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IDENTIFICATION AND MANAGEMENT OF RISKS IN ISLAMIC FINANCE IN THE
REPUBLIC OF UZBEKISTAN
Shirin Tursunxodjayeva
associate professor, PhD at the "Finance and financial technology" Department of
Tashkent State University of Economics
Abduqahhorov Oybek
Master of the Tashkent State University of Economics
abduqahhorovoybek009@gmail.com
https://doi.org/10.5281/zenodo.14617601
Abstract.
The importance of developing Islamic finance in the Republic of Uzbekistan is
increasing in the context of international economic integration and globalization. The creation
and development of financial institutions based on the principles of Islamic finance in our country,
including Islamic banks and investment funds, play a crucial role in ensuring the stability and
development of the national economy. In 2021, the total value of assets in global Islamic finance
markets reached approximately $3.95 trillion. By 2026, the total value of assets in these markets
is projected to reach $5.9 trillion, with an annual growth rate of 10-20%. The emergence of Islamic
finance as a decisive component of economic changes in Uzbekistan is explained by the
government’s efforts to modernize the financial sector and integrate advanced global experiences.
The principles of Islamic finance, including the prohibition of interest (riba), risk-sharing, and the
requirement to back transactions with real assets, distinguish it from traditional finance. However,
these unique characteristics give rise to specific risks that need to be identified and managed
effectively. These include compliance, operational, market, and liquidity risks. This thesis
examines the identification and effective management methods of these risks.
Key words:
Islamic Finance;
Risk Management Sharia Compliance; Legal Risk; Liquidity
risk; Operational risk.
The emergence and development of Islamic finance in Uzbekistan represents a dynamic
opportunity for diversifying the country's financial sector, in line with ethical financial principles
derived from Sharia law. Islamic finance not only promises to attract significant international
investments but also fulfills the needs of the country's predominantly Muslim population, ensuring
inclusive economic growth. In Uzbekistan, Islamic finance has become a crucial component of the
ongoing economic changes, closely linked to the government's efforts to modernize the financial
sector and integrate advanced global practices.The principles of Islamic finance, such as the
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prohibition of interest (riba), risk-sharing, and the requirement to back transactions with real assets,
distinguish it from traditional finance. However, these unique features introduce specific risks that
need to be identified and managed effectively. This thesis explores the identification and
management of risks in Islamic finance within the context of Uzbekistan's developing legal and
institutional framework. By analyzing international practices and Uzbekistan's recent efforts, the
study proposes strategies for mitigating these risks to encourage sector growth.Integrating Islamic
financial practices into Uzbekistan's evolving financial landscape brings with it various challenges,
such as addressing regulatory uncertainties, mitigating market-specific risks, ensuring operational
efficiency, maintaining liquidity, and strict adherence to Sharia principles. These risks are
compounded by Uzbekistan's relatively limited experience in Islamic finance and the unique
dynamics of its financial ecosystem. This thesis aims to comprehensively analyze these risks by
drawing on international research, Uzbekistan's legal and financial foundations, and globally
recognized risk mitigation strategies.Through identifying potential pitfalls and offering effective
solutions, this study strives to contribute to the establishment of a stable and sustainable Islamic
finance sector in Uzbekistan, enhancing its role as a driver of economic development and serving
as a model for other emerging markets.
While Islamic finance offers numerous advantages, particularly in promoting ethical and
sustainable business practices, it also presents unique risks:
1-table.
Risks in Islamic Finance and Their Implications
1
Risk Type
Causes of Risk
Likelihood Consequences
Management strategy
Legal risk
- Lack of specific
legislation
- Unclear regulatory
framework
High
- Financial disputes
- Misinterpretation of
contracts
- Weak investor
confidence
- Develop specific laws for Islamic finance
- Study and adapt international legal
practices
- Organize training for lawyers specializing
in Islamic finance
Liquidity risk
- Limited financial
products and
services
Medium
- Financial instability
- Difficulty in
fulfilling obligations
- Introduce innovative financial products
- Promote diversification of assets and
funding sources
1
Table created by the author
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- Low market
participation
- Encourage participation of institutional
investors
Operationalr
isk
- Lack of
experienced staff
- Weak internal
controls
High
- Errors in processes
- Operational
inefficiency
- Increased costs
Automate and digitize operational processes
- Conduct regular training and certification
programs for staff
- Implement strong internal control systems
Shariah
compliance
.risk
- Weak performance
of Shariah boards
- Inconsistent
Shariah standards
High
- Social unrest
- Loss of trust among
investors
- Non-compliance
penalties
- Strengthen the capacity of Shariah boards
through training
- Apply internationally recognized Shariah
standards
- Conduct periodic Shariah audits
Uncertainy
risk
- Uncertainty in
profit and loss
sharing
- Lack of clarity in
contracts
High
- Unexpected losses
- Investor
dissatisfaction
- Reduced market
confidence
- Develop risk-sharing mechanisms such as
takaful (Islamic insurance)
- Ensure transparency in profit and loss
sharing contracts
- Educate investors on risks
The economic conditions of the Republic of Uzbekistan and the inherent characteristics of Islamic
finance give rise to a number of risks. The following analysis presents these risks and their
management strategies in the form of a table: The analysis shows that:
Legal Risk
: In the context of Uzbekistan, legal risk is the most pressing issue, and to address
it, special laws and regulatory documents need to be developed.
Operational Risk
: To reduce operational risks, it is necessary to train qualified personnel
and study international practices.
Sharia Compliance Risk
: Strengthening the activities of the advisory boards is crucial for
eliminating this risk.
Strategic management of these risks not only ensures financial stability but also helps
to increase confidence in Islamic finance.To assess the risks in Islamic finance in the context
of Uzbekistan and their scale, quantitative indicators will be used. These indicators are of
significant importance in analyzing the real-life impact of these risks and developing
effective strategies to address them.
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2-table.
SWOT analysisRisks in Islamic Finance in the Republic of Uzbekistan
2
.
SWOT
Category
Description
Strengths
1. Risk-sharing mechanism (based on Sharia principles).
2. Stable financing foundations (real assets).
3. Government focus on developing Islamic finance.
4. Social responsibility-based approach.
5. Principles of honesty and transparency.
Weaknesses
1. Lack of skilled personnel.
2. Underdeveloped legal framework.
3. Limited risk management tools.
4. Low financial literacy.
5. Weak risk assessment methods.
Opportunities
1. Learning from international experiences (Saudi Arabia, Malaysia,
Indonesia).
2. Implementation of innovative technologies (Fintech).
3. Improvement of the legal framework.
4. Accessing international financial markets (Sukuk).
5. Diversification of the financial sector.
Threats
1. Non-compliance with international standards.
2. Risks related to Sharia compliance.
3. Resistance from market participants.
4. Geopolitical instability.
5. Lagging technological advancement.
The SWOT analysis highlights both the potential and challenges faced by Islamic finance
in Uzbekistan. While there are strong foundations in terms of social responsibility, transparency,
and the risk-sharing model, the sector still faces several challenges, particularly in terms of legal
infrastructure, skilled personnel, and risk management tools. By leveraging international best
practices, embracing technological advancements, and strengthening its legal and regulatory
framework, Uzbekistan has significant opportunities to develop its Islamic finance sector.
2
Table created by the author
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However, it must also address the risks of non-compliance with global standards and the resistance
from traditional market participants to realize its full potential.
In conclusion, this analysis identifies key risks in the Islamic finance sector in Uzbekistan,
including legal, liquidity, operational, Sharia compliance, and uncertainty risks. Legal risk is the
most critical, requiring immediate legal reforms due to its high impact. Operational risk, linked to
the shortage of skilled professionals, demands enhanced training programs. Liquidity risk, arising
from limited financial products, highlights the need for diversification to ensure market stability.
Sharia compliance risk requires strengthening Sharia boards to ensure legitimacy and prevent
financial instability. Lastly, uncertainty in profit-sharing mechanisms emphasizes the importance
of clear guidelines. Addressing these risks through targeted strategies will foster the growth of
Islamic finance in Uzbekistan.
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