The president Shavkat Mirziyoyev signed amendments implementing Islamic banking mechanisms on March 27 with effect as of June 29 this year.

The amendments set a legal framework for providing banking services based on Islamic financial principles that align with international standards.

Permitted Operations

The amendments have outlined a list of Islamic financial operations, including:

All such operations must comply with Islamic financial standards. Banks operating under these principles can use the tools provided by the law and engage in other Islamic financial practices, provided they align with international standards and do not contradict Uzbek legislation.

• Mudarabah: Client financing and attracting investment deposits on a profit-sharing basis.
• Wakalah: Providing or attracting funds through agency agreements.
• Murabaha: Client financing via installment sales of goods.
• Salam: Financing through the prepayment of goods.
• Musharakah: Financing through joint ventures (partnerships) or equity participation in companies.
• Ijarah: Islamic leasing with the right to purchase the property.

Islamic Finance Council

A five-member Islamic Finance Council will be set up under the Central Bank. It will develop Islamic financial standards, provide expert opinions on products, and advise banks on Sharia compliance. Islamic banking activities may only be conducted by legal entities that have obtained a license from the Central Bank.

Tax Specifics
The amendments have also established specific tax regulations for Islamic financial operations.
Income will include remuneration from these operations, as well as revenues from Islamic insurance and reinsurance. Notably, standard Tax Code provisions regarding loans will not apply to these specific transactions.

Several Islamic finance operations shall be waived from VAT, including:

• Transactions involving Islamic securities (Sukuk), including custody, accounting of rights, transfers, and trade organization (excluding issuance services).
• Services provided by banks and microfinance organizations under trust management agreements.
• Income representing the difference between lease payments and the buyout value in Islamic leasing (Ijarah).
• The markup on goods sold to clients under Islamic financing arrangements.

However, banks and microfinance organizations providing real estate via Islamic leasing shall be recognized as property tax payers.

The amendments will amend several regulations, including Banks and Banking Activity Law, the Tax Code, the on Credit Bureaus Law, and other regulations. It will also introduce provisions for microfinance organizations, allowing them to operate under Islamic principles provided they meet established requirements.