8/14/2019 Islamic Banking and Finance in Sri Lanka: A Paradigm of Success by Riyazi Farook

1/2

COUNTRY REPORTwww.islamicfi nancenews.com

Islamic Banking and Finance in Sri Lanka:A Paradigm of Success

By Riyazi Farook

Sri Lanka s modern financial sector has undergone significantreforms since the early 1990s, notably to reduce the government srole as a direct financial provider. A wide range of institutions offerfinancial services, including public and private banks, developmentfinance institutions, merchant banks, investment banks, specializedfinancial institutions, microfinance institutions, leasing companiesand 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 andreorganization 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 smonetary authority and the sole bank of issue, CBSL acts as financialadviser to the government.

Sri Lankan Muslims havelong awaited the entry of a

full-fl edged Islamic financialinstitution that can provide them the opportunity toinvest or deposit their moneyin a Shariah compliantmanner

Currently, more than 15 foreign banks have set up branches in theisland nation. What is more significant is that some of these branches

have been established for more than 100 years. Sri Lanka also hasmore 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 legislationfor the Islamic banking sector. Following amendments to the Banking Act No 30 of 1988 in March 2005, there is now adequate flexibility forconventional banks to establish Islamic banking windows and launchIslamic financial products. However, efforts in strategic marketing communication to promote and raise awareness of these products arestill in the infancy stage.

CBSL has already authorized Islamic banking to be carried outin licensed commercial banks as a regulated and legal activity.However, CBSL is studying the Islamic banking concepts and once therequirements are legislated in the Banking Act, Sri Lanka would haveincreasing opportunity to establish a full-fl edged bank. Meanwhile,

senior Muslim ministers are also backing an initiative to allow full-fledged Islamic banks to operate in the country.

SriLankan Muslims have long awaited the entry of a full-fl edgedIslamic financial institution that can provide them the opportunity toinvest or deposit their money in a Shariah compliant manner. Islamicmicrofinance institutions in the rural areas are also keen to capitalizeon this need, but most are offering limited service in small communitieswith a high density of Muslims.

The country has the potential to become an Islamic banking hubfor the South Asian region. Nevertheless, only if CBSL expresses itsinterest and development initiatives does Sri Lanka stand a chance of competing and establishing itself in the market. Therefore, governmentorganizations, monetary authorities and the private sector must workwith Islamic banking institutions to achieve this objective.

In light of this, it is high time that Sri Lanka came up with a strategicframework on the Islamic financial sector in order to address the needsof all segments of the community. There are specialized local andoverseas institutions and professionals, some of whom are experts inIslamic banking; others may have good managerial skills to contribute to

the promotion of Islamic banking and its concepts. Therefore, it isparamount to include such specialists in a discussion on building a

conceptual framework for Islamic banking and finance in Sri Lanka.

Players in Islamic financeThe market value of the Islamic banking sector in Sri Lanka isestimated at LKR 70 billion to LKR 100 billion (US$634 million toUS$907 million). Islamic financial services providers currently active

there include Amana Investments Limited, Ceylinco Islamic InvestmentCorporation (CIIC), Muslim Commercial Bank (MCB), National AssetManagement Limited (NAMAL), First Global Investments Group andABC Investments.

Amana Investments, established in 1997, leads the country s Islamicfinancial services market. Its subsidiary Amana Takaful Ltd (ATL) beganoperations in June 1999 and is acknowledged as the market leaderfor Takaful services (commonly perceived as the Islamic alternative toconventional insurance). ATL was listed on the Colombo StockExchange in late 2006.

Major players Market value

Amana Investments Limited

Ceylinco Islamic Investment Corporation

Muslim Commercial Bank US$634 million to

National Asset Management Limited US$907 million

First Global Investments Group

ABC Investments

http://www.islamicfi/http://www.islamicfi/

8/14/2019 Islamic Banking and Finance in Sri Lanka: A Paradigm of Success by Riyazi Farook

2/2

COUNTRY REPORTwww.islamicfi nancenews.com

CIIC made its entry in 2003 and is fully backed by Ceylinco Insurance,one of the leading conventional insurance providers in Sri Lanka. CIICoffers both selected Shariah compliant and Takaful products.

New kid on the block MCB owned by MCB Pakistan commencedoperations early this year. It offers both Islamic and conventionalfinancial products.

NAMAL is the first fund management company in Sri Lanka licensed tomanage 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 significantgrowth over the medium to long term by primarily investing in equitysecurities that are Shariah compliant.

First Global Group is a public limited finance investment company thatdeals with Shariah compliant investments and financing products andservices. Domestically, it is the first institution to promote training andcareer development programs related to Islamic banking and finance.

The Sri Lankan market, including that for Takaful, faces severalchallenges, however. One is thecurrent legal environment, which isdeemed unfavorable to Takafuloperations.

Finally, there s ABC Investments, a relatively new Islamic investmentgroup that claims to have strong funding backing from differentcountries. It has a memorandum of understanding with the CentralBank 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 industryThe Takaful concept is steadily gaining acceptance in Sri Lanka, where

there are now 13 licensed insurance companies. Takaful was introducedin 2002 with the entry of ATL, which recently created history in SriLanka and the Islamic financial services industry worldwide when itwas ranked 203rd in the world s first comprehensive Top 500 IslamicFinancial Institutions published by The Banker, the global finance

magazine of the Financial Times Group, in its November issue. ATLaccounted for US$5.55 million worth of Shariah compliant assets.

A second Takaful operator, Ceylinco Takaful Limited, made its debut inmid-2006. Sri Lanka Insurance Corporation Limited the republic slargest and strongest composite insurance provider with LKR 50billion worth of assets under management has also announced itsintended foray into Takaful. Two of the country s largest insuranceoperators (Ceylinco Life and Sri Lanka Insurance Corporation) alsoplan to offer Takaful products.

The Sri Lankan market, including that for Takaful, faces severalchallenges, however. One is the current legal environment, which isdeemed unfavorable to Takaful operations. Other hurdles arereluctance on the part of regulators to introduce thenecessary changes in law to encourage the development of Takaful,a lack of investment opportunities that are Shariah compliant andacceptable to the insurance regulators, a high capitalrequirement, severe competition, consumer resistance to a new

form of insurance based on religious principles and the fact thatMuslims represent only about 9% of Sri Lanka s population.

Overcoming these barriers is more crucial for the Takaful industry inSri Lanka. Its operators should make a concerted effort to convinceinsurance regulators to accept the salient features of Takaful and treat itas a new business model. They could also form strategic alliances topromote their products.

Human resource needsSri Lanka should aim to produce highly skilled practitioners andprofessionals as well as specialists and researchers to develop humancapital 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 recentlyestablished the faculty of Islamic banking and finance, the first in SriLanka. It is hoped that the faculty will fulfill the need to produce a pool of Islamic professionals for the fast-growing global Islamic banking andfinancial services industry.

Riyazi Farook is a Master s student at Middlesex UniversityLondon and has a postgraduate diploma in marketing from theChartered Institute of Marketing, UK and postgraduatediploma in Islamic banking and insurance from the Institute

of Islamic Banking & Insurance, the UK. He can be contacted viaemail at riyazif@yahoo. com or visit www.islamicfinanceandbanking.blogspot.com

http://www.islamicfi/http://www.islamicfi/http://www.islamicfi/http://www.islamicfi/