Exploring The Prospect Of Islamic Banking At Agrobank Of Uzbekistan

Literature Review

Joint Stock Commercial Bank “Agrobank” of the Republic of Uzbekistan (Agrobank) is a financial institution that provides banking products and services such as saving activities, loan activities, and advisory and insurance coverage services to mostly the agricultural and related sector (Hoggarth, 2016). In order to cover the growing demand of the financial needs, Agrobanks tends to provide a wide range of financial services and products. Agrobank thus supports the food production and supply chain in various countries such as Uzbekistan. For managers, this research will shed light on the areas of Islamic banking that need to be addressed in order to attract more customers. The inclusion of the IB in the Agrobank thus faced various barriers to the implementation procedure due to different law and management procedures (Mansour, Ben & Majdoub, 2015). The narrative led to the creation of a negative attitude towards IB and subjected the Islamic and the central Asia banks in difficulty of being accepted by other joint-stock commercial banks (Stephan & Mirzoev, 2016, p.159). 

 For policy makers, this research will highlight the necessity of streamlining Islamic banking to create the right environment for business. Professionals practicing in banks that implement Islamic banking practices face hurdles incomparable to their counterparts in conventional banking (Bansal et al 2018, p. 1193). The general society stands to benefit if Islamic banking is streamlined because it will make Islamic banking services more accessible and easy to understand. Limited scholarly work has been done towards issues pertinent to Islamic Banking and Finance in Uzbekistan. Particularly, no research has been done on prospects of Islamic Baking at Agrobank. This paper is important because it will attempts to bridge this gap by exploring the benefits and barriers to the implementation of Islamic banking at Agrobank.

Arobank was established in 1995 year under the law of the Republic of Uzbekistan (Agrobank.uz, 2018). The bank’s principal activity is commercial banking, retail banking, operations with securities, foreign currencies and originating loans and guarantees. The bank accepts deposits from legal entities and individuals and makes loans, transfers payment within Uzbekistan and abroad. The bank conducts it is banking operations from it head office in Tashkent and 177 branches within Uzbekistan. Bank’s strategy reflects the Government’s strategy in developing the country economy. Namely, the bank plays a significant role in the distribution of funds of the country’s budget, which flow through the bank to different governmental agencies. In addition, being an agent of the government in financing cotton and grain related sectors of the economy (Agrobank.uz, 2018).

From the very onset, it must be stated that notwithstanding the rise in IB over the last 3 decades, majority of the Muslim world as well as the non-Muslim population have yet to understand the workings of the system (Ariff 2014, p. 448). The bare minimum set by the Sharia is that earning more money on money is prohibited on account that it is contrary to the Islamic law (Nabilah & Rahman 2013). Rather, IB encourages Muslims to earn profits from real assets and further, that wealth accumulation should come only through trade. Interestingly, in all existing literature, IB is not clearly defined anywhere and there exists no clear stipulation as to what qualifies to be called an IB product and what isn’t. As contended by Hesse, Jobst & Solé (2010), the prevailing situation is that individual Islamic banks decide what an IB product is and what isn’t and stipulate for themselves the way to do go about IB. The challenge posed herein is that it becomes difficult to standardize transactions between Islamic banks themselves as well as between Islamic banks and conventional banks. Furthermore, the assessment of risk is complicated for the banks and their customers too (Rahman 2017). Hesse, Jobst & Solé (2010) further state that even regulators of the banking industry are uncertain about what they authorize and what they don’t. This has been a major hurdle in the implementation of IB practices for Agrobank and most of Central Asia. Idris & Gatawa (2018) observe that there is great need for Muslim scholars to provide insights into this area.  

Understanding Islamic Banking Practices

Islamic banking which may also be referred to as non-interest banking as described by Melly (2012) premises on the teachings of Sharia law-or Islamic law and is strictly regulated by Islamic economics principles. Islamic laws that regulate financial transactions are contained in the Figh al-Muamat which provides for a culture of ethical investing and as posited by Aliyu et al (2017), investments on forbidden goods such as pork, gambling and alcohol are prohibited by Sharia. Islamic banking is based on 2 core principles of Sharia; profit and loss sharing and disallowing interest collection or payment.  

Most sharia-compliant banks are guided by concepts of Bai-Muazzal, Bai-Muraba, Bai-Salam and hire purchase or leasing investments methods in their operations (Aliyu et al, 2017). Mudarabah is an IB method for profit sharing also called trustee finance. Musharakah on the other hand is used to refer to equity participation contract. Unlike conventional banks, IB institutions prefer markups or profit bases that have coverage in the sharia law (Ahmed, 2011). Conventional economists and strategists at Agrobank just like most of Central Asia for this reason not gotten the difference between IB practices vis-à-vis the conventional banking practices. IB practices are ideal modes of financing and investment but the challenge with their implementation in conventional banks such as Agrobank is barred by a negative policy environment and structural challenges at banks (Hoggarth 2016). There is a shortage of experts who can create relevant instruments for implementing of IB practices.

The regulatory environment for banks in Uzbekistan also presents a set of unique challenges to banks such as Agrobank. In Uzbekistan, the relationship between the Islamic Banks (and banks implementing IB practices) and the regulatory authority is very sensitive (Aliyu et al 2017). The monetary regulator (majorly the Central Bank of Uzbekistan) exercises their regulatory power through the execution of laws and statutes that are made to supervise the conventional banks (Ariff 2014, p. 738).

Ahmed (2011) argues that the value of international currencies such as the US dollar, the Euro or the Sterling pound is prone to fluctuation. The values of international currencies are not fixed by the Central Bank of Uzbekistan. Melly (2012) contends that Sharia law restricts banks such as the Agrobank from anticipating and seeking cover for the sake of fluctuations in currency. According to the dictate of Sharia, Idris & Gatawa (2018) submit that trade in currency is regulated as stipulated in the ‘sarf’ under terms and conditions that are not provided for in the conventional forward booking (Idris & Gatawa 2018, p. 59). This has been a challenge for banks in Uzbekistan in implementing IB and financing systems. According to Melly (2012) the ‘sarf’ as contained in Sharia laws categorically disallows forward booking even in instances where it is intended to forestall loss of profits. The dilemma here is that most of the time, export and import transactions are done at times when certain currencies involved have been projected to decline in value and forward booking is the only remedy for such scenarios (Hesse, Jobst & Solé 2010, p. 184). This is one of the major areas of IB that still needs more research exploration and interpretation from experts in the sharia law.

Issues Pertinent to Sharia-compliant Banking

Varriale (2013) explores the place of foreign bill purchases in the course of IB and financing. In several instances, exporting firms seek funding from banks even before the date of maturity of their bills so that they can finance their daily spending. In the process of implementing IB practices, the bank would have to spend billions of money in foreign bill purchases. However, uncertainty as to the mode of investment in which this would be done still lingers (Iqbal & Mirakhor 2010).

Liquidity management also remains a principle concern for banks that offer or seek to offer IB. According to Diallo, Fitrijanti & Tanzi (2015), IB is more often than not characterized by the absence of instruments of liquidity. These include marketable securities such as treasury bills and bonds which the bank can use to manage shortages in liquidity or excesses in the same. Diallo, Fitrijanti & Tanzi (2015) also note that a bank that has a high number of clients operating sharia compliant accounts may suffer the consequences of non-compatibility, which would hinder the intervention of the central bank in instances where liquidity issues arise.

There exists a major gap in literature that attempt to highlight the intersection of issues such as liquidity management, forward booking of currency and the banking regulatory environment with IB. Given the fact that the very nature of bankers’ jobs requires them to be pragmatic, it follows that even those of them who operate in non-Islamic banks such as Agrobank will generally have a tendency of manipulating Islamic principles to meet the needs of the present transaction (Doumpos, Hasan & Pasiouras 2017, p. 516). Professionals practicing in banks that implement IB practices face hurdles incomparable to their counterparts in conventional banking. The existing knowledge gap has slowed the pace of implementation of IB in Uzbekistani banks such as Agrobank because the banks have not been able to harmonize liquidity management and forward booking of currencies. Another gap exists with regard to the nature of most scholarly work done in the area of IB. Most of these researches tend to be normative in their approach and put more emphasis on what is expected (Diallo, Fitrijanti & Tanzi 2015). Majority of the studies are not done in a manner that seeks to find the needs of the IB sector.

The aim of this study is to determine the barriers posed by the structural and policy environment to the implementation of Islamic Banking in the Joint Stock Commercial Bank “Agrobank” of the Republic of Uzbekistan.  

• To determine the IB practices under implementation by Agrobank;
• To determine the challenges of IB in Agrobank;
• To identify structural and the policy environment at Agrobank;
• To highlight the challenges of liquidity management in IB at Agrobank;
• To determine the shortcomings of forward bookings of currency (as stipulated by Sharia) in IB.

The researcher will employ the pragmatism philosophy in the course of this study. Pragmatism does not limit the study to one philosophical approach, as suggested by Mkansi & Acheampong (2012) it allows the author liberty to draw from both quantitative and qualitative methods which in this case, explains why the researcher will use both interviews and questionnaires as data collection techniques. Pragmatics refuse to view phenomena in the world from a single perspective, likewise the pragmatic philosophy gives the researcher the freedom of choice of techniques and methods to be used in the study which is why it’s a philosophy of choice.  

The Regulatory Atmosphere for Islamic Banking

This paper takes both deductive and inductive approaches given the fact that it is making use of mixed methods. The deductive approach will be employed in the in testing theory that is majorly focused on causality (barriers to implementation of IB practices). The inductive approach will be used with a focus on exploring new aspects or phenomena that have been studied in the past, this approach will attempt to establish a new viewpoint to barriers of IB based on current banking environment. In this approach, the researcher starts off with some premeditated concepts (Mkansi & Acheampong 2013) regarding the research question. In testing the research questions regarding the barriers to implementation of IB, employing both the deductive and inductive approaches is more effective because it is more thorough and exhaustive.

The proposed research will employ an exploratory study nature. This is meant to provide meaningful insights into the different aspects of the research question (Beall 2012). The objective is to use this study to formulate a clear problem to be used as the basis for further studies on the issues surrounding IB in Uzbekistan. This choice is made because the exploratory approach is flexible in terms of the overall design, objectifies the unearthing of insights and ideas as opposed to the explanatory approach which is more rigid and has to be done in a pre-structured method. The basis for comparison in this study fits the use of the exploratory approach.

The researcher will employ the use of a cross-sectional study design also called a cross-sectional analysis. In a cross sectional analysis, a method that is applied in observational studies, data from a segment of the population is studied at a given point in time (Kouamé & Langley 2018). It is possible to assess the causal effects of each dependent variable basing it upon the independent variable. In this regard, the study is seeking got explore the case of IB in the current situation in Uzbekistan as opposed to a longitudinal study which takes a look at the research question with a view to establishing how it has changed in the past and how it will change in the future

The research will make use mixed methods i.e. both primary data collection methods and secondary data collection methods. The study will collect information from policy publications of the government regarding IB and publications by foreign organizations such as Islamic Development Bank on the same. The researcher will also obtain data from reports and publications from banking sector regulators, books, magazines and newspapers. The study will make use of qualitative data collection methods. This is informed by the fact that qualitative research methods yield information that is richer in content and quality and gives real and practical insights in the phenomenon under study (Bansal et al 2018).  For this study, a combination of interviews and questionnaires will be used for data. The study will send out questionnaires to be completed by 177 bank managers of the all branches of Agrobank. In support of questionnaire technique Bansal et al (2018) submits they are suitable because they allow the respondents to give more information, allowing the survey to capture their feelings and attitudes without limitation. The questionnaires will be structured to meet the objective of unearthing the circumstances around IB in Agrobank. The study will then deploy structured interviews as in Bansal et al (2018) to the 12 chief accountants to determine the shortcomings of forward bookings of currency (as stipulated by Sharia) in IB, 12 chief of the Assets and Liability departments to highlight the challenges of liquidity management in IB. The questions to be asked in the interviews will be predetermined with minimal to no variations to aid in obtaining clarification on the issues surrounding IB at Agrobank. Moreover, the study will measure the financial statements posted by Agrobank in 5 preceding financial years. Alongside these, the study will observe the after tax profits posted by Islamic banks and conventional banks offering IB services and products in order to evaluate the industry issues pertinent to IB and financing.

Forward booking of Currencies

This study will employ purposive sampling, a type of non-probability sampling. Purposive sampling a non-probability sampling according to Uprichard (2013) is a sampling method where the sample to be used in the study is chosen entirely based on the subjective perceptions of the person doing the study as opposed to random where the sample is selected using random method. While many may argue that purposive sampling is inferior, Uprichard (2013) posits that it provides the researcher-as the person with the clear objectives of the research-to apply theoretical reasoning and decide which participants will help the study to achieve its goals. This approach will allow the researcher to use their subjective judgment through their knowledge of literature to decide which participants will help identify the barriers to the implementation of IB in Agrobank.

Sample size in a study is used to refer to the number of participants or units from which data or information is to be collected in line with the research questions and the objectives. More specifically as submitted by Sim et al (2018), designated sample size is a term used with reference to the number of participants that have been identified to be used in gathering data. In this study, a variety of participants will be included. Agrobank has 12 regional offices and 12 regional offices. A total of 177 managers from all the branches of Agrobank, 12 chief accountants and 12 chiefs of the department of Assets and Liability will be selected from each of the 12 regional offices respectively to take part in the study.

Previously the author worked 16 years in different departments and also as a manager of the branches of Agrobank. As a previous employee of Agrobank the author has primary access to all the data which is needed to this research. One common feature that poses accessibility challenges for a study of this kind is the work schedules of bankers and bank managers. However, according to the high interest of implementation IB at Agrobank, chairman of the bank is able to provide all the participants of the research to interview and get answer to the questionnaires which will be send to all branch managers of the bank.

As a matter of principle the integrity of personal data will be protected and plagiarism will be avoided by first priority. All information rendered to the study shall be attributed to the respective authors and facts shall be presented without alternation. The researcher also takes into account the necessity of confidentiality and anonymity of the participants (Partridge & Allman 2016, p. 61). In a repressive regime that is keen to obstruct every idea that bears the name Muslim on it, it is necessary that the researcher ensures anonymity of participants who shall volunteer information on IB and finance.

Firstly, this work will contribute to the furtherance of the growth of the existing body of knowledge on IB and finance practices (Bansal et al 2018, p. 1193). This information will be helpful for other scholars in the course of their work in the same field of study. The researcher will publish the study so that it can be accessed as a journal. The material will be handy for banks and financial institutions seeking relevant information on IB. The study will also be essential in informing policy formulation to provide regulatory framework for the implementation of IB.

The researcher will prepare a report of the final research work upon completion to summarize the activities performed as well as the objectives that will have been met. The researcher will also publish the complete copy of the research paper after the data analysis and results to give Agrobank which will guide for implementation IB at Agrobank. Other scholars will use this study as a reference in the study area. Both print and online versions of the paper will be availed by publishing the work so it can be accessed as a journal.

The study will send out questionnaires to be completed by 177 bank managers of all branches of Agrobank. The questionnaires will be structured such that they uncover circumstances around IB in Agrobank. The study will then deploy structured interviews as in Bansal et al (2018) with the 12 chief accountants and 12 chiefs of the department Assets and Liability. The questions to be asked in the interviews will be predetermined with minimal to no variations to aid in obtaining clarification on the issues surrounding IB at Agrobank. The study will measure the financial statements posted by Agrobank in 5 preceding financial years and the after tax profits posted by Islamic banks and conventional banks offering IB services and products in order to evaluate the industry issues pertinent to IB.

No	Activity	Weeks
1	2	3	4	5	6	7	8	9	10
1	Upgrading literature review
2	Refinement of aims and objectives
3	Development of Data collection tools
4	Data Collection and Analysis
5	Writing several chapters of the final report
6	Formatting and Proofreading

List of References

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