Uzbekistan Takes Major Step Toward Diversifying Financial Sector with Approval of Islamic Banking Draft Law

The Uzbekistan parliament has taken a significant step toward diversifying its financial sector with the approval of a draft law on Islamic banking in its first reading. The initiative aims to expand access to financial services for citizens and businesses, attract foreign investment, and create new mechanisms for economic support. The draft law proposes amendments to several existing laws and introduces key concepts of Islamic banks, financial operations, standards, and investment deposits. It also outlines a licensing regime for fully-fledged Islamic banks or Islamic 'windows' within conventional banks, as well as permitted financial instruments such as murabaha, mudaraba, musharaka, wakala, and salam.

Key Takeaways:

• The proposed draft law on Islamic banking aims to establish a modern infrastructure for Islamic finance in Uzbekistan, drawing on international experience from Malaysia, Turkey, the UAE, and neighboring countries.
• The law would provide legal grounds for establishing Islamic banks, Islamic windows, and microfinance institutions, expanding access to alternative financial services and introducing new tools to support business.
• Abrorkhoja Turdaliev, Deputy Chairman of the Central Bank, emphasized that the reforms go beyond removing legal barriers and are aimed at building the institutional foundations of Islamic finance.
• The draft law includes provisions for a special tax regime tailored to Islamic finance operations, eliminating restrictions that prevent banks from directly participating in trade or acquiring equity stakes in companies.
• Islamic banking prohibits the charging of interest, financing of activities forbidden under Islamic law, and excessive uncertainty in contracts, emphasizing partnership and risk-sharing.

Statistics:

• The draft law proposes amendments to the Tax Code, Civil Code, and eight other laws to facilitate the development of Islamic finance in Uzbekistan.
• The permitted financial instruments under Islamic banking include murabaha, mudaraba, musharaka, wakala, and salam transactions.
• Uzbekistan's Central Bank aims to build dedicated councils, audit bodies, and accounting systems to ensure compliance with Islamic financial principles.
• Islamic banking is expected to attract foreign investment and create new mechanisms for economic support in Uzbekistan.

Sources:

• Parliament of Uzbekistan: Draft Law on Islamic Banking (August 2022)
• Uzbekistan Central Bank: Abrorkhoja Turdaliev Statement on Islamic Banking Reforms (September 16, 2022)
• BBC News: Uzbekistan pushes through Islamic banking law (September 22, 2022)