2020 thus far has witnessed events which are bound to leave a long-lasting impact on global economies. The most significant of these events is the COVID-19 pandemic that has induced a downturn in the world financial markets and economies thus impacting countries, industries and businesses on an unprecedented scale. Many countries, including Uzbekistan, have maintained COVID-19 containment measures in the first half of 2020 which have already resulted in a significant decline in their national GDPs and which still pose significant economic and social challenges.
In a battle to lessen the economic ramifications in the largest Central Asian country (with a 34 million population), the government has drafted a blueprint presidential decree enabling the first-ever Sukuk issuance in 2021. Further, a number of state and private commercial banks are tirelessly working on establishing Islamic windows next year.
Review of 2020
Despite the economic downturn on a global scale, the Uzbek economy reported mild growth in the first half of 2020. The backbone of the Uzbek economy is SMEs that provide 80% of employment and make up the bulk of its GDP. In a bid to restore economic activity in exceptional times and attract the huge sums of idle cash of those who have turned their noses up at conventional banking for faith-related reasons, as well as attract investments into the Uzbek market, the Capital Markets Agency of Uzbekistan drafted the aforementioned blueprint presidential decree that would enable the first-ever Sukuk issuance in 2021. A number of Uzbek state and private banks are also getting their systems, procedures and processes ready to launch Islamic windows next year.
These are certainly extraordinary developments in the 30 years since the country’s independence, which were made possible with the major political transition that culminated with the election of a new president on the 14th December 2016.
The new leadership has realized the obvious reality — there is a considerable stratum of the population who refuse to invest their idle money or cannot develop and grow their businesses due to traditional banking being incompatible with their faith. This obvious truth was supported by the nationwide survey recently conducted at the request of the United Nations Development Programme across the whole country aiming to assess demand for Islamic finance. The survey covered a total of 7,200 respondents, including businesses (2,235), general population (4,938) and Uzbek commercial banks (27 out of 30 banks). The salient outcomes of this survey revealed that:
• About 60% of businesses and 68% of individuals do not resort to bank lending, the major reason being their religious beliefs.
• If Islamic financial institutions start operating in Uzbekistan, 61% of businesses and 75% of individuals are ready to become their clients, while most of these are willing to resort to Islamic banking products even if they were to be more expensive than conventional.
• All 27 surveyed banks articulated their support for the introduction of Islamic finance and banking in Uzbekistan.
All of the aforementioned show the good alignment between the government’s willingness to address social and economic concerns and enhance the financial inclusiveness of the people regardless of faith and the substantial proportion of Uzbek people who have a deep interest in Islamic banking services.
To add to the foregoing, Uzbekistan enjoys political stability, good relations with its neighbors, a large and predominantly Muslim population and a strategic location in the region. All these could potentially turn Uzbekistan into the Central Asian Islamic finance hub.
The country has a unique chance to choose its own model of Islamic banking. Thus, instead of emulating other countries, it may come up with a model that fits well with its social and cultural environment as well as the prevailing market demand. For example, Islamic windows may focus more on Salam and Istisnah products which promote financial inclusion by providing much-needed finance to the country’s agricultural sector as well as SMEs dealing in production and manufacturing.
Preview of 2021
Without a doubt, Uzbekistan has all the key ingredients to become an important regional hub of Islamic banking in terms of the size and positive impact. But in a constitutional state, no potential can be realized without both the political will/commitment and the establishment of an enabling legal and regulatory framework for Islamic finance. The first steps were taken in 2020. The government is firm in continuing economic reforms and liberalizing its banking sector. The Islamic banking and capital markets will certainly reinforce and boost both of these by attracting internal and external capital into the real economic sectors, funding ambitious infrastructure products and increasing competitiveness and diversity of products offered to the public.
Having witnessed bold initiatives from both the government (the blueprint presidential decree on Sukuk), conventional banking (Islamic window preparedness) and a few grassroot initiatives in establishing Islamic finance vehicles in 2020, it is rightfully expected that 2021 will bring about enabling legislation and a regulatory environment for the three major pillars of Islamic finance: Islamic banking, Sukuk and Takaful (to support Islamic banking and add to its credibility). It is also hoped that Uzbekistan will quickly move from the Islamic window model to establishing fully-fledged Islamic banks.
Finally, Islamic finance is a totally new concept for a majority of the people and bankers. Raising awareness, working with misconceptions and providing knowledge in Islamic finance, banking and Shariah compliance for both the banking community and the grassroots are important keys to deepening the penetration of the new industry in the country.
Uzbekistan has all the ingredients for the introduction of Islamic finance — great Islamic heritage and roots, sizeable population, deep interest in Islamic finance, potential to disseminate successful Islamic finance experience to other countries of the region, political stability, good infrastructure, 100% literacy as well as real economic challenges and financial exclusion for a considerable stratum of society driven by faith motives.
What is needed to make an ‘unforgettable dish’ from all these ingredients is strong commitment from the government and the regulator to enable the birth of the Islamic finance industry and its swift growth and contribution to the country’s economic development. Now we have all the reasons to expect that 2021 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.