Sri Lanka can be an Islamic finance hub

By Cheranka Mendis

Sri Lanka can position itself as a hub for the Islamic finance industry in the South Asian region given the high density of Muslims in the area and the advanced status of the country’s business practices in the field.

Even though it has been only a year since the launch of Amana Bank, the first fully-fledged Islamic bank in the country, the form of banking has been well accepted, with leading private and public sector banks adopting Islamic banking as a window operation.

Delivering the welcome address at the Sri Lanka Islamic Banking and Finance Conference, Chairman of the conference and CEO of Adl Capital Ishrat Rauff stated that the country had a good chance of becoming a hub for Islamic financing in the region.

“South Asia is home to the single biggest block of Muslims in the world with three of the five most Muslim populated countries in the world (Pakistan, India and Bangladesh) being situated here,” Rauff said. “We are also more ahead in Islamic finance than Maldives, Bangladesh and India. Pakistan is probably ahead of us but I do not see that coming out as a hub for the region.”

He stated that there was considerable interest and that Sri Lanka would do well to follow the footsteps of Malaysia, the unparallel global leader in the industry, where Islamic banking is no longer limited to the excessive demand of the Muslim population.

There is considerable interest, especially from the Middle East, for investment into Sri Lanka. “We have seen very serious, large financial institutions coming in because there is a huge surplus of liquidity given the big oil prices and a lot of this money is being channelled into investments that are Shariah-compliant. Given the fact that there is a mismatch of surplus liquidity during the past year, yields on Islamic finance, debt instruments have come down, which means Sri Lanka is in a prime position to exploit it.”

He noted that statistics show yields on Islamic bonds have averaged 170 basis points in the past year compared to conventional bonds. The difference between the bonds is said to have been 70 basis points. “Islamic finance caters to all segments of population. It is the same in Sri Lanka as well,” he added.

In Malaysia, it was stated that the Chinese community was one of the biggest users of Islamic finance, whereas in Europe 80% of funds going into Islamic funds are from non-Muslims. “Even in Sri Lanka the biggest institutional investor was not a Muslim institution, but the church,” Rauff said. “It has transcended all boundaries and moved beyond Muslim-citizens-only service.”

However, it is unlikely that the country will enjoy a separate regulatory body for Islamic finance in the near future.

At the conference’s panel discussion, Amana Bank CEO Faizal Salieh, IBU, LOLC and CLC CEO Krishan Tillekeratne and HNB COO Jonathan Alles agreed that it would take years and careful growth of the industry without major mishaps to reach separate regulations.

“Even though Islamic banking cannot succeed, sustain and deliver its fullest value to society and customers of market without separate regulation, I do not see this happening in the very near future,” Salieh said.

“It took 14 years for regulators to tweak the Banking Act to allow Islamic banking. Although we have been negotiating for a conceptually level playing field, it has not cascaded down to the Inland Revenue Department,” he said.

When it comes to specific Islamic regulations, the industry must work step by step, while looking at regulations through the conventional model will not work since the two models are fundamentally different.

“Regulators will not come up with a complete and comprehensive set of regulations; they will always test the waters.”

However, the regulators have shown willingness to look at bringing in new changes depending on how the industry performs. “The regulator is watching and any one failure can cause further apprehension.”

Tillekeratne stated that the first step was for the industry to speak to regulators to consider a separate department connected to the Central Bank to oversee Islamic banking and then work its way from there.

Alles, assuring HNB’s support in furthering the cause, added: “As the industry grows to a point where both regulators and we realise there is no other way but to manage it by the right structure, regulations will then evolve to keep this industry clear and away from the conventional model.”