Improving Lending Mechanisms and Risk Management in the Context of an Interest-Free Banking System
Keywords:
Interest-free banking, Islamic finance, murabaha, musharaka, credit risk, risk managementAbstract
The development of interest-free banking is increasingly seen as a way to broaden financial inclusion and mobilise savings of households and firms that avoid conventional interest-based products. However, replacing interest with trade-, lease- and partnership-based contracts changes the nature of the risks a bank carries, and risk management practices designed for conventional loans cannot simply be transferred. The aim of this study is to develop scientifically grounded proposals for improving lending mechanisms and risk management in an interest-free banking system, with particular reference to countries such as Uzbekistan where the regulatory framework for such services is still being formed. The study combines a systematic review of theoretical and empirical literature, comparative institutional analysis of the standards of the Islamic Financial Services Board and AAOIFI, and a structured qualitative assessment of the risk profile of seven financing contracts. The results show that murabaha and ijara concentrate credit and asset-related risks that are manageable with conventional tools, whereas musharaka and mudaraba shift equity-type, information and governance risks onto the bank, which explains their limited use in practice. A risk-adjusted profit-rate pricing model, a two-tier reserve system for smoothing returns to investment account holders, and a staged risk management framework are proposed. The findings can be used by regulators when drafting prudential rules and by banks opening interest-free windows.
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Copyright (c) 2026 Islomjon Ziyodullayev (Author)
This work is licensed under a Creative Commons Attribution 4.0 International License.
This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0). Authors retain copyright and grant the journal the right of first publication.
