Islamic Finance in Uzbekistan: How Banks Should Apply Financial Monitoring Requirements

Tashkent, Uzbekistan (UzDaily.uz) — The development of Islamic finance opens up new opportunities for Uzbekistan’s banks, but it also raises new questions. One of the key ones is how to apply financial monitoring requirements to Islamic products, which are built on a different economic model from conventional banking instruments.

According to the Islamic Financial Services Board (IFSB), the assets of the global Islamic finance industry reached approximately $4.4 trillion in 2025. Growth was recorded across all key segments, including Islamic banking, capital markets and takaful, with particularly strong momentum in the non-banking segments. The IFSB also notes the continued strengthening of Islamic finance in developed markets and the industry’s expansion into new markets, notably Africa and Central Asia.

Uzbekistan’s Islamic finance market is still at a formative stage, but the development of the regulatory framework is laying the groundwork for its gradual scaling.

A major step in the development of Islamic finance was the adoption of Law of the Republic of Uzbekistan No. ZRU-1126 of 28 March 2026, aimed at introducing Islamic banking. For the first time, the new regulation establishes a comprehensive legal framework for Islamic banking operations and provides for a dual model of market development: specialized Islamic banks, and Islamic financial services offered by existing banks through “Islamic windows”.

Banks engaged in Islamic banking must introduce a separate governance system for Islamic operations, including internal control and audit, while the institutional model provides for the establishment of an Islamic Finance Council under the Central Bank and corresponding councils within banks to ensure that operations comply with established Islamic finance standards.

The new regulation thus creates the basis for Islamic finance to gradually move beyond a niche segment and for a broader offering of instruments such as murabaha, ijara, musharaka, mudaraba and wakala through Uzbekistan’s existing banking system.

Further impetus for the industry could come from the establishment of the Tashkent International Financial Centre (TIFC), which provides for a special legal regime and is focused on developing modern financial instruments, including Islamic finance. Building such infrastructure alongside the new regulation of Islamic banking creates the conditions for new market entrants, a wider product range and the attraction of international investors into Uzbekistan’s Islamic finance sector.

Against this backdrop, the main question for financial institutions is not whether financial monitoring (AML/CFT/CPF) requirements should apply to Islamic products, but how to apply them correctly given more complex transaction structures.

Islamic Finance in Uzbekistan: The Rules Are the Same, the Risks Are Different

As the Financial Action Task Force (FATF) points out, AML/CFT/CPF risk assessment should take into account, among other things, the risks associated with customers, products (services), intermediaries and the nature of the relevant business relationships, rather than being limited to a formal classification of the product.

In this context, Islamic financial instruments require the same risk-based approach as conventional products, but the specifics of their structure may call for analysis of a wider range of parties and transactions. In a murabaha transaction, for example, in addition to the customer, it is necessary to consider the seller and the underlying asset, the economic purpose of the transaction, the sources of financing and payment flows, as well as possible links between the parties involved. Accordingly, in Uzbekistan, AML/CFT/CPF requirements apply to banking activities regardless of whether a product is based on a conventional or an Islamic financial model.

What this means for Uzbekistan: Islamic windows and Islamic banks must apply the same AML/CFT/CPF procedures, but analyze transactions in greater depth. The very structure of Islamic products may involve additional contractual relationships, parties and operations with the underlying asset, which requires analysis of the transaction as a whole rather than of the movement of funds alone.

Comparison: Conventional Bank vs Bank with an Islamic Window

On paper, the requirements are the same. In practice, the way they are applied differs fundamentally.

International experience: adaptation, not separate regulation.

• Malaysia:
  Islamic assets account for 30–40% of the banking system
  → AML/CFT monitoring takes into account not only the movement of funds, but also the transaction structure, its parties and the underlying asset.
• UAE:
  at some banks, Islamic assets exceed 50% of the portfolio
  → the key emphasis is on staff expertise.
• United Kingdom:
  Europe’s largest Islamic finance hub
  → a single regulatory framework is applied, together with analysis of economic substance (a transaction may look like a trade deal but in fact be financing).

For Uzbekistan’s banks, the task is not to create a separate AML system for Islamic finance, but to properly adapt the existing internal control system under Rules No. 2886: customer due diligence (CDD) should cover all significant parties and beneficiaries of a transaction, and transaction monitoring should be able to link individual payments and contracts into a single economic structure and promptly identify the criteria for dubious and suspicious transactions.

What This Means for Uzbekistan’s Banks       

To avoid regulatory and reputational risks, banks need to act now and:

• move to a risk-based approach;
• adapt their AML policies to Islamic products, including by embedding the specifics of each product into risk assessment, Know Your Customer/Customer Due Diligence and transaction monitoring procedures. Unlike conventional lending, where the main focus is often on the borrower and the movement of funds, an Islamic transaction may involve an underlying asset, multiple parties, several interrelated contracts and sequential stages in the transfer of ownership or the right of use;
• configure monitoring to reflect transaction structures;
• strengthen the vetting of beneficiaries and intermediaries;
• invest in staff training;
• conduct independent audits.

Moreover, a distinctive feature of Uzbek regulation is the combination of a risk-based approach with fairly detailed criteria for identifying dubious and suspicious transactions. Rules No. 2886 provide for both qualitative indicators relating to the nature of the customer, the counterparty, the jurisdiction and the economic substance of a transaction, and quantitative criteria expressed as multiples of the base calculation amount.

This is of particular practical importance for Islamic financial products. A single economic transaction may consist of several interrelated contracts and payments and involve a seller, a buyer, an intermediary and an underlying asset. Compliance’s task is therefore not only to vet the customer, but also to correctly interpret the entire chain of operations: which payments form part of a single transaction, whether they are consistent with its economic purpose, and whether, taken together, they meet the criteria for a dubious or suspicious transaction set out in Rules No. 2886.

At the same time, the detection of an established criterion should not be treated merely as a technical alert from the monitoring system. Rules No. 2886 require banks to identify dubious and suspicious transactions and to report suspicious transactions in a timely manner to the specially authorized state body — the Department for Combating Economic Crimes under the Prosecutor General’s Office of the Republic of Uzbekistan. A bank’s internal rules must separately set out the procedure for identifying such transactions and for preparing and submitting the relevant reports.

Despite its still modest market share, Islamic finance in Uzbekistan     has significant growth potential. Today the market has a rare opportunity to develop not on a “product first, compliance later” model, but by building financial monitoring requirements into the architecture of new products and processes from the outset.

International practice shows how important it is to adapt internal processes to the specifics of Islamic finance. For Uzbekistan, this means an opportunity to build a mature system of AML/CFT controls from day one that takes into account the transaction structure, its parties, the underlying asset and cash flows, thereby avoiding a costly overhaul of the control environment as the market scales.

Ultimately, the competitive advantage will go not only to the players who are first to offer Islamic products, but also to those who can ensure their safe, transparent and scalable development.

Assel Omarbekova, Deputy Director, Forensic Practice, and Head of Financial Crime, KPMG Caucasus and Central Asia