Islamic finance goes global as Uzbekistan opens the door

Once associated mainly with Muslim-majority countries, Islamic finance has become a global industry. Its assets reached around $5.98 trillion in 2024, according to ICD-LSEG, as more countries explore Shariah-compliant finance.

At its core, Islamic finance is a system of managing money, investing and borrowing in accordance with Islamic, or Shariah, law. It covers a broad range of financial services, including banking, savings, investment and home financing.

Unlike conventional finance, Islamic finance prohibits the payment or receipt of interest, known as riba, and generally requires financial returns to be linked to legitimate trade, investment or productive economic activity.

The system also discourages excessive uncertainty and speculation, promotes the sharing of risks and rewards between parties, and prohibits investments in activities considered harmful to society, such as gambling, alcohol and tobacco.

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A practice dating back centuries

Although the principles of Islamic finance can be traced back more than 1,400 years to early Islamic commercial practices, the modern industry is relatively young.

The first modern experiment in Islamic banking began in 1963 with the establishment of the Mit Ghamr Savings Bank in Egypt by economist Ahmad El Naggar. Instead of paying depositors interest, the institution operated on a profit-sharing basis, directing funds towards productive local economic activity.

The industry expanded rapidly during the 1970s, supported by rising oil revenues, growing political backing across Muslim-majority countries and the establishment of key institutions such as the Islamic Development Bank and Dubai Islamic Bank in 1975.

Over the following decades, Islamic finance spread across the Middle East, Asia and beyond, with Malaysia emerging as one of the world's leading Islamic finance centres thanks to a strong regulatory framework and continued financial innovation. Today, the Islamic finance industry has a presence in 98 countries and serves both Muslim and non-Muslim clients.

How Islamic finance works

Despite its evolution into a sophisticated global industry, Islamic finance remains built around a handful of principles that set it apart from conventional banking.

Rather than relying on interest-based lending, it connects financial transactions to real economic activity, encourages shared responsibility between contracting parties and incorporates ethical considerations into investment decisions.

Prohibition of interest

Perhaps the best-known principle of Islamic finance is the prohibition of riba, commonly understood as interest. Under Shariah law, earning money solely by lending money is considered an unjust gain because wealth increases without being connected to productive economic activity. Instead, Islamic finance encourages returns generated through trade, investment and leasing.

Murabaha: Cost-plus financing

One of the most widely used alternatives is murabaha, often described as cost-plus financing. Rather than issuing a conventional loan, the bank purchases the requested asset and resells it to the customer at an agreed price that includes a predetermined profit margin. The customer repays the amount in instalments, while the selling price remains fixed once the contract has been signed.

Sharing profits and risks

Islamic finance places great emphasis on sharing both profits and risks. Two common structures reflecting this principle are mudaraba and musharaka.

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Under a mudaraba agreement, one party provides the capital while the other contributes expertise and management, with profits shared according to a pre-agreed ratio. Musharaka resembles a joint venture in which both parties contribute capital, share profits and bear losses according to the terms of the arrangement.

Financing the real economy

Another defining feature of Islamic finance is that financial transactions should be backed by tangible assets or genuine economic activity. This principle encourages financing that supports trade, production and investment.

One example is ijara, an Islamic leasing arrangement in which the bank purchases an asset and leases it to the customer, with ownership potentially transferring at the end of the lease period.

Avoiding excessive uncertainty

Islamic finance also prohibits gharar, which refers to excessive uncertainty, ambiguity or deception in financial transactions. Highly speculative activities are generally considered inconsistent with Shariah principles because they involve significant uncertainty over the ownership or delivery of the underlying asset.

Islamic finance also excludes investments in sectors considered non-permissible under Islamic law, reinforcing its broader ethical framework.

Sukuk: An alternative to conventional bonds

Governments and companies seeking to raise capital through Islamic finance often issue sukuk, which are described as Islamic alternatives to conventional bonds. Sukuk are structured around ownership interests in assets or the income generated by them.

More than 20 countries, including non-Muslim markets such as the United Kingdom, Hong Kong and Luxembourg, have issued sukuk, with Malaysia remaining the world's largest issuer.

Who ensures compliance?

Compliance with Shariah principles is overseen by Shariah boards – groups of Islamic scholars appointed by financial institutions. They review financial products before launch and continue supervising them throughout their life cycle to ensure ongoing compliance with Islamic principles.

Why are non-Muslim countries embracing Islamic finance?

Although Islamic finance originated within the framework of Islamic law, its appeal today extends far beyond Muslim-majority countries.

Over the past three decades, governments and financial institutions across Europe, North America and Asia have introduced Shariah-compliant products not only to meet religious requirements, but also to diversify financial markets, attract international investment and strengthen their positions as global financial centres.

The UK is among the most successful examples, with London emerging as a leading Islamic finance hub outside the Muslim world following regulatory reforms and government support.

In the U.S., Islamic finance initially focused on Shariah-compliant home financing before expanding into investment funds and other financial services. Australia has also developed Islamic banking services to meet domestic demand, while financial centres including Luxembourg, Singapore and Switzerland have incorporated Islamic financial products to broaden investment opportunities and attract international capital.

For many governments, issuing sovereign sukuk is not simply a religious initiative but an economic strategy. It allows them to diversify sources of public financing and attract investors seeking Shariah-compliant assets.

Islamic finance and ESG: Similar goals, different foundations

The growing popularity of environmental, social and governance (ESG) investing has highlighted its similarities with Islamic finance. Both approaches promote responsible investment, transparency and accountability while discouraging the financing of activities considered harmful to society.

Islamic finance excludes sectors such as alcohol, gambling and tobacco, while ESG investing evaluates companies according to environmental performance, social responsibility and corporate governance.

That overlap has led some investors to view Shariah-compliant products as complementary to broader sustainable investment strategies rather than purely as a religious alternative.

Despite these similarities, the two approaches are built on different foundations. Islamic finance is guided by Shariah principles, including the prohibition of interest, excessive uncertainty and speculative transactions, whereas ESG is a secular investment framework centred on sustainability and corporate responsibility.

While there has been growing overlap between the two in recent years, particularly in markets such as Malaysia, they remain distinct investment approaches with different objectives and screening methods.

Uzbekistan: Why now?

Although Islam has shaped the history and culture of present-day Uzbekistan for more than a millennium, Islamic finance is only now beginning to take root.

Discussions on introducing Shariah-compliant financial services gained momentum in 2018 as the government explored ways to diversify the financial sector, improve financial inclusion and expand access to alternative sources of financing. Since then, a series of legislative and regulatory reforms has gradually laid the foundation for the industry.

One of the first major milestones came with the adoption of the Law on Non-Bank Credit Organisations and Microfinance Activity in 2022.

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This was followed by the Central Bank's 2024 regulation authorising microfinance organisations to provide Islamic financing services through instruments such as murabaha, mudaraba, musharaka, salam and Islamic ijara, while requiring providers to establish special councils responsible for ensuring compliance with Islamic finance principles.

The pace of reform accelerated further in 2026. In March, Uzbekistan adopted legislation establishing the legal framework for Islamic banking, including licensing requirements for Shariah-compliant financial institutions and provisions defining the activities Islamic banks may undertake.

Additional regulations later created procedures for converting conventional banks and microfinance organisations into Islamic financial institutions, paving the way for dedicated Islamic banks and so-called “Islamic windows” within existing banks.

The legislation also provides for an Islamic Finance Council within the Central Bank to help coordinate the development of Islamic finance and related standards. Universities are expected to begin offering bachelor's programmes in Islamic finance from the 2026/27 academic year.

It remains to be seen whether Islamic finance will become a significant part of Uzbekistan's financial system. But the recent reforms suggest policymakers increasingly see it not simply as a religious alternative, but as a tool for attracting investment, widening financial inclusion and integrating the country more closely into global capital markets.

The test for Uzbekistan will be whether it can build the legal, regulatory and institutional framework needed to turn that ambition into a functioning Islamic finance industry.

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islam Islamic banking Uzbekistan Economy Shariah