The Democratic Socialist Republic of Sri Lanka is a South Asian island-nation located in the Indian Ocean, separated from Indian subcontinent by the Gulf of Mannar and Palk Strait, and sharing a maritime border with India and the Maldives. Its legislative capital is Sri Jayawardenapura-Kotte and the commercial capital is Colombo.
Sri Lanka’s population as per 2020 statistics is approximately 22 million. It is a multicultural nation with diverse ethnicities. Sinhalese make up the majority at 74.8%, Tamils 11.2% and Moors 9.2% while Malays, Burghers and indigenous communities comprise 4.8%. While Buddhism is the main religion, the cultural history of Sri Lanka is enriched by the influence of Hinduism, Christianity and Islam.
A developing country with a 92.9% literacy rate, Sri Lanka is ranked 73rd on the Human Development Index and 95th in the Global Innovation Index in 2021. With a recorded history of being the highest-ranked South Asian nation for development and the second-highest per capita income in South Asia, private sector contribution to GDP is about 85% of the economy while service, industrial and agriculture sectors are at 59.7%, 26.2% and 8.4% respectively.
The regulatory framework encourages Islamic finance within the banking, finance and insurance sectors. The industry comprises one licensed Islamic bank, six commercial banks and six non-bank financial institution (NBFI) window operators. The Association of Alternate Financial Institutes of Sri Lanka, a professional body guided by KPMG, has a practitioner membership to make collective references to the regulators to develop the Islamic finance industry.
Review of 2022
The Islamic finance industry has been enjoying a steady year-on-year growth, averaging approximately 20% in assets-based growth and 25% in deposits-based growth over the past decade.
2021/22 recorded a promising 27.11% growth in assets (see Chart 1) and 31.97% in deposits (see Chart 2) in both the banking and NBFI sectors collectively.
Assets controlled by banks stood at 82.69%, whereas NBFIs’ stake was at 17.3%. The deposit base of banks was at 89.04% and services by the NBFIs were at 10.95%.
Nonperforming loans of the industry reduced to 2.93% from the previous year’s 3.46%, improving the quality of the portfolios.
Further, the service-points of Islamic financial institutions increased to 426 from 390 and the customer base increased to approximately 426,000 from last year’s 390,000.
The industry’s gross written premiums (GWPs) are expected to grow by approximately 27% for the general insurance sector and by approximately 7% in the life assurance sector by the close of the current financial year (see Chart 3).
Significant industry developments in the NBFI sector were the consolidation plan of the Central Bank of Sri Lanka and LOLC Finance’s acquisition of Commercial Leasing & Finance (CLC) to become the largest NBFI in Sri Lanka earlier this year which paved the way for the strategic amalgamation of LOFC’s Islamic window operation Al-Falaah with CLC’s Islamic Business Division to create the largest NBFI operator in the Islamic finance industry, controlling over 60% of the NBFIs’ Islamic financial services market share.
Preview of 2023
Promoting investment opportunities to both local and international Sukuk markets, the Securities and Exchange Commission invited written submissions for a public consultation paper in the third quarter of 2022 titled ‘Public Consultation on Proposal for Introducing Sukuk Products at the Colombo Stock Exchange’ — an initiative activated under technical assistance from the Asian Development Bank.
New product variants are being developed and introduced by practitioners to support the growing demands of consumers. Wadiah as an alternate option for pawning and gold-based financings are gaining traction as an option for both consumer financing and microfinancing.
Demand for Takaful endowment products has seen an increase in the trend where Takaful providers are introducing options to cater to this niche. The average weighted prime lending rate-pegged instruments are being actively reintroduced by practitioners as a prudent measure to stabilize the balance of assets vs. liability pricing movements, and have become a common norm in the industry.
The industry invests substantially in technology and automation of conceptual methodologies which has given practitioners speed and efficiency on par with their conventional counterparts. Digital investments and savings accounts are introduced to the consumer and access to digital settlements of facility installments and rentals is becoming popular.
Sri Lanka has experienced certain economic adversities that are being improved over the last quarter with the authorities initiating prudent multiple programs to control the contraction of the economy and maintain stability. The Islamic finance industry with its proven productive economic sustainability traits is expected to contribute positively toward the country’s economy going forward.
Shiraz Refai is the head of Alternate Financial Services — LOLC Finance and head of Strategic Initiatives, International Operations (Middle East & North Africa) — LOLC Holdings. He can be contacted at [email protected].