Islamic banking in Sri Lanka: Prospects and challenges

By Shezna Shums

The third Islamic Banking and Finance Conference earlier this week saw experts calling on stakeholders in the Islamic industry to follow strict governance in every level of their transactions, product and services offered, as this industry was now under the spot light, following the collapse of the conventional banking industry during the last few years.

Experts in their fields discussed issues that were now affecting this much looked upon industry as well as its benefits for even non Muslim clients.

Islamic finance professionals called for strict quality assurance for all the products and services offered by the Islamic financial institutions.

Great opportunity

A growing number of non Muslims also seek such products and services, and given that Islamic banking is now under the spotlight this industry should rise above the occasion to show the public that this alternative banking solution is superior and safe.

At the conference Managing Director/ CEO Amana Bank Limited Faizel Salieh in his key note address said that the crisis in the conventional banking sector created a great opportunity for Islamic Banking and Finance Industry (IBF) to grow.

“Looking at the IBF sector in Sri Lanka, its growth has been relatively slower when compared with other non Muslim countries,” he noted. Islamic Finance in Sri Lanka now boasts of being practised for the last 14 years; but as numbers help to strengthen an industry, the behaviour behind the number is as important.

The behaviour individually as well as collectively by all operators and practitioners in the IBF industry is paramount.

The time is now for practitioners to reflect and look at their input to the market space. Salieh was urging the stakeholders in the IBF industry on how they act in the market place and look into their companies to see if they uphold the values and principles of Islamic Banking.

“The IBF business model is under the spot light, and it has to succeed now specially after the conventional banking system was under stress and has collapsed globally,” explained Salieh.

It is also an opportune time for the industry to rise above and look at the challenges they are to face in the future. “This is also a time for the industry to do some soul searching,” he said further asking that as an industry whether were we looking at attracting a small niche market or we were to offer our services to the whole market both Muslims and non Muslims?

Responsible behaviour

Salieh called for responsible behaviour in the IBF industry and market place and proposed that practitioners look at what new products and services that can be offered in the future for new generations. Further calling governance of the institutions and the courage and confidence to rise up and know when to be held responsible if the market is mislead.

Services of the IBF industry depends on the quality of the products and services, and the success depends on how we are to bring forth these futuristic products that will meet the needs of the clients both in Sri Lanka and globally.

The products and services have to be dynamic, meet the market requirements, futuristic and conform to the principles.

Whilst it is also important that the industry cannot afford to leave Shari’ah scholars out of this process as they need to be a part of the development of these new products and services. However it is also crucial that the scholars step into the ring to work actively with the practitioners to meet the demands of the IBF industry, “as we are being watched by the entire market place, customers and the conventional banking practitioners,” he explained.

Raising the question “Do we have the need to meet the future aspirations of the emerging generations?” Salieh said, “We cannot compromise on the Shari’ah principles but we also have to respond to the future aspirations of the market; this is a huge challenge for practitioners and scholars.”

With regard to capacity building the IBF industry sees a wealth in the supply of good practitioners who need knowledge and skills training. It was also highlighted that the critical factor is the dearth of Shari’ah scholars both globally and in Sri Lanka.

There is also a need to engage the authorities in regulatory tax purposes, “We have to actively work with regulators and systems controllers to make the necessary changes to facilitate the industry and support the IBF industry in getting into a level playing field,” explained Salieh.

Principal/KPMG Ford Rhodes Thornton & Co Suresh Perera called on the industry to have a platform for practitioners to come together and for information on new products. “It is important to shift the agenda to product development,” he highlighted, while proposing that the Central Bank brings in a Shari’ah desk as soon as possible. There was also a call on all practitioners to ensure good Shari’ah risk management processes and also focus on good governance and compliance with a suggestion that IBF had to comply with regulations, accounting standards, tax and other regulations and good governance.

“Failures and collapses at any time will discredit this industry,” stressed Perera.

Tough parameters

In the atmosphere of smaller Islamic institutions emerging, this will worry the regulators and the system, but there are tough parameters with regard to financial transactions. The Islamic group has to work together to face the challenges at present and steps have to be taken that this group of banking and finance is a cohesive and influential group that obeys the regulations to resolve remaining issues and future issues. “Quality should be ensured at all levels of the product, transactions, practises and governance,” he stressed.

Regional Director CIMA Bradley Emerson speaking on the CIMA Islamic Finance Qualification which was launched earlier this week at the Conference said that to join the bandwagon of the IBF industry there has to be rightly qualified persons. He too endorsed the statements made by Salieh and Perera earlier.

Statistics provided by him showed that while there were 1.8 billion Muslims in the world; one billion were located in Asia and 15 million Muslims were living in Malaysia alone. “Islamic Finance allows banking and finance for Muslims without compromising on their beliefs; but this industry is also an alternative to non Muslims,” he explained. The world recession did not directly affect the Islamic Finance sector, and Islamic Finance is a growing sector in Malaysia, Hong Kong, and Singapore,” he added. Islamic banking and finance industry is becoming increasingly popular among non Islamic countries as well as non Muslims who benefit from these alternative banking and finance practices for their business transactions and is valued at US $ 1 trillion and is estimated to grow at 15 to 20 percent annually.

The figure of US$ 1 trillion however, is still minute when compared with the global banking and finance industry. It is also estimated that 50,000 professionals are expected to join this industry over the next five to seven years and “The continued growth needs to benefit by new human capital,” stressed Emerson. When it comes to CIMA’s role in the IBF industry they were asked to create an educational product that is accessible world wide, with a comprehensive coverage, focuses on practical application and non geographically aligned.“We found a huge growth potential but the demand of suitably qualified persons far out- weighed the supply; there are a few specialists and few substantial courses available,” he explained.

CIMA has launched its Diploma in Islamic Finance and course in Islamic Commercial Law at the conference earlier this week. “The global Islamic Finance qualification from CIMA was launched to meet the global demand,” it was highlighted. This course was created with the input of scholars from Britain, Saudi Arabia, Malaysia and other countries, it was noted.

Perera speaking on amendments to tax noted that when it came to the substance of a tax transaction there was no need for any changes when Islamic finance is brought; but when it came to countries that look at the form of a transaction, then amendments would have to be brought in if Islamic finance is involved.

Perera strongly urged that industrialists in the IBF sector use neutral terms for alternative products and services as this would make their introduction into the legislature and statutes convenient noting that this had also been observed in other countries and had proved successful, and was especially important in a multi cultural society.

While noting that religious and Arabic terminology may not be familiar to society as a whole, he said that it should be a salient feature to be observed in drawing Islamic finance tax rules.

During the session ‘Entry of convention financial institutions into the IBF industry’  Associate Director ADL Capital Limited Azad Zaheed stated that despite criticism Islamic Banking has evolved and found its way into the mainstream financial world, with the recent milestone of Amana Bank now becoming a fully fledged licensed bank. Sri Lanka has also witnessed amendments to the Banking Acts to accommodate these alternative banking and financial requirements.

The Bank of Ceylon has its own Islamic Banking division and other players are showing keen interest in the IBF industry. “Islamic banking is open to all, it is not exclusive to Muslims but for the nation as a whole,” he highlighted, pointing out that in Malaysia, the non Muslim Chinese patronised Islamic banks to benefit from the alternative banking solutions.

Product development

Head of Structured Finance ADL Capital Limited Sadri Cader noted that product development was critical when it came to the assets side.

Chairman ADL Capital Limited A. I. Marikar noted that two milestones were achieved that benefited the IBF industry.

One was in 2005 when amendments were made in the Banking Act which showed some issues such as customers being allowed to be a loss bearer and a bank being able to buy, sell, and trade. In Islamic Banking there is a case of excess liquidity it was noted.

In the session on ‘Private Equity to Listing’ Director Calamander Group Singapore Mafaz Ishaq noted that Islamic Banking transcended across race and religions and that some of the biggest clients were non Muslims.

“Islamic Banking goes well beyond only a Muslim market and now opportunities are available in the stock market that were previously not,” he stated. Some of the Shari’ah compliant sectors to invest in include healthcare, education, real-estate and property, infrastructure assets, agriculture and plantation assets, lifestyle products, food and beverage, manufacturing, as well as retail and distribution.

Managing Director/CEO Vidullanka PLC Riyaz Sangani added that the alternative banking solutions had greatly helped Vidullanka PLC come out of its debts and move forward in starting more Hydro power projects.What is needed in the industry is more suppliers of Islamic banking for a more competitive environment with regard to products and services offered, he said.

Managing Director/CEO Alufab PLC., T. N. Dole noted that the company did not have any issue with considering alternative banking solutions as long as they compled with the rules of the land and that they were trying to blend Shari’ah compliancy with the company for the future.

During the session of ‘Equity Investments — the Shari’ah in Perspective,’ the speakers included Executive Director/CEO Financial Services Group; Executive Director, Baer Capital Partners Dubai UAE Padmanabhan Markandan and General Manager Comtrust Asset Management P. Ashokan, and Executive Director/CEO CT Financial Services Group Sheyantha Abeykoon.

Markandan urged that the practitioners of the IBF industry stay focused on what they had to deliver for their clients.

Ashokan noted that as interest rates have reduced more people were looking at alternative means of investment. People put money in the stock market for a quick return and this is were unit trust industry comes in. The stock market is a long tern investment where you should prevail for a long period of time, were some of the points raised by him.

Abeykoon while agreeing with the above, added that post war investments were increasing and urged caution so that more people coming into the stock market could be ensured. He noted that too many people were investing without knowing what they were getting into.

A synopsis of Islamic banking

Islamic finance is a term that reflects financial business that are not contradictory to the principles of Sharia’ah. Conventional finance, particular conventional banking business relies on taking deposits from, and providing loans to the public. Therefore the banker-customer relationship is always a debtor-creditor relationship. A key aspect of conventional banking is the giving or receiving of interest, which is specifically prohibited by Shari’ah.

For example a conventional bank’s fixed deposit product is based on a promise by the borrower that is the bank to repay the loan plus fixed interest to the lender that is the depositor. Essentially money deposited will result in more money which is the basic structure of an interest.



Pix by Daminda Harsha Perera