Madina Abdullaeva
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May 31, 2021

Purpose of blogpost

Modern Islamic finance began to attract more attention after the global financial crisis that began in 2008, with Islamic finance offering an alternative way of doing business. One of the financial instruments in this financial system is Sukuk (bonds), which plays an important role in the stock market. The production of Sukuk has doubled since the end of the global economic crisis. So, why is Sukuk entering the economy of states so intensively? What is the need for the introduction of sukuk in Uzbekistan?

Today, according to a UNDP study, 27% of the population or entrepreneurs in Uzbekistan avoid bank interest. This not only reduces the consumption of bonds based on bank interest rates, but also limits the legitimate interests of those 27% of the population or entrepreneurs. On the other hand, introducing Islamic securities in our economy leads to reduce “secret economy”  as alternative finance instrument. In such a situation, the publication of the draft Resolution of the President of the Republic of Uzbekistan “On measures to introduce securities based on the principles of Islamic finance” (The Resolution) is important in creating a legal basis for the issuance of sukuk in our country. This blog post discusses sukuk and the prospects for creating a legal framework in Uzbekistan for the issuance of sukuk.

Notion of “sukuk” and its distinction from conventional bond

Islamic finance is alternative financial system that is consistent with the principles of shari’a (Islamic law) so that it differs from the classic system by five main principles:

• no interest rate (riba);

• prohibition of financing of gambling and speculative operations (maisir, zulm);

• prohibition of financing operations with tobacco, alcohol, guns, entertainment, pork and etc. (haram);

• no limits for transparency (gharar);

• profit and risk are equally divided among all participants.

One of the instruments based on the above Shari’a principles is sakk. Sakk (a unit of sukuk) is a document confirming the ownership right, which is financed through its use or by acquiring a stake in a project funded by sukuk.

If we compare sukuk with traditional securities, Islamic securities are like bonds. However, a traditional bond is a security that certifies the holder of a loan and confirms to him the obligation to repay the nominal value of the security with a fixed (fixed) interest rate. Whether the issuers make a profit or lose, the bondholders still get their contractual interest, which is also called as fixed yield interest. The fact that the bond represents a fixed interest rate distinguishes it from sukuk. Because in sukuk usury and interest are the first elements to be avoided. Precisely, it is forbidden to sell or lend debt at a price different from the amount of debt when issuing a security (riba). Moreover, unlike a conventional bond, the sukuk project must depend on the real economy.  Namely, the use of capital is strictly controlled when financing through sukuk. There should not be financing operations with tobacco, alcohol, guns, entertainment, pork or other products that are considered inappropriate (haram) for consumption by sharia law.

Importance of sukuk

A well-known scholar, Mufti Muhammad Taqi Usmaniy, described sukuk as follows:

“Sukuk is among the best ways of financing large enterprises that are beyond the ability of a single party to finance and means for the equitable distribution of wealth as they allow all investors to benefit from the true profits resulting from the enterprise in equal shares. In this way, wealth may circulate on a broad scale without remaining as the exclusive domain of a handful of wealthy people. Clearly, this is among the most important higher purposes of the Islamic economic system”.

Interest (a fixed percentage of obligation) is a form of injustice in society. One of the brightest aspects of sukuk is that it is free of usury. Because in the shari’a, the benefits and risks must be divided equally among the participants. In contrast, whether the issuers make a profit or lose, the bondholders still get their contractual interest in conventional securities. This, in turn, shows how acceptable and fair Islamic finance and Islamic laws are.

The implementation of sukuk securities in Uzbekistan’s legislation

Article 96 of the Civil Code lists several types of securities, including bonds, promissory notes, checks, certificates of deposit and savings, bills of lading, shares and other documents. While above article lists the types of securities, the list is not complete and closed This suggests that sukuk may also be on the list. At the same time, it states that the inclusion of documents in the list of securities is a prerogative of the law. Namely, new forms of securities may be created not on the initiative of commercial banks or individuals, they should be prescribed only by law. This means that sukuk securities need to be specifically stipulated in current legislation in order to be enforced. The resolution also aims to create a legal basis for the introduction of sukuk in Uzbekistan, as well as to amend the Civil Code.

According to professor Omonboy Okyulov, Chapter 37 of the draft Civil Code should provide norms for debt and credit agreements with equal distribution of risk. It is common in Islamic bank loans worldwide that the lender enters into a contract based on both profit and loss. Usury is prohibited in Islam.  Therefore, the contract construction option that corresponds to the beliefs of the majority of the population (80 percent of Uzbekistan’s population is Muslim) should be included in the new Civil Code. Sukuk itself represents a debt relationship that the above-mentioned change is very important.

In addition, in the Decree of the President of Uzbekistan dated April 13, 2021 “On measures to further develop the capital market” PF-6207 the decision provides for the introduction of sukuk”. It is obvious that the legal basis for the introduction of sukuk in Uzbekistan is being created. However, it does not mean that a complete legal system has been created in connection with sukuk. In particular, will there be an appropriate tax system for sukuk? If sukuk, which requires full compliance with Sharia law, is introduced, will a Shariah council be set up to regulate it? How are disputes on sukuk application to be resolved? Indeed, on October 12, 2020, the Agency for Capital Market Development submitted for public discussion a draft resolution of the President of the Republic of Uzbekistan “On measures to introduce securities based on the principles of Islamic finance” would partially answer the above questions. However, this resolution is not approved, so it has no legal force. In Kyrgyzstan, sukuk was introduced in 2015, not in 2009, due to the long process of creating a legal framework in the legislation.  This means that the faster the legal framework is created, the faster Sukuk sukuk enters the economy.

Comparative analysis

Analyzing the introduction of Islamic finance instruments such as Sukuk in the legislation of our country, it is vital to study Kazakhstan and Kyrgyzstan, which are post-soviet countries that have similarities in the legislation with Uzbekistan. The experience of these countries shows that the transition from a monistic model (that is based on traditional banking) to a dualistic model (that allows both models to coexist) creates equal conditions for Islamic and traditional financial institutions. Furthermore, it encourages competition between them and leads to the emergence of innovative products and tools. In the dualistic model, the activities of Islamic financial instruments are usually regulated by a special law from conventional instruments.  In a monistic model, there is no special legislation regulating the status of Islamic institutions. This can prevent the Islamic and traditional financial sectors from working side by side, on equal conditions. In Kazakhstan, this can be seen in the banking legislation. Apart from Development Bank of Kazakhstan, all other banks are secondary banks. An Islamic bank is a “second-tier bank” as others after the Development Bank of Kazakhstan. It is noted that the Islamic Bank is not a member of the mandatory system of Bank Deposit Insurance System. In short, the Islamic financial system in Kazakhstan works side by side with the traditional financial system, and there are special norms for it. Creating a legal framework in Uzbekistan based on a dualistic model is an effective way for Islamic finance to work in practice.


 While the list of securities in the Civil Code is incomplete and not finalized, there is room for sukuk as a security in Uzbek legislation. The fact that securities can only be implemented if supported by law calls for a legislative action to introduce sukuk.

 It is also essential to study the experience of neighboring countries, such as Kazakhstan and Kyrgyzstan, which used the dualistic model in the introduction of sukuk, in order to create special legislation. Likewise, it is necessary to speed up the adoption of legal act that could create a legal system for the sukuk and to deal with any disputes that may arise with it.

Cite as: Madina Abdullaeva, “Introduction of Sukuk in Uzbekistan: is the national legislation ready to introduce sharia-compliant bond-like instruments?”, Uzbekistan Law Blog, 31.05.202