Islamic Banking potential in Uzbekistan
Full-scale reforms in the economy of the Republic of Uzbekistan caused an ever-increasing interest of the world community in the country, favored its openness to foreign investment and the readiness of foreign companies to found their business in the country. At the same time, Uzbekistan has a huge untapped potential, in particular in the financial sphere: the possibility of creating an Islamic bank, that is, a bank that would work according to Sharia norms.
And for the first time, in September 2018, during the conference “Day of the Islamic Development Bank Group”, a memorandum of understanding was signed between the IsDB and the major banks of Uzbekistan, which can be considered as the first steps in implementing the principles of Islamic finance in the country. Therefore, in view of the fact that Islamic banking is a new phenomenon in the economy of the Republic, we decided to consider its features, operating principles and what products it provides for the population and entrepreneurs of the country.
It is well known that Islamic banking has a fundamental difference from traditional Western-style banking, and the difference is in the absence of interest on capital, that is, a ban on the usury. According to one of the IsDB employees, the attractiveness of Islamic finance in the world is growing every day, not only among the Muslim population, but also among representatives of other faiths.
Source: ICD- Thomson Reuter Islamic Finance Development Indicator 2016
So, what is the peculiarity of Islamic banking, and what set of financial instruments should entrepreneurs and ordinary people expect from local banks in the near future?
The main feature of Islamic banking, as was noted, is the absence of interest on a loan, the ban on which is imposed mainly due to the fact that making a profit in excess of the principal amount of the debt is considered unfair according to Sharia.
Brian Kettell, a well-known Islamic finance scholar, explains this in the following way: in a traditional bank, an entrepreneur receives a loan at a certain interest rate with guarantees of his return to the agreed time, regardless of the result of his investments. That is, by investing this loan in a business, he has to repay the loan with interest, even if this investment does not bring him any profit, and even if he loses everything. Accordingly, the risk is borne only by the entrepreneur.
However, in Islamic banking the situation is different: the bank issuing a loan actually becomes a partner of the entrepreneur, risks and profits are equally divided between them, that is, in case the entrepreneur invested a loan from an Islamic bank makes a profit, the bank and the entrepreneur share this profit according to the agreements. However, if this business does not bring profit, then both of them lose (“Introduction to Islamic Banking and Finance,” Brian Kettell).
The main financial instruments provided by Islamic banks, which entrepreneurs can expect from local banks are mudarabah, murabah, musharakah, ijara, istisna, salam and takaful.
Wiley’s Glossary of Islamic Finance provides the following definitions of the mentioned financial instruments:
• mudarabah is a partnership whereby an investor provides a certain amount of investment to an entrepreneur who undertakes to invest this money in a business and thereby increase it. According to this contract, the profit is divided according to a predetermined proportion, and in case of failure, only the investor bears a loss: the entrepreneur loses only his share of the expected profit;
• murabahah - a form of interest-free loan that allows a customer to purchase goods by installments: the goods purchased by the bank and transferred to the customer under the contract of murabahah become the property of the customer after he pays the full cost of the goods, including the previously agreed mark-up;
• musharakah is a joint venture that implies sharing of profits and losses between partners: profit is divided according to a previously agreed proportion, and losses are divided according to the sum of the contribution of each partner;
• ijara - the equivalent of a common financial product - leasing. This is a leasing agreement, according to which a bank buys a product and leases it to its client and receives a rent for it. During the term of this contract, the ownership remains with the bank, and the right to use the product is transferred to the lessee. Upon expiration of the contract, the right to use is returned to the bank;
• istisna - a contract for the purchase of goods by order, according to which payment is made in advance in whole or in part as the order is fulfilled;
• salam - payment for goods that must be delivered at a certain time in the future. Usually the sale cannot be carried out and is not considered valid if the seller does not have a real product at the time of the transaction. However, this type of contract is an exception and is usually used in the agricultural sector, when Islamic banks pay in advance under this type of contract to farmers to receive a certain share of future products;
• takaful - based on the principle of mutual assistance, takaful implies mutual protection of goods and property through the sharing of risks in the event of losses of one of the partners. Takaful corresponds to mutual insurance, when the partners of this contract are both insurers and insured.
These financial instruments are fairly common in the Muslim world and are gaining increasing popularity in the Western world. With the opening of Islamic financing windows in local banks, the population and business of Uzbekistan will be able to obtain the described financial products and take advantage of Islamic banking, which in general will have a positive effect on the country's socio-economic development and its further integration into the international financial system.