Amana Bank MD/CEO reflects on achievement of Fitch BBB- rating amid economic struggles

Amana Bank was recently upgraded by Fitch Ratings to an investment grade rating of BBB- with a stable outlook. The Daily FT recently caught up with Amana Bank Managing Director/CEO Mohamed Azmeer to speak on this special achievement and other updates on the bank.

Q: Congratulations on the recent upgrade by Fitch ratings to an investment-grade rating of BBB-. In recent times as Sri Lankans, we have always been hearing about rating downgrades. In this backdrop how has Amana Bank been able to secure a rating upgrade?  

A: Indeed, we are very honoured to have received this rating upgrade. But as you mentioned, we are even more delighted to have received this in the backdrop of the serious economic challenges faced by the country and the Banking industry in the recent years. This rating upgrade, validates the unique advantage of the development focussed people friendly banking model followed by Amana Bank and the important strategic choices we made in the face of mounting external challenges, which has helped us stand out and perform against the tide.   

Q: Could you elaborate further on the challenges faced by the Banking industry?  

A: Over the last five years, the Sri Lankan economy was impacted with a Forex Crisis Debt Crisis and a resulting socio-economic crisis involving high inflation and lower disposable income, which had very strong repercussions to the Banking industry. Further, business supply chains were interrupted affecting the industrial outputs. This coupled with lower demand and overall payment delays, exerted pressure on business cash flows which negatively impacted the debt repayment capacity of businesses. Due to the forex shortage, banks were facing challenges even to finance imports of essential goods. Banks were constantly challenged by rising non-performing advances, lower credit growth and overall pressure on liquidity amidst a default sovereign rating. 

Q: Was the model of banking followed by Amana Bank, in any way an impetus to its ability to steer through these industry wide challenges effectively?  

A: Most certainly. The model of banking we follow ensures a strong alignment between the bank’s core activity and the real economy. By model, our financing engagements are based on real assets which results in value addition to the economy. This approach not only minimises speculative risks but also promotes sustainable economic development. By focusing on these values, we have been able to build resilience, particularly in times of economic stress, ensuring that both the bank and its customers remain stable and well-supported through industry-wide challenges.

Q: You mentioned about some important strategic choices made by the bank, which helped you to succeed. Could you elaborate on what these important strategic choices were? 

A: In response to the challenging macroeconomic environment, the bank shifted its financing towards export-oriented businesses and companies generating foreign currency, building a strong forex reserve. This reserve became crucial during the forex crisis. Despite having an overarching focus on the SME sector and primarily being an SME Bank, when the overall banking industry experienced negative credit growth, Amana Bank transitioned to positive growth by tactically shifting its focus towards top-tier corporates selectively. Most of these corporates, especially the ones who were involved in the imports of essential goods, experienced our stability and benefited from our model during the forex crisis.  

Q: You mentioned about your overarching focus on the SME sector. Could you touch on the reason for this focus?

A: SMEs account for over 50% of the country’s GDP and contributes 45% of the employment. Our focus on SMEs stems from their vital role in driving economic growth as our development-focused banking model is closely aligned with the unique needs of SMEs. Our trade-based financing solutions, combined with personalised service and flexible offerings, makes us an ideal banking partner for SMEs looking to grow sustainably, often providing assistance and advisory services to help improve their liquidity position and strengthen their financial resilience and revival efforts in difficult times. 

Q: What are the top highlights of Amana Bank’s performance? 

A: In terms of key performance highlights, if you look at the last 10 years, our deposits have grown from LKR 18 billion to LKR 146 billion as of Q2 2024, whereas our advances have grown from LKR 15 billion to LKR 98 billion while maintaining an industry low Stage 3 impairment ratio of 1.7%. Our Total Assets stand at LKR 174 billion, reflecting a CAGR in excess of 22%. This growth has translated to sustained profits, where last year alone we recorded LKR 2.3 billion in PBT, resulting in the Bank continuously declaring dividends in the last six years and enhancing value to our shareholders

Q: I am aware that the Banking industry Stage 3 impairment ratio stands at 12.9%. How is it that Amana Bank has managed to record a very favourable Stage 3 impairment ratio of 1.7% (Net of Impairment) in this backdrop? 

A: Our asset-backed model promotes financial discipline, encourages prudent financial practices and risk-sharing, reducing the likelihood of default. Further our robust underwriting, strong risk management framework, timely customer engagement, and focused sectoral investments all contribute to minimising exposure to high-risk areas, effectively managing credit risk, and maintaining a strong portfolio quality. Additionally, the bank has established a Business Revival Unit to objectively engage with businesses in difficulty and support their business recovery which is very much in line with our model.

Q: How has Amana Bank supported the country’s economy, in its hour of need? 

A: By building a good forex reserve we played a pivotal role during the height of the economic crisis by financing the importation of essential goods like food, fuel and pharmaceuticals, etc. through our trade financing engagements facilitated by a strong network of Global Correspondent Banking Relationships. Also to help the country with much needed FDI, the bank was able to secure strong inflow of capital from its overseas investors during this period. Another important value addition we are strongly pursuing and that can support the economy is the introduction of a sovereign Sukuk.

Q: Why do you say that a Sukuk will be an important value addition to the country’s economy?   

A: As the country plans for fiscal consolidation, the focus is often on two options: Debt or equity. While debt can lead to unsustainable borrowing, and equity impacts long-term ownership of state assets, a Sukuk offers a third option. Sukuk is a hybrid solution, bringing together the features of debt and equity in the form of an asset based security. Sukuks come with the benefit of optimising available assets of the State, through a mechanism of disciplined debt, without impacting the ownership of such assets. We have seen many countries benefiting from Sukuks including United Kingdom, Germany, China, Hong Kong, South Africa, Luxemburg and Singapore, besides Middle Eastern and Far Eastern countries. 

Q: You touched on the capital inflows. Could you elaborate more on how these capital inflows were enabled? 

A: Starting with our IPO in 2014, we have successfully raised capital on several occasions, receiving overwhelming support from both local and overseas investors, resulting in our capital now exceeding LKR 20 billion with our recent Rights Issue which brought in LKR 6 billion. We are thankful to our primary shareholder IsDB Group, which is a AAA rated supra-national organisation, for their continued trust and confidence placed in us. As one of their investee banks, IsDB has recognised Amana Bank as a success story in promoting Islamic Banking in a muslim minority country.     

Q: You have been talking about your unique model of banking. How would you shortly describe this model?

A: Islamic banking is a financial system that avoids charging or earning interest, aligning with ethical principles that emphasise justice, fairness, and transparency. Its trade based approach to banking, operates on the core values of mutual benefit, risk-sharing, and social responsibility, well aligned to the real economy. The focus is on achieving the greater objective of overall human well-being without any form of discrimination.

Q: What is Amana Bank doing towards improving the market awareness and reach of this unique model? 

A:: The bank has established a dedicated Knowledge Marketing unit through which we carry out workshops and seminars engaging audiences including professional forums, trade associations and corporates. Further, we have also released a series of informative videos highlighting the features to easily understand the benefits and product structures of our banking model in all three languages which is accessible on our YouTube channel and website. In partnership with the Institute of Bankers of Sri Lanka we have rolled out an exclusive diploma program on Islamic Banking. In terms of our reach, Amana Bank is accessible today across 66 dedicated customer locations.  Through multiple collaborations we have also facilitated 6,000+ withdrawal points and 1,000+ deposit points across the island. Further, we have leveraged on digital technology to enable customer onboarding and transactions anytime anywhere. 

Q: Sustainability is an important global theme. Can you advise on Amana Bank’s approach towards sustainability? 

A: Stemming from our business model where sustainability is an integral principle, the bank has embedded sustainability deeply across our Core Business, Operations and CSR activities. In addition to our model-driven decisions, we have proactively begun working towards the early adoption of the Central Bank of Sri Lanka’s (CBSL) green finance taxonomy guidelines, updating our policies to include mandatory ESG (Environmental, Social, Governance) screening as part of the pre-credit assessment process to enable customers to qualify for additional benefits under sustainable financing. 

Q: With financial inclusion being a hot topic what has Amana Bank done towards this?

Mohamed Azmeer:  Yes, financial inclusion is a priority in the banking circle to reach out to the unbanked and underbanked segments of the country. In this regard, we have introduced our Gold Certificate Financing scheme, which provides emergency cash as an alternative to conventional pawning. This initiative has allowed us to reach a larger customer base, offering vital support to grassroots-level and women entrepreneurs, helping them access the financing they need to grow. Further, through the bank-sponsored OrphanCare initiative, which operates as an independent trust, we have supported over 3,000 deserving children by providing financial resources when they turn 18, helping prevent a ‘second abandonment’ after they leave orphanages. Guided by Article 2 of the United Nations Convention on the Rights of the Child, OrphanCare remains committed to operating without any form of discrimination.

Q: I am sure this investment grade rating clears the pathway for many other growth opportunities for Amana Bank. Could you give us a glimpse of the bank’s future? 

Mohamed Azmeer:  Yes, this rating upgrade has opened up multiple avenues for the bank to benefit from such as securing low cost funding lines, expanding our product suite to include products such as Sukuk, strengthening the balance sheet, cross border collaborations etc. Our strategic priority is to expand our operations beyond borders as this will provide opportunities for geographic diversification and market expansion. With our recent capital infusion, the bank is well positioned to expand our footprint beyond Sri Lankan boarders to cater the rising demand of non-interest based banking in the region.