2021 started with the hope of a recovery from the COVID-19 pandemic. Many have changed their approach to life and business. In Uzbekistan, the main areas of business development are digitalization, e-commerce and Islamic finance. The country’s leadership has realized the obvious reality — there is a considerable stratum of population willing to invest their idle money or to finance their businesses on the principles of Islamic finance as their faith dictates. However, up until now, it is one of the biggest challenges that stand between them and lack of ethical financing.

The good news is that 2021 manifested the seriousness of the government of Uzbekistan in making real steps toward establishing a solid basis for Islamic finance and deepening social and economic reforms. 2022 is expected to be the year of legislative developments and the creation of an enabling environment for Islamic banking, microfinance, leasing, Takaful and Sukuk.

Review of 2021
In December 2020, the president of the Republic of Uzbekistan, Shavkat Mirziyoev, in his speech in parliament said that the time has come to develop Islamic finance and it is necessary to involve international experts. We see how these words have transformed into real developments that took place in 2021.

Namely, in 2021, the government of Uzbekistan received technical and financial support from IsDB-selected international consultants to develop a regulatory framework for Islamic banking in the Republic of Uzbekistan.

Also, with the IsDB’s support, the Ministry of Finance, in collaboration with the United Nations Development Programme, is working on a legal and regulatory framework for the issuance and circulation of Sukuk.

Further, in March 2021, insurance company Apex Insurance opened its Islamic insurance window through which it offers a Takaful product, which was approved as Shariah compliant within the framework of the current legislation.

Another symbolic development of 2021 was the establishment in May 2021 of the Association of Islamic Finance and Takaful of Uzbekistan. The association is a non-governmental and non-profit organization whose mandate is to work with and unite all Islamic finance stakeholders with the aim of developing the Islamic finance industry.

On the banking side, nine Uzbek banks, with the support of the Islamic Corporation for the Development of the Private Sector (ICD — an IsDB Group member), continued working on creating a holistic infrastructure for the activities of Islamic windows. This work also included hiring IsDB Institute and the ICD to conduct practical training on Islamic banking for employees of five Uzbek banks.

Noticeably, September 2021 witnessed a truly historic and symbolic event. For the first time in the history of cooperation between Uzbekistan and the IsDB Group, the IsDB held its 46th annual meeting in Tashkent. During this forum, it was announced that a number of financial agreements have been signed between the IsDB and the Republic of Uzbekistan for over US$300 million.

Also, within the framework of the annual meeting, a memorandum of cooperation was signed between the government of Uzbekistan, Saudi Arabia and the IsDB to create the Economic Empowerment Fund of Uzbekistan with an initial capital of US$100 million which shall be increased to US$500 million. This fund shall provide equity, debt and Ijarah-based financing to medium-sized businesses as well as funding for start-up projects.

All of these developments and initiatives manifest the seriousness, commitment and interest of the country’s leadership to address the social and economic concerns of the people and enhance financial inclusiveness by introducing Islamic finance and banking in the country; 97% of Uzbekistan’s 35 million population are ethnic Muslims.

Preview of 2022
Mirziyoev was reelected in October 2021 and he is keen and firm in continuing economic reforms, liberalizing the banking sector and enhancing the investment climate. The Islamic banking and capital markets shall be among the key ingredients of these reforms in the coming years.

The work on creating an enabling regulatory environment for the Islamic banking and capital markets has already started and insha Allah we shall see its first fruits in 2022. It is expected and hoped that the legislation will become effective, Islamic windows will be operationalized, the first Sukuk will be issued and we may even witness the first Islamic banking license as well as an array of private Islamic finance and Islamic fintech initiatives in 2022.

Raising Islamic finance knowledge and awareness by introducing Islamic finance and banking in the higher education curriculums as well as through other educational channels shall bridge the knowledge gap and clear widespread misconceptions about the new industry as well as stimulate the penetration of Islamic finance in the country.

Conclusion
Uzbekistan enjoys political stability, good relations with its neighbors, a strategic location and the largest population in the Central Asian region. Moreover, 70–80% of the country’s GDP is contributed by small- and medium-sized businesses. These are expected to become the major customers of Islamic financial institutions.

All of these factors could potentially turn Uzbekistan into a Central Asian Islamic banking and capital market regional hub in terms of its size, scalability and positive impact.

Turning the potentiality into reality requires certain key milestones and enablers to be achieved as follows:
• Political will and commitment to introduce Islamic finance
• Creation of an enabling regulatory environment and supervision over the industry
• Enabling a level playing field for both conventional and Islamic financial institutions
• Creating attractive investment opportunities for international Islamic banking and capital market players to enter the Uzbek market with their innovations, technologies, expertise and wide financing capabilities, and
• Wide Islamic finance awareness and literacy at the levels of Islamic financial institutions, the population and entrepreneurs.

2021’s developments and initiatives as well as a healthy fervor and eagerness to ‘land’ Islamic finance on Uzbek soil make us hopeful and optimistic that 2022 will be the year of seizing the huge Islamic finance potential which promises to significantly boost the economy and wellbeing of the people, deepen financial inclusiveness and become a quick win for all — the leadership, the government, the financial sector and the people.

Hondamir Nusrathujaev is a member of the Accounting Board of AAOIFI. He can be contacted at [email protected].