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