Islamic Banking and Finance in Sri Lanka: A Paradigm of Success
By Riyazi Farook
Sri Lanka’s modern financial sector has undergone significant reforms since the early 1990s, notably to reduce the government’s role as a direct financial provider. A wide range of institutions offer financial services, including public and private banks, development finance institutions, merchant banks, investment banks, specialized financial institutions, microfinance institutions, leasing companies and insurance companies.
There is also a burgeoning stock exchange. The government is taking steps to strengthen the institutional and regulatory framework for financial services. A remarkable recent evolution is the reform and reorganization of the Central Bank of Sri Lanka (CBSL).
The monetary unit in Sri Lanka is the rupee (LKR), which consists of 100 cents (US$1 approx LKR 110). In addition to being the island’s monetary authority and the sole bank of issue, CBSL acts as financial adviser to the government.
Currently, more than 15 foreign banks have set up branches in the island nation. What is more significant is that some of these branches have been established for more than 100 years. Sri Lanka also has more than 10 local banks, including two that are state-owned (Bank of Ceylon and People’s Bank).
Sri Lanka is one of the few non-Islamic countries to have legislation for the Islamic banking sector. Following amendments to the Banking Act No 30 of 1988 in March 2005, there is now adequate flexibility for conventional banks to establish Islamic banking windows and launch Islamic financial products. However, efforts in strategic marketing communication to promote and raise awareness of these products are still in the infancy stage.
CBSL has already authorized Islamic banking to be carried out in licensed commercial banks as a regulated and legal activity. However, CBSL is studying the Islamic banking concepts and once the requirements are legislated in the Banking Act, Sri Lanka would have increasing opportunity to establish a full-fledged bank. Meanwhile, senior Muslim ministers are also backing an initiative to allow full-fledged Islamic banks to operate in the country.
Sri Lankan Muslims have long awaited the entry of a full-fledged Islamic financial institution that can provide them the opportunity to invest or deposit their money in a Shariah compliant manner. Islamic microfinance institutions in the rural areas are also keen to capitalize on this need, but most are offering limited service in small communities with a high density of Muslims.
The country has the potential to become an Islamic banking hub for the South Asian region. Nevertheless, only if CBSL expresses its interest and development initiatives does Sri Lanka stand a chance of competing and establishing itself in the market. Therefore, government organizations, monetary authorities and the private sector must work with Islamic banking institutions to achieve this objective.
In light of this, it is high time that Sri Lanka came up with a strategic framework on the Islamic financial sector in order to address the needs of all segments of the community. There are specialized local and overseas institutions and professionals, some of whom are experts in Islamic banking; others may have good managerial skills to contribute to the promotion of Islamic banking and its concepts. Therefore, it is paramount to include such specialists in a discussion on building a conceptual framework for Islamic banking and finance in Sri Lanka.
Players in Islamic finance
By Riyazi Farook
Sri Lanka’s modern financial sector has undergone significant reforms since the early 1990s, notably to reduce the government’s role as a direct financial provider. A wide range of institutions offer financial services, including public and private banks, development finance institutions, merchant banks, investment banks, specialized financial institutions, microfinance institutions, leasing companies and insurance companies.
There is also a burgeoning stock exchange. The government is taking steps to strengthen the institutional and regulatory framework for financial services. A remarkable recent evolution is the reform and reorganization of the Central Bank of Sri Lanka (CBSL).
The monetary unit in Sri Lanka is the rupee (LKR), which consists of 100 cents (US$1 approx LKR 110). In addition to being the island’s monetary authority and the sole bank of issue, CBSL acts as financial adviser to the government.
Currently, more than 15 foreign banks have set up branches in the island nation. What is more significant is that some of these branches have been established for more than 100 years. Sri Lanka also has more than 10 local banks, including two that are state-owned (Bank of Ceylon and People’s Bank).
Sri Lanka is one of the few non-Islamic countries to have legislation for the Islamic banking sector. Following amendments to the Banking Act No 30 of 1988 in March 2005, there is now adequate flexibility for conventional banks to establish Islamic banking windows and launch Islamic financial products. However, efforts in strategic marketing communication to promote and raise awareness of these products are still in the infancy stage.
CBSL has already authorized Islamic banking to be carried out in licensed commercial banks as a regulated and legal activity. However, CBSL is studying the Islamic banking concepts and once the requirements are legislated in the Banking Act, Sri Lanka would have increasing opportunity to establish a full-fledged bank. Meanwhile, senior Muslim ministers are also backing an initiative to allow full-fledged Islamic banks to operate in the country.
Sri Lankan Muslims have long awaited the entry of a full-fledged Islamic financial institution that can provide them the opportunity to invest or deposit their money in a Shariah compliant manner. Islamic microfinance institutions in the rural areas are also keen to capitalize on this need, but most are offering limited service in small communities with a high density of Muslims.
The country has the potential to become an Islamic banking hub for the South Asian region. Nevertheless, only if CBSL expresses its interest and development initiatives does Sri Lanka stand a chance of competing and establishing itself in the market. Therefore, government organizations, monetary authorities and the private sector must work with Islamic banking institutions to achieve this objective.
In light of this, it is high time that Sri Lanka came up with a strategic framework on the Islamic financial sector in order to address the needs of all segments of the community. There are specialized local and overseas institutions and professionals, some of whom are experts in Islamic banking; others may have good managerial skills to contribute to the promotion of Islamic banking and its concepts. Therefore, it is paramount to include such specialists in a discussion on building a conceptual framework for Islamic banking and finance in Sri Lanka.
Players in Islamic finance
The market value of the Islamic banking sector in Sri Lanka is estimated at LKR 70 billion to LKR 100 billion (US$634 million to US$907 million). Islamic financial services providers currently active there include Amana Investments Limited, Ceylinco Islamic Investment Corporation (CIIC), Muslim Commercial Bank (MCB), National Asset Management Limited (NAMAL), First Global Investments Group and ABC Investments.
Amana Investments, established in 1997, leads the country’s Islamic financial services market. Its subsidiary Amana Takaful Ltd (ATL) began operations in June 1999 and is acknowledged as the market leader for Takaful services (commonly perceived as the Islamic alternative to conventional insurance). ATL was listed on the Colombo Stock Exchange in late 2006.
CIIC made its entry in 2003 and is fully backed by Ceylinco Insurance, one of the leading conventional insurance providers in Sri Lanka. CIIC offers both selected Shariah compliant and Takaful products.
New kid on the block MCB — owned by MCB Pakistan — commenced operations early this year. It offers both Islamic and conventional financial products.
NAMAL is the first fund management company in Sri Lanka licensed to manage unit trusts. Together with Amana Capital (a subsidiary of Amana Investments), it launched the NAMAL Amana Equity Fund early this month. The objective of the equity fund is to achieve significant growth over the medium to long term by primarily investing in equity securities that are Shariah compliant.
First Global Group is a public limited finance investment company that deals with Shariah compliant investments and financing products and services. Domestically, it is the first institution to promote training and career development programs related to Islamic banking and finance.
Finally, there’s ABC Investments, a relatively new Islamic investment group that claims to have strong funding backing from different countries. It has a memorandum of understanding with the Central Bank of Sudan in which the latter’s experts will provide assistance on training and development to ABC — especially in its Takaful segment — and will be working closely with leading Islamic financial countries for the funding in Takaful as they plan to start off with general insurance.
Barriers in Takaful industry
The Takaful concept is steadily gaining acceptance in Sri Lanka, where there are now 13 licensed insurance companies. Takaful was introduced in 2002 with the entry of ATL, which recently created history in Sri Lanka and the Islamic financial services industry worldwide when it was ranked 203rd in the world’s first comprehensive “Top 500 Islamic Financial Institutions” published by The Banker, the global finance magazine of the Financial Times Group, in its November issue. ATL accounted for US$5.55 million worth of Shariah compliant assets.
A second Takaful operator, Ceylinco Takaful Limited, made its debut in mid-2006. Sri Lanka Insurance Corporation Limited — the republic’s largest and strongest composite insurance provider with LKR 50 billion worth of assets under management — has also announced its intended foray into Takaful. Two of the country’s largest insurance operators (Ceylinco Life and Sri Lanka Insurance Corporation) also plan to offer Takaful products.
The Sri Lankan market, including that for Takaful, faces several challenges, however. One is the current legal environment, which is deemed unfavorable to Takaful operations. Other hurdles are reluctance on the part of regulators to introduce the necessary changes in law to encourage the development of Takaful, a lack of investment opportunities that are Shariah compliant and acceptable to the insurance regulators, a high capital requirement, severe competition, consumer resistance to a new form of insurance based on religious principles and the fact that Muslims represent only about 9% of Sri Lanka’s population.
Overcoming these barriers is more crucial for the Takaful industry in Sri Lanka. Its operators should make a concerted effort to convince insurance regulators to accept the salient features of Takaful and treat it as a new business model. They could also form strategic alliances to promote their products.
Human resource needs
Sri Lanka should aim to produce highly skilled practitioners and professionals as well as specialists and researchers to develop human capital needs for its Islamic banking and financial services industry, both at local and international level. Shariah scholars are scarce but they are highly critical to the success of the republic’s Islamic banking industry and its growth.
International Center for Education in Islamic Finance recently established the faculty of Islamic banking and finance, the first in Sri Lanka. It is hoped that the faculty will fulfill the need to produce a pool of Islamic professionals for the fast-growing global Islamic banking and financial services industry.
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