March 18, 2024

Islamic Finance in Uzbekistan

Islamic finance is a system of financial transactions that complies with Shariah principles. It prohibits the payment of interest and incorporates the principles of fair distribution of risk and profit between the bank and the customer. The introduction of Islamic finance services in Uzbekistan has been under heated discussion since 2018. Since then, legislative acts have been adopted that promote the idea of Islamic finance and facilitate the expansion of the market for lending services.

1. Legislative acts

1.Law of the Republic of Uzbekistan “On Non-Bank Credit Organisations and Microfinance Activity” dated 20.04.2022 No. ZRU-765;

2. Decree of the President of the Republic of Uzbekistan “On additional measures to increase the role and share of microfinance services in the development of entrepreneurial activity”.

3. Decree of the President of the Republic of Uzbekistan “On measures on further development of the capital market” dated 13.04.2021 No. UP-6207 (Presidential Decree);

4. Resolution of the Central Bank “On approval of the regulation on the procedure for the provision of Islamic financing services by microfinance organizations” dated 19.07.2024 No. 23/4.

2. Subjects of Islamic finances

Islamic financing is provided by microfinance organizations (hereinafter – “MFOs”) in amounts not exceeding the amount of microcredit limit of 300,000,000 UZS for business entities and the microloan limit of 100,000,000 UZS for individuals.

The procedure for providing Islamic finance services is developed by the Central Bank of the Republic of Uzbekistan. On July 19, 2024, the Central Bank adopted a Resolution establishing the procedure for the provision of services by MFOs on Islamic financing (hereinafter – “Resolution No. 23/4”).

According to the resolution, MFOs may provide the following Islamic finance services:

1.	Ijara muntahiyya bittamlik	leasing the premises with the condition of its subsequent purchase;
2.	Islomiy ijara	transfer to the client for temporary possession and (or) use of things (property) that were purchased by the MFO at the client’s request or that are on the balance sheet of this organization but not in use, for an agreed period of time and fee;
3.	Murobaja	financing a client by selling goods in installments with a pre-determined price for the goods and a markup;
4.	Muzoraba	financing a client by directing funds to the client’s commercial activities, where profits generated are shared between the MFO and the client according to a pre-agreed ratio;
5.	Mushoraka	a partnership based on the distribution of profits and losses, in the form of financing a client through the implementation of commercial activities (partnerships) by the MFO together with one or more participants (clients) or participation in the authorized capital of legal entities.
6.	Salam	financing a client through prepayment by the MFO of the price of a product to be delivered by the client of this product.

A mandatory condition for the provision of Islamic financing services is the creation of a Special Council for Coordination of Islamic Finance Issues (hereinafter referred to as the “Special Council”) responsible for the provision of services by an MFO related to Islamic financing, based on the requirements of the legislation and this Regulation.

A Special Council is established by participants (shareholders) at a general meeting and must consist of no fewer than five members. In addition, by decision of the general meeting of participants (shareholders) of an MFO, a Special council may be attracted on the basis of an agreement (outsourcing), which is established under associations or unions specializing in this area, with its composition meeting the requirements established by Resolution No. 23/4.

At least one member of the Special council must have a higher education in Islamic law, one must have a higher education in law, and the remaining members must have an international certificate in Islamic finance.

3. Principles of Islamic finance

In Islamic finance, money is viewed not as an object of sale but as a medium of exchange and a measure of value. The subject of a transaction between the bank and its client consists of tangible goods, assets, or a partnership in which each party bears its respective risks.

Prohibition of riba (interest)

A key feature of Islamic finance is the prohibition of riba — earning of guaranteed interest. Under this principle, income cannot be generated from guaranteed interest on deposits or loans. Therefore, a bank providing Islamic financing earns revenue through the resale of goods and other assets, leasing assets with a subsequent buyback, or investing in business ventures.

Link to the real economy

All operations in Islamic financing must be tied to specific assets, goods, or services. Funds are provided not for speculation with money but for real economic activity that creates tangible value.

Risk and responsibility sharing

Unlike conventional lending, where the client bears the full financial burden — paying interest and principal regardless of business performance — Islamic finance is based on the principles of partnership and shared responsibility. Both the bank and the client share the risks and profit according to the outcomes of the venture.

4. Types of Islamic finance

Murobaha (providing a financing service on a deferred sale basis)

Murobaha is a form of Islamic financing in which an MFO, at the client’s request, purchases the required goods from a seller and then sells them to the client at a pre-agreed markup with deferred payment.

The price of the goods and the amount of the markup are fixed in the contract in advance and cannot depend on future or uncertain factors. The client makes payments according to the agreed schedule, including the possibility of paying in installments.

The object of a Murabaha transaction cannot be money, currency, crypto-assets, gold, or silver.

Islomiy ijarah (purchase of premises and leasing)

Islomiy ijarah is a form of Islamic financing in which an MFO acquires an asset and transfers it to the client for temporary use under a lease agreement.

The service is provided based on the client’s application. The lease agreement must specify the lease term, payment schedule, and amount. To provide an asset under Islamic ijarah, the MFO must own the title to the asset.

MFO is responsible for any defects in the leased asset. Costs for major repairs of the asset are borne by an MFO, while maintenance and minor current are the responsibility of the client. Additionally, to minimize risks associated with potential dishonest actions (or inaction) by the client, MFO may require collateral from the client (such as a pledge, guarantee, or advance payment). For example, if the client refuses to accept the object of Islamic ijarah, the advance payment can be used to cover MFO’s actual losses.

Ijara muntahiyya bittamlik (leasing the premises with the condition of its subsequent purchase)

An MFO and a client may enter into an Islomiy ijarah agreement under which the client later acquires the right to purchase the leased asset. Ownership of the asset is transferred to the client only through a separate sales agreement.

Salam (provision of prepayment financing service)

Salam is a form of Islamic financing in which an MFO pays the client the full amount in advance for goods that will be delivered in the future. This instrument is designed to support producers and entrepreneurs who need working capital before the manufacturing or delivery of their products. The object of a salam contract must be goods that are fungible, precisely defined in terms of quantity and quality, and capable of being weighed, measured, or counted. Money, crypto-assets, gold, and silver cannot be the subject of a salam contract.

Muzoraba (providing a profit-sharing partnership financing service)

Muzoraba is a form of Islamic financing structured as a partnership agreement in which an MFO provides the capital for a business venture (as Rab-ul-Mal), while the client manages the business operations (as Mudarib).The capital may be provided in cash or in the form of tangible assets with a clearly determined value.

The profits from the business are shared as per the terms of the agreement. Losses are borne solely by the MFO, limited to the amount of invested capital, except in cases where these losses are due to negligence or misuse of capital by the client.

Mushoraka (provision of financing service based on profit and loss sharing Islamic partnership-based financing)

Mushoraka is a form of Islamic financing based on partnership where both MFO and a client jointly invest funds or assets into a project and share in both the profits and the risks. Profits are distributed between the parties according to capital shares unless otherwise stated in the contract. Losses are shared in proportion to each party’s capital contribution.

Within the partnership, management of the project may be carried out jointly by all partners or delegated to one of them by mutual agreement. After losses have actually occurred, a partner may voluntarily agree to bear a larger portion or even the entirety of the losses.

Each party has the right to withdraw from the partnership by providing prior notice to the other participants and to receive its share of the capital in accordance with the terms of the agreement. The withdrawal of one or more parties does not automatically terminate the partnership between the remaining participants.

5. Penalties (liquidated damages) in Islamic finance contracts

The Resolution No. 23/4allows MFOs to collect penalties (liquidated damages) when a client breaches its obligations. However, all funds received at interest must be kept separate from the MFO’s profits and allocated to charity.

Islamic Finance in Uzbekistan

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