Uzbekistan drafts bill to introduce Islamic banking

On 15 September, the UzLiDeP faction discussed the draft law “On amendments and additions to certain legislative acts of the Republic of Uzbekistan aimed at introducing Islamic banking in Uzbekistan.”

The legislation currently contains a number of barriers to the use of trade- and partnership-based financing by commercial banks. In Islamic finance, banks provide financial support to clients through trade, but in Uzbekistan commercial banks are prohibited from engaging directly in trading activities.

Islamic finance also allows financing based on partnership, whereas banks in Uzbekistan face restrictions on establishing legal entities or participating in their charter capital.

The draft law seeks to establish the necessary legal framework for Islamic banks in line with the standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB).

According to UzLiDeP, the legislation will provide a foundation for organizing the activities of Islamic banks and Islamic “windows,” reduce the size of the shadow economy, and attract foreign investment into the development of Islamic banking.

A survey by the United Nations Development Programme (UNDP) found that 68% of Uzbekistan’s population and 60% of businesses do not want to use traditional banking services due to religious beliefs.

In November 2023, the president instructed the creation of a regulatory framework for microfinance organizations to provide Islamic financial services.

The initial plan was to submit the draft law on Islamic finance to the Oliy Majlis by the end of 2024. The Central Bank prepared regulations on the provision of Islamic financial services and submitted them to the Ministry of Justice for state registration.

During last year’s dialogue with business representatives, President Shavkat Mirziyoyev announced the development of the draft law on Islamic banking. He estimated that, once adopted, the law would make $5 billion in financial resources available to businesses annually.

In December, the Central Bank joined the Islamic Financial Services Board (IFSB) to study international experience in regulating Islamic banking.