Alokabank, Trustbank, Make investments Finance Financial institution, Kapitalbank, Asakabank, Turonbank, Uzpromstroybank, Khamkorbank, and Asia Alliance financial institution have signed a cooperation settlement with the Islamic Company for the Growth of the Personal Sector. The financing is especially within the type of offering banks with ensures on Murabaha rules. Known as cost-plus financing, Murabaha is an Islamic financing construction by which the vendor and purchaser comply with the price and markup of an asset. Concurrently, a number of firms – corresponding to Iman Make investments, Alif Nasiya, and Uzum Nasiya – have additionally began working beneath Islamic finance rules.

In 2021, Uzbekistan’s Central Financial institution chair, Mamarizo Nurmurodov, said that work is underway to open Islamic home windows in 14 banks within the nation. In the identical 12 months, the forty sixth annual assembly of the Board of Administrators of the Islamic Growth Financial institution (IsDB) was held in Tashkent, the place 30 monetary agreements price $1.2 billion have been signed between the IsDB and 10 accomplice international locations. It was agreed that $330 million can be spent on the pursuits of Uzbekistan.

One of many optimistic adjustments for Islamic banking is the Uzbekistan 2030 technique, which gives for the introduction of Islamic finance standards and procedures in at the very least three business banks.

Challenges for Islamic Finance in Uzbekistan

Nonetheless, the shortage of laws regulating Islamic monetary services is a significant impediment. 

The Deposit Assure Fund ensures that deposits are protected in conventional banks solely, which make it harder to draw financing to Islamic banking. As well as, the shortage of essential infrastructure in business banks for mutual settlements and software of Islamic rules in accounting additionally hinders the event of this space. You will need to notice that Islamic finance requires a separate accounting strategy from conventional banking practices. As a way to make the most of loans based mostly on Islamic finance, it’s essential to draw sources which are given on Shariah rules; loans with curiosity on deposits usually are not in keeping with these rules. 

Along with this, there isn’t a Islamic finance legislation. For instance, a financial institution can use the money balances of Islamic firms in present accounts in interest-bearing transactions opened with that financial institution. Firms working beneath Islamic finance norms are compelled to cope with conventional banks beneath the Tanazul precept (the precept of exclusion as a substitute of not coping with Islamic finance in any respect). The identical will occur with the introduction of single home windows. The accounts of the 2 methods must be separated, and Islamic home windows shouldn’t be financed from the revenue or deposits of business banks.

Results of the Introduction of Islamic Finance

The introduction of Islamic banking in Uzbekistan may set off a multifaceted surge in financial exercise. The attraction for buyers from the Islamic world is clear, probably attracting overseas buyers and stimulating native infrastructure growth tasks. Estimates by the Islamic Growth Financial institution recommend an annual influx of as much as $10 billion into Uzbekistan by way of Islamic banking. 

As well as, empirical proof emphasizes the optimistic correlation between funding and GDP development, particularly in international locations with important Muslim populations. In line with Ledhem and Mekidiche, inspecting the Turkish expertise, a rise of 1 % in Islamic finance median worth will improve GDP by 4.97 % within the median worth. Analysis by Naz and Gulzar based mostly on empirical calculations in international locations with massive Muslim populations reveals {that a} 1 % improve in Islamic financial institution financing can improve actual GDP by 4.1 %. 

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Evaluation based mostly on the vector autoregression mannequin reveals that in the long run the implementation of Islamic investments can improve the GDP of Uzbekistan by 16.3 % and thereby probably create greater than 2 million jobs. The Ministry of Funding, Business and Commerce estimates that the introduction of Islamic finance may improve funds revenues by $100 million.

Along with profit-based merchandise, the Islamic monetary system also can supply such providers as sadaqa (voluntary charity), zakat (obligatory tax levied on Muslims), and waqf (donation) to scale back poverty and overseas debt.

International Expertise: Methods and Laws

Many international locations all over the world are implementing efficient steps to develop Islamic finance by way of growth methods and authorities laws. The general aim is to make use of Islamic finance as a software to extend the general financial exercise of the state.

Kazakhstan adopted an Islamic finance Grasp Plan for 2020-2025. The grasp plan contains 9 strategic initiatives, every of which is connected to motion plans. The aim is to extend the share of Islamic finance belongings in complete monetary belongings to 3-5 % by 2025. In Kazakhstan, the common annual development of Islamic banks’ belongings amounted to 30.3 % in opposition to 12 % of conventional banks.

Below Saudi Arabia’s Monetary Sector Growth Program, a part of its Saudi Imaginative and prescient 2030 financial plan, the authorities goal to make Riyadh the world capital of Islamic finance by 2030. Saudi Arabia goals to draw $100 billion in overseas direct funding by 2030 as a part of its financial diversification plans.

Islamic finance is likely one of the key areas talked about in Malaysia’s twelfth Financial Plan (2021-2025). Particularly, it focuses on the regulation and supervision of Islamic monetary establishments. The Central Financial institution’s 5-12 months Monetary Sector Blueprint 2022-2026 mentions the event of value-based finance by way of Islamic finance governance.

To assist liquidity administration of home Islamic banks, the Financial institution of England launched the Different Liquidity Facility (ALF) in December 2021. The ALF allowed British Islamic banks to carry an account with the central financial institution to be used as a high-quality liquid asset. It’s estimated that the ALF will additional improve competitors within the U.Ok. banking sector, and additional strengthen the nation as a world monetary middle for Islamic finance exterior the Muslim world. 

In line with The Banker, banks in Central Asia are already among the many prime 205 based mostly on Islamic finance. Particularly, banks in Kazakhstan (with Al Hilal Islamic Financial institution at a hundred and seventy fifth place and Zaman Financial institution at 189th place), Kyrgyzstan (Eco Islamic Financial institution at 191st place) and Tajikistan (Tawhidbank at 202nd place) are already totally or partially functioning organizations on the rules of Islamic finance. In Central Asia, Shariah-compliant belongings are rising by 12.7 % per 12 months.

Conclusion

In conclusion, in gentle of the escalating instability of the worldwide economic system and the intensifying competitors for monetary sources, Islamic finance presents a promising different for attracting investments, selling enterprise actions, facilitating worldwide commerce, and addressing poverty. Nonetheless, for Uzbekistan to totally harness the potential of Islamic finance, it’s crucial to introduce authorized changes that facilitate its implementation. Moreover, establishing academic packages for bachelor’s and grasp’s levels in Islamic finance is essential, as experience on this discipline is at present missing. By making these strategic strikes, Uzbekistan can successfully leverage Islamic finance to attain financial development and prosperity.