Islamic banking and finance: Lucrative opportunity for NPP Government 

Sri Lanka deserves all the benefits that this global industry offers in terms of its innovative product and service range

All in all, there is a keen interest from many quarters in the industry to see the light of sukuk entering the market. The NPP Government must not miss out on the opportunity for issuing the sovereign bonds when the “time” now is just right to make it happen. The future of tomorrow is today! Our future is shaped by actions and decisions we make today

The slogan of ‘Islamic Bank’ carries a connotational interpretation that its functions are based on the principles of banking as stipulated by Islam. This interpretation is true, in my opinion. But it does not mean that an Islamic bank caters only to the needs of Muslims. It is meant for the entire population. A non-Muslim need not study Sharia to establish a banking relationship with an Islamic bank. The products and services are tailor made to suit every customer and appear as good as any other commercial bank. Thus, the customer is made at ease, as much as with the same ease that he will feel dealing with his conventional commercial bank. 

Usury is prohibited in Islam as mentioned in the Holy Quran. What is usury? In Islam, usury is the act of charging or receiving interest (called Riba) on a loan or a transaction. It is considered a major sin and therefore is strictly prohibited in Islamic law. In the case of exchange of goods you need to return the same quantity what you borrowed. Any excess given is considered riba. But if the excess is given on his own discretion as an appreciation for the favour extended then it is taken as a gift and not riba. In the case of a loan, riba is the excess amount charged by the lender for the period taken to repay the capital. This is prohibited in Islamic law. You can lend and or receive without the expectation of a financial gain. Another form of riba prohibits the simultaneous exchange of goods of unequal quantity and quality.

The slogan “Islamic Bank” is a misnomer. It is an alternative banking option. The first bank based on the principles of sharia was the Dubai Islamic bank in 1975 and hence the origin of the word “Islamic”. When the original system is very strong and well accepted as a good practice, an alternative to this can be perceived as somewhat inferior, for instance Western medicine is considered superior as compared to Ayurvedic medicine. This is so, due to strong lobby by the Western medicine cartel against Ayurveda.  

Despite the emergence of Islamic banks, the Middle East banking industry is still dominated by the traditional banks operating under the nucleus of interest and have successfully lobbied to project and highlight the teething problems of the Islamic banks as their inherent problems and weakness. This is not true.  

The only Islamic bank in Sri Lanka viz Amana bank also was subjected to obstacles. 

The Central Bank was reluctant to grant Amana the commercial banking licence not due to pressure from the existing commercial banks but due to their own lack of understanding of this new and unfamiliar system of banking. During its formative years of operation, it faced various other problems particularly from a few of the Buddhist clergy headed by Ven. Gnanasera thero. But this turned out to be of no threat afterwards, thanks to the firm understanding of the Central Bank. The general public was also too naive about the Islamic banks. Even the Muslim population was not all out to go for this alternative since they perceived the new system not as a perfect substitute for the conventional banks. As at today it remains almost a captive market for Amana but it has already made successful inroads and is making steady progress in attracting many non-Muslim customers. 

Presently there are six Islamic banking windows operating out of 35 licensed commercial banks in Sri Lanka. Bank of Ceylon is one of the pioneers who introduced the concept of the Islamic banking window and is supervised by its own Sharia Board 

The global Islamic banking industry

As of end 2022, the assets of the world’s Islamic banks were valued at $ 3.24 trillion, in 2012 it was only $ 1.3 trillion. Islamic banking is growing at an annual rate of 9% and that is faster than the conventional finance.

The majority of the Islamic finance ventures is concentrated in about 10 countries including Saudi Arabia, Iran, Malaysia, the UAE, Kuwait, Qatar, Turkey, Bahrain, Indonesia and Pakistan. They also have significant presence in UK, Egypt, Brunei and several European capitals.

Al Rajih bank headquartered in Riyadh Saudi Arabia is the largest Islamic bank in the world with assets valued at $ 216 billion and an equity of $ 28 billion. 

The Islamic finance industry include the Islamic banks, Insurance (called the Takaful), Islamic bonds (called the sukuks) and various other Islamic financial institutions and Islamic funds. The value of total assets of the Islamic finance industry as at 2022 was around $ 4.5 trillion and expected to increase up to $ 6.7 trillion by 2027. 

Sukuk is a popular instrument particularly in the Middle East markets. A sukuk is a sharia complaint bonds. Sri Lankan markets have been discussing sukuk for almost 10 years now. The first sukuk was issued by LOLC Finance in 2016 for Rs. 500 million and was fully subscribed by the Bank of Ceylon. The Trustee to the issuance was HNB custodial services. But since then the market remains lull. 

The Daily Mirror online on 26 November 2024 produced a good article based on interviews with Suresh Perera of KPMG and Mohamed Azmeer, CEO of Amana Bank. Both of them expressed that they are highly optimistic about the country issuing its first-ever sovereign sukuk, under the new Government. The article said that a sovereign sukuk is an Islamic financial bond issued by the Government to raise capital, similar to a traditional sovereign bond but in compliance with the Islamic law (Sharia). These bonds allow investors to have a share in underlying assets or projects, with returns coming from the profits generated by those assets, rather than from the interest payments owed by the Government.

The NPP Government must take a serious note of these new developments and take immediate action to issue the first ever sovereign sukuk bond since these non-conventional financial solutions often offer more effective quasi-equity approaches compared to the traditional debt instruments. 

Al-Waleed bin Talal Al Saud is the richest billionaire in Saudi Arabia and was ranked by Forbes as the 7th richest billionaire in the world in November 2017. He visited Sri Lanka in May 2017 to explore investment and business opportunities. He was met with the then President, Prime Minister and the Finance Minister. The team was quite interested in our hospitality sector. We however were not successful in winning his interest in Sri Lanka. The Government must explore the possibility of attracting such eminent entrepreneurs and offer readymade investment packages in the hospitality and banking sectors. 

Unlike China and India, the leaders of the Middle East will have no political motives regarding their interests in Sri Lanka. Hence a serious business approach targeting the top corporates/individuals with well identified projects in the hospitality and banking sectors will pave the way for some solid investment into Sri Lanka. Moreover the Islamic banking and finance industry is well developed in countries like UAE, Bahrain Saudi Arabia and Qatar. Our NPP Government must seek lucrative proposals from this region that will enrich and fuel our Sri Lankan capital market.

The markets over there remain very vibrant and progressive, it is we who must make initiatives to bring them to Sri Lanka. The time is ripe to knock on these opportunities. Sri Lanka enjoys a good reputation in this region and compares more favourably than our other South Asian counterparts. 

In May 2024 Colombo Stock Exchange (CSE) said that efforts are being actively rolled out to introduce sukuk products to the Sri Lankan capital market by the end of the month. (Daily Mirror of 7 May 2024). The CSE said that “Sri Lanka would be able to tap into the much-needed foreign funds and source it for development goals through the capital market framework.” 

All in all, there is a keen interest from many quarters in the industry to see the light of sukuk entering the market. The NPP Government must not miss out on the opportunity for issuing the sovereign bonds when the “time” now is just right to make it happen. The future of tomorrow is today! Our future is shaped by actions and decisions we make today.

Some unusual features of Islamic banks

Another function of all Islamic banks is their annual payment of “Zakat”. Zakat is a compulsory levy in Islamic law payable by the rich to needy and poor through the established zakat channels. Zakat is a wealth tax calculated at 2.5% per annum of the wealth. Some adjustments are allowed to be considered in the actual computation of the eligible Zakat. Even individuals who meet the Zakat threshold are obligated to pay this every year. All eligible Muslims in Sri Lanka do pay their zakat annually. Whether Zakat paid by the Islamic bank is tax deductible or not needs to be verified.

Islamic banks are under obligation by sharia law that emphasises the banks not to finance and or provide assistance to unethical and unacceptable activities such as granting loans and other facilities to say liquor production and distribution, pork and other unacceptable meat farms, gaming and gambling, manufacture and sale of tobacco and tobacco related products, and all other activities deemed unethical and socially unacceptable. Businesses that are speculative with uncertainties remain not allowed for financing.

Another notable feature is that the bank cannot charge penal interest rates if the customer delays his scheduled payment period. This is applicable for Ijara (lease) facility as well where the customer has agreed on an instalment basis to pay say monthly, but not honouring the same. Hence the Islamic banks also adopt a stringent screening process on the credibility and integrity of the borrower. 

An Islamic bank usually offers complimentary services in providing information on the so-called “White  List” companies that are traded in the Stock Exchange. In Sri Lanka, the SEC maintains a list of accredited Islamic scholars. The White List prior to the publication must be signed off by three of them. A white list in Islamic banking is a list of securities that are screened against sharia principles and are considered to be compliant with Islamic law. Many of the companies are white listed at the Colombo Stock Exchange. Companies whose core business is “impermissible” in the light of sharia are not allowed to be white listed.

 Conclusion

 There are plenty of cynical views that challenge the basis upon which this relatively new concept was born. Some are constructive and some destructive. A strong critic will argue that Islamic banking is a mirror image of conventional banking. They go to extremes to say it’s only a change in terminology for instance they say a structured Lease is name-changed as Ijara! This group does not even understand the essence of the principles of conventional banking leave alone Islamic banking. The working of both types of banking appear similar but they are in fact distinctively different. 

All in all, Islamic banking and finance are here to stay. Sri Lanka deserves all the benefits that this global industry offers in terms of its innovative product and service range. Non-Muslim institutions can own Islamic banks and finance. Sovereign Islamic debt issuance is on the increase in non-Muslim countries such as Singapore, Hong Kong, Luxembourg, UK and recently in some African countries led by South Africa!

It is all about an innovative business! Let’s grab it!

 

(The writer is the former Deputy Director General of the Board of Investment of Sri Lanka and a co-founder of Amana, now into Amana Bank and Amana Takaful.)