Uzbekistan is a fast-growing country in Central Asia, with 34 million inhabitants, more than 90% of which profess Islam. Therefore, more and more people and businesses are concerned about finances and their origin. Various research shows that around 15–20% of the population refrain from using traditional financial tools due to religious concerns and among businesses these numbers are even higher. Islamic finance in one form or another is present in business relationships in Uzbekistan, eg in the form of Musharakah.
According to experts interviewed, the US$200 million received annually through the Islamic Corporation for the Development of the Private Sector satisfies only about 5% of US$10 billion demand for Islamic finance in Uzbekistan.
Traditional financial institutions try to adapt elements of Islamic finance in their financial products that need to comply with the national legislation, but the need for comprehensive regulations in this area is obvious for global Islamic finance outreach.
In the meantime, one could observe various businesses emerging that address the growing demand for Halal finance in Uzbekistan.
Review of 2022
In February 2022, Uzbekistan based start-up Iman, which focuses exclusively on Islamic financing and investments, attracted US$1million in venture funding in an ‘A’ round. The co-founder and CEO, Rustam Rakhmatov, sees a great potential for the expansion of Islamic financing and has an ambition to build the first digital Islamic bank in Uzbekistan. Iman has already distributed more than US$5 million through Ijarah and Murabahah products mainly for consumer products.
“We saw a great demand in the country for Islamic finance among the population and decided to establish our start-up to address low coverage (4.5%) with formal financial products in banks,” Rustam opined. He sees the lack of a regulatory framework as one of the greatest obstacles for expanding Islamic finance in Uzbekistan.
During the opening of the 46th Annual Meeting of the Board of Governors of the IsDB Group in Tashkent, Shavkat Mirziyoev, the president of Uzbekistan, touched upon the need to expand Islamic financial instruments in the country.
In the meantime, the lack of infrastructure, regulatory framework and protection of deposits, as well as fiscal barriers, hinders the introduction of Islamic finance in Uzbekistan, according to the Ministry of Investments and Trade of the Republic of Uzbekistan, which leads the work on the development of a regulatory framework in Islamic banking to address the growing demand for such services. Another working group led by the Ministry of Finance is working on the law on Islamic capital markets.
Preview of 2023
Khusan Khasanov, the IsDB Group field representative in Uzbekistan, mentioned significant progress with regards to implementing Islamic finance regulations in the country based on signed agreements at the aforementioned meeting. With the help of the IsDB, two main regulations are foreseen to be in force in 2023.
“Those regulations should change the landscape and open the country’s doors for global Islamic capital, so the players active in this area should already be seeking the ways to enter the Uzbek market,” advises Khusan.
The IsDB also cooperates with the central bank on experimenting with Islamic windows in selected banks within a regulatory sandbox, to see how they can be multiplied throughout the country. Still, Khusan thinks that apart from the regulatory initiatives, much effort should be given by the government on expanding Islamic finance advisory and increasing public awareness.
But what about businesses — how are their demands considered and addressed in terms of Halal financing? Bakhrom Numonov, the council chairman of the Islamic Finance and Takaful Association in Uzbekistan and the chairman of the board of directors of Apex Ijara Company which focuses on B2B transactions, is looking forward to the new laws. Bakhrom mentioned that the reforms should also cover the laws on banking activities and civil and tax codes and go beyond these laws for financial institutions to attract Sukuk financing.
“In order to attract Sukuk, we had to establish a company abroad as the national legislation doesn’t allow such operations,” says Bakhrom, while stating the challenges in attracting Islamic investments into the sector.
With this in mind and the regulatory reforms foreseen in 2023 to introduce Islamic banking and Islamic capital markets, financial institutions would be in a better position to reach out to global markets for Sukuk should their opportunities be expanded toward attracting Islamic investments.
Conclusion
In general, one should note that within the last three to four years, the landscape of Islamic finance has changed rapidly, creating opportunities for more private players and creating the ground for substantial reforms. Those positive dynamics, growing demand for Islamic finance and near-tectonic changes in the financial and capital markets that are foreseen are seriously worth considering in the coming years and 2023 will set some important milestones in this case, thus making it the right time to start investing in Uzbekistan.
Murod Khusanov is an expert and consultant in governance and economic development programs management in the international development context in particular working with the Organization for Security and Co-operation in Europe (OSCE), Organization for Economic Co-operation and Development (OECD) and United Nations (UN). He can be contacted at [email protected].