President Sadyr Japarov signed a law amending the Civil Code, aimed at improving the regulation of Islamic banking and finance principles in Kyrgyzstan.
The document clarifies the application of a number of financial instruments used by Islamic banks, including murabaha, musharakah, and diminishing musharakah.
One of the key changes is the expansion of banks’ options when concluding murabaha agreements.
Financial institutions in Kyrgyzstan will now be able to sell clients goods in installments, both items purchased at the client’s request and property already owned by the bank.
The law allows for the appointment of a client as a bank agent when purchasing property, clarifies the distribution of risks between the parties to the transaction, and the procedure for the return of property in the event of a breach of payment terms.
Furthermore, the document introduces separate regulations for other financial transactions based on Islamic principles that were not previously directly provided for by law.
The Civil Code stipulates that financial services are defined as transactions carried out based on Islamic principles of banking and finance by organizations holding the appropriate license.
As noted in the document, the changes are aimed at further developing Islamic finance, eliminating legal gaps, and creating clearer rules for market participants.
The law will come into force six months after its official publication. During this time, the Cabinet of Ministers and the National Bank have to bring their regulations into compliance with the new standards.
Murabaha is a transaction with a fixed markup, where the client purchases an asset with a pre-agreed profit. Payments are made in installments, making murabaha similar to a loan, but without interest.
Musharakah is a partnership where the parties share profits and losses. The investor and client jointly finance a project or business, and the profits are distributed proportionally to the invested capital.
Diminishing musharakah is a form of musharakah in which diminishing capital is divided between the partners. This allows investors to contribute capital and participate in the management of the project, but at the same time, a portion of the capital is removed with each payment.
