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ISLAMIC FINANCE IN THE WORLD AND THE REASONS FOR THE
NEED OF INTRODUCING IT TO UZBEKISTAN
Shahriyor Murodov Tahirjan ogli Second
year student at UWED E-mail:
shaxriyor0922taxirovich@gmail.com
Abstract:
Over the past few decades, Islamic finance has developed in
very fast pace accupying big place in the world economy and the value of its
assets is increasing rapidly day by day. This article aims to give brief
information about what exactly Islamic finance is, investigate its role in the world
economy and why it should be introduced to Uzbekistan. Comparative, event
analysis, content analysis methods were used while writing this article. The
benefits of Islamic finance for Uzbekistan, the develoments which will come
after introducing it were concluded in this scientific work. This academic writing
may be useful for economists and officials in making contribution to the
development of Uzbekistan economy.
Key words:
Islamic finance, Islamic law, world economy, Traditional
finance, Uzbekistan economy.
Introduction
The Islamic finance is based on Islamic law. It is developing substantially
across the globe. It outpaced the growth of Traditional finance with an estimated
15% increase in assets every year[1]. “Statista” gives information that the value
of its assets made up almost 4 trillion in 2021[2]. It means that Islamic finance
is now playing an important role in the world economy. Moreover, the number
of the people who want to use the instruments of Islamic finance is growing day
by day. Especially, they are a lot in the countries with muslim population.
Therefore, every country, especially the countries with muslim population,
should use the instruments of Islamic finance in particular percentage in order
to boost their economy. Uzbekistan is also one of those countries and below,
the reasons for this and the advantages which Islamic finance bring will be fully
explained and concluded.
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What is Islamic finance?
Islamic finance can be said as an alternative system of finance, which is
governed by Shariah (Islamic law), sourced by the Quran and the Sunnah.
There are 3 main variations between Traditional finance and Islamic finance.
The first one is that the Islamic finance does not see money as a kind of product
while Traditional finance does[3]. In Traditional finance, money can be used as
a product and therefore it can be sold or bought. But it is said in islam that
money is only a means of exchanging products and can never been as a
product. That is why any predermined payment over and above the actual
amount of the principal (i.e. interest) is prohibited in the Islamic finance. The
second one is that companies shares the risk with financial institutions, like
banks, in the Islamic finance, which means that if a company makes a profit, a
financial institution also makes a profit, but if it makes a loss, the financial
institution also makes a loss[3]. Companies and financial institutions will be
partners in it. Therefore, there should not be any uncertainty in terms of their
shares in profit or loss. But in Traditional finance, creditors always get their
money back with interests no matter whether the company makes a profit or
not. The last one is that companies and financial institutions can not work with
prohibited products and services in Islamic religion as alcohol and cigarettes[3].
As a conclusion for these 3 distinctions, we may say that all activities in this
form of finance must reflect the philophy, values, ethics and objectives of
islamic shariah. Furthermore, it is claimed by scholars that although we reckon
the Islamic finance as an alternative one to the Traditional finance when
learning, it is actually not very different. It is almost same to Traditional finance,
but it is only regulated by the Islamic religion.
Main instruments of Islamic finance
6 terms can be used as main instruments of Islamic finance. They are
called Musharakah, Mudarabah, Murabahah, Ijarah, Salam and Istithna[3].
Below, we will discuss about every of them to understand them briefly.
The first is Musharakah which was taken from Arabic language meaning
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to be partners. It is joint venture. Under Musharakah, all partners contribute
funds and have rights to participate in the management of the business[3].
Profits are shared according to agreed ratio but partners share loss in the ratio
of capital invested[3]. Contributions can be made either in cash or in kind.
Moreover, as everyone understands, we can say that all partners may invest in
the business, not only financial institutions, in Musharakah.
The second one is Mudarabah in which 100% capital is provided by one
partner while other one manages the investment project[3]. In this, profits are
shared under pre-agreed ratio whereas losses are borne by only the partner
who provides the capital. Mudarabah is often used for investment funds, where
money is provided to islamic institutions by investor and islamic institutions
invest using this money[4].
The next one is Murobahah which is often used as a instrument although
it is actually not. Under Murabahah, financial institution buys a kind of product
and sells it to businessman for more than the money in which it buys[3]. It look
likes trade more between them than partnership.
The forth one is Ijarah which is also called Leasing. Ijarah is a kind of
trade between financial instution and client of it too. In Ijarah, one party buys
one particular thing and leases it to another party for some period of time[3].
One thing needs to be taken into consideration that the ownership of the
equipment is not changed in Ijarah until it is sold. For more data, it is widely
used for house and aircraft financing[4].
The fifth is Salam in which the cost of the equipment is paid immediately
but the delivery of that will be later[3]. In this, one party who is buying the
equipment should make a full payment during trading, if it is not, this tarding is
prohibited in Islam. Because there is one rule in Islam that trading which
depends on future events is haram[3]. Therefore, full payment during trading is
important and moreover, time and place of the delivery should be clear.
The last one is Istithna which is categorized to asset based and
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comissioned manufacturing[3]. Under istithna, a party (bank) takes the
responsibility of producing a specific thing that is possible to be made according
to agreed specifications at a determined price and fixed date of delivery. Bank
does not carry out manufacturing process as it can make paralell contract with
other manufacturing company. Then, bank charges the buyer the price which
they pay to the manufacturer plus a reasonable profit and takes the risk of
manufacture of the asset. These are general descriptions for main instruments
of Islamic finance but in order to understand them fully the reader should learn
all rules of each of them from reliable islamic sources. As a result, the reader
will realize the Islamic finance better and not make mistakes when dealing with
them.
The countries where Islamic finance is well developed
The top countries ranked by Islamic finance assets are Iran, Saudia
Arabia and Malaysia. Among the counties with the biggest rise in assets are
Russia, Canada, the United States, Maldives, Nigeria, Tajikistan[5]. In the
meantime, United Kingdom is also considered one of the countries where
Islamic finance is well developed. Below, some information about the
developments of Islamic finance in some countries will be given.
The development of Islamic finance in Malaysia
The growth rate of Islamic finance in Malaysia is impressive by any
standarts. Prior to the year 2000, there were only 2 full-fledget Islamic banks in
Malaysia, Bank Islam Malaysia Berhad which was established in 1983 and
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Bank Muamalat Malaysia Berhad in 1999. In 20 years, the figure has rised by
eight times and now there are 16 full-fledged Islamic banks in Malaysia[6]. The
value of their assets had a considerable rise respectively.
Growth of Islamic Banking System [7]
The development of Islamic finance in Indonesia
Indonesia is considered as one of the countries with highest muslim
population. It has dual banking system, which means that it uses conventional
and Islamic banking system in one time. The first Islamic bank established is in
Muamalat in 1991. Currently, there are 14 Islamic Commercial banks (BUS)
and 20 conventional banks which have Islamic Business Unit with 2443 total
offices[8].
Table
1. The Development of Sharia and Conventional Banking in Indonesia in 2020
Islamic Banks
Conventional Banks
Assets
1DR 576.813 Billion
IDR 9.053.446 Billion
Number of Offices
2.433
30.755
Third Party Funds
IDR 464.193 Billion
IDR 6.634.998 Billion
Total Financing/Credit
IDR 89.539 Billion
IDR 5.516.904
Billion
The development of Islamic Finance in United Kingdom
Islamic finance is developed in United Kingdom well too. The indicators
of assets are very high there. In Europe (excluding Turkey) the UK made up
85% of total European islamic banking assets. In 2021 islamic banks assets
were 7.5 billion dollars in United Kingdom[9]. Islamic finance is not limited to
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the Islamic world. In Europe, especially in the UK, a lot of nonmuslim people
use the service of Islamic banks or other Islamic financial institutions. This
means that in the whole wolrd there is a demand for Islamic finance.
Why is the introducing Islamic finance important for Uzbekistan
Above, information about Islamic finance and its role in the world was
given. From that, it is clear to realize that every country should introduce it to
themselves, especially Uzbekistan. But there are other reasons which makes it
more reasonable. Firstly, 96.3% of the population in Uzbekistan is muslim
according the Ministry of Foreign Affairs meaning that most of people in
Uzbekistan follow Islamic law[10]. If Islamic finance is introduced to Uzbekistan,
it is easy for it to develop rapidly as a lot of people there do not use services of
conventional banks or other Conventional financial institutions and moreover,
other many people who are using them would prefer to use services of Islamic
banks because of religious reasons. Meeting the needs of population is the
state’s responsibility. Meanwhile, introducing it makes many people very happy
and this will lead to warmth in relationships between state and public. Since
religion is idiology and everything done according to particular idiology always
makes its followers happy. Therefore, if muslim people in Uzbekistan have a
chance to use Islamic finance, they will be very satisfied.
Furthermore, it is fact that a lot ofpeople in Central Asia have been
religious since long history. Thus, many people in Uzbekistan are holding their
money in cash. They are not using or investing them for good projects. The
reason for this is that they do not use the services of conventional banks due
to religious reasons. If a chance to use the services of Islamic banks is created,
it may bring many investments to the country and be reason to the development
of Uzbekistan economy because a lot of people who are holding their money in
cash may invest their money.
Conclusion
To conclude, firstly, Islamic finance in the world economy is playing a
remarkable role and is developing rapidly. The benefits which some countries
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get from Islamic finance were explained above. Secondly, the demand for
Islamic finance in Uzbekistan is very high. Thirdly, Islamic finance will bring
large investment to Uzbekistan if it is inroduced. Because of these
abovementioned reasons, Islamic finance should be disseminated to
Uzbekistan. After that, it may make a huge contribution to Uzbekistan in terms
of economy which we may see as the examples of some countries where
Islamic finance is used and social life of Uzbek people.
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