The possibility of legalizing the issuance of sukuk—securities based on the principles of Islamic finance—is being considered in Uzbekistan. A correspondent from Podrobno.uz studied the 'Capital Market Law,' which defines the mechanism for operating this new financial instrument, the conditions for its issuance, and measures to protect investor rights.
This document provides for four types of sukuk, establishes a procedure for verifying their compliance with Islamic norms, and includes additional mechanisms to ensure the security of the holders of these securities. The bill successfully passed its first reading in the Legislative Chamber of the Oliy Majlis and is preparing for consideration at the second stage.
At a press conference held at the National Agency for Advanced Projects (NAAP), agency representatives provided detailed information about the proposed system for issuing such securities, who will assess their compliance with Islamic principles, and the potential opportunities this will open up for the local market.
How do sukuk differ from conventional bonds?
Traditionally, companies issue bonds to attract capital from investors, promising to repay the debt amount within a specified period and, typically, paying interest. Sukuk functions differently: their structure is based on specific assets or business operations, and investor returns are determined by the specifics of that transaction.
Although sukuk are also classified as securities, their fundamental difference lies in the basis of issuance and the source of income generation. These instruments must comply with the norms of Islamic finance, which implies restrictions on activities related to alcohol production or the use of traditional interest-based loans. Consequently, it is not enough merely to classify securities as sukuk; it is necessary to confirm compliance with the requirements placed on the issuer's activities, its assets, and the structure of the transaction itself.
This financial product may attract investors who avoid standard financial products for ethical or religious reasons.
What types of sukuk are planned to be introduced?
The law provides for the introduction of four types of sukuk, classified according to the assets or operations on which the financing is based. These include:
- Partnership sukuk: involve joint participation of investors in a project with subsequent distribution of profits and losses according to an established agreement.
- Leasing sukuk: are based on the use of property leased out, and income is generated from rental payments.
- Trade sukuk: are related to the processes of buying and selling goods.
- Agency sukuk: stipulate a contract where one party acts on behalf of another.
The choice of a specific model will depend on the goals of raising funds, the characteristics of the project, and the assets underlying the issuance. Saibjan Khudoyberdiyev, Head of the NAAP Capital Market Development Department, and Saulat Toreshov, Head of the Capital Market Regulation Department, reported that the development of this mechanism was driven by the demands of both local and foreign investors, as well as professional market participants. In preparation, the agency consulted with representatives of the Islamic banking sector and received support from international experts from the United Nations Development Programme.
Who will verify compliance with Islamic principles?
One of the most important aspects is confirming that a specific sukuk issuance complies with all requirements of Islamic finance. The law provides for obtaining an official opinion from a specialized council, known globally as a Sharia Board.
According to the proposed scheme, such opinions can be issued by Sharia boards operating under the Central Bank, as well as similar structures to be created in Islamic banks. At the temporary stage, recognition of opinions from international organizations specializing in Islamic finance standards, including AAOIFI and IFSB, is permitted if local bodies have not yet been formed or are not ready to operate. The issuer must provide this opinion along with the documents for registration of the issuance.
If compliance with Islamic principles is not confirmed, the sukuk issuance will not pass registration. Furthermore, the verification will not be limited to the time of issuance; the council will monitor the implementation of the project throughout the entire term of the securities to ensure that the actual structure of the transaction continues to meet the initially stated requirements. It is important to note that the opinion of the Sharia board does not replace state registration nor does it guarantee investment returns; it only confirms the instrument's compliance with Islamic principles but does not eliminate the financial risks inherent in the project and assets.
How will investors be protected?
The law also provides for a mechanism for segregating assets related to the sukuk issuance. To achieve this, it is proposed to create a special financial company through which certain assets, claims, and revenues derived from them will be separated. The accounting of these assets will be kept separately from the company's general capital.
Income generated from the segregated assets must be directed towards payments to sukuk holders in accordance with the issuance terms. This separation is intended to protect investor interests and clearly distinguish the assets securing this instrument from the company's other property.
Additionally, it is proposed to establish an institute for the representation of sukuk holders. This representative will monitor the fulfillment of the issuer's obligations and defend the rights of the security holders, which is particularly important when there are many investors. After successful registration, the sukuk are planned to be placed among private, as well as institutional, including foreign, investors. Provided there is demand and sufficient liquidity, these securities can be traded in the secondary market.
Who can invest in sukuk?
Representatives of NAAP emphasized that this new instrument can attract people who do not participate in traditional banking or stock products due to religious beliefs, allowing their savings to become an additional source of funding for enterprises. Nevertheless, sukuk are not exclusively for Muslims; any market participant can make the decision to invest after assessing the issuance terms, expected returns, and associated risks.
It was also clarified that companies with diverse activities do not necessarily have to abandon the issuance of sukuk entirely. If an enterprise has separate assets or areas that comply with Islamic principles, they can be isolated into a separate structure while meeting all established requirements. For example, if a company conducts several types of activities, some of which do not comply with these principles, only suitable assets and related revenues can be used for the sukuk issuance, depending on the business structure and the terms of the specific transaction.
When will sukuk appear in Uzbekistan?
Currently, the issuance of sukuk remains part of the 'Capital Market Law,' which is in the process of preparation for the second reading in the Legislative Chamber of the Oliy Majlis. These regulations must detail the procedure for issuing such securities, the procedures for verifying their compliance with Islamic principles, and the protection of investor rights.
The introduction of this new instrument can expand companies' ability to raise funds and open the market to investors who have previously not used traditional financial products. However, the mere adoption of the law does not guarantee a large volume of issuances; the practical result will depend on the clarity of the rules for companies and investors, on which projects can receive funding through sukuk, and on the level of demand for these securities.
