COUNTRY REPORT
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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.
“Sri Lankan Muslims have
long awaited the entry of a
full-fl edged Islamic financial
institution that can provide
them the opportunity to
invest or deposit their money
in a Shariah compliant
manner”
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-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 edged
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.
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

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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.
“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.”
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
COUNTRY REPORT
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.
Riyazi Farook is a Master’s student at Middlesex University
London and has a postgraduate diploma in marketing from the
Chartered Institute of Marketing, UK and postgraduate
diploma in Islamic banking and insurance from the Institute
of Islamic Banking & Insurance, the UK. He can be contacted via
email at riyazif@yahoo. com or visit www.islamicfi
nanceandbanking.blogspot.com