Sri Lanka, despite being a Muslim-minority country with a population share of less than 10%, has made very strong progress in Islamic banking and finance with growing acceptance among customers not limited by their faith. Promoting the universal value proposition of the Islamic banking and finance model has been the core driver of such acceptance.

Having boldly commenced Islamic finance operations as a means to showcase the demand and viability of the model, the Islamic banking and finance industry in Sri Lanka was blessed with the necessary legislative enactments, leading to the birth of Amana Bank in 2011, which is the flag bearer for the industry in Sri Lanka.

Today, Sri Lanka’s Islamic banking and finance industry comprises one fully-fledged Islamic bank — Amana Bank — two windows operated by state banks, 14 windows operated by private banks and financial institutions, four Takaful providers and four Shariah compliant unit trusts serving over 500,000 customers. Further, the Islamic finance ecosystem also comprises dedicated educational institutes and advisory firms.

As a result of Sri Lanka’s Islamic banking and finance growth in terms of quantitative development, knowledge, awareness, governance and corporate social responsibility, it is humbling to note that Sri Lanka was ranked 14th out of 135 countries in the Islamic Finance Development Index 2020 presented by Refinitiv (Reuters) and the Islamic Corporation for the Development of the Private Sector.

Accordingly, Sri Lanka is the highest-ranked non-Muslim-majority nation, compared with other larger and advanced economies, and is also looked upon as an example for establishing and growing Islamic banking and finance in a Muslim-minority country.

Review of 2021
2021 started with a glimmer of hope, after Sri Lanka’s economic performance suffered a setback due to consecutive economic shocks which occurred during the past three years, namely the 2018 political crisis of two prime ministers, the 2019 Easter Sunday attacks and since 2020 the COVID-19 pandemic which has affected even the strongest of economies.

However, the resurgence of COVID-19 variants in the country resulted in multiple lockdowns and travel restrictions which caused the economy to encounter renewed challenges. By the end of the second quarter of 2021, a modest economic growth of 4.1% was recorded but the rapid escalation of the third wave of COVID-19 stalled the momentum in the second half of 2021.

In order to control the resultant rupee depreciation and its consequent economic impacts, the government continued its import restrictions which had a notable impact on the SME sector. Further, sovereign rating revisions made access to overseas funds more challenging.

However, the financial sector was found to be resilient in the face of these challenges through various government and regulatory policy measures. Policies to promote exports, enhance domestic production and reduce import expenditure helped maintain the momentum of market purchases of foreign exchange by the central bank, thereby supporting the external sector stability. Concessional credit and refinancing schemes were introduced to fulfill the needs of SMEs, alongside debt moratoria offered for businesses and individuals affected by the pandemic.

The Islamic banking and finance industry, through its constituents, supported various government efforts in piloting pandemic-related economic and financial challenges, for which the Islamic banking and finance model was ideally positioned and duly acknowledged by customers for the inherent benefits it rolled out.

The industry, based on the performance of its flag bearer Amana Bank, approximately grew by 10% during the first half of the year, demonstrating strong resilience amid widespread challenges.

Preview of 2022
Economic resurgence in 2022 is largely expected to depend on the country’s vaccination drive, which currently stands at approximately 60%, and moving fast toward being a fully vaccinated country, which Sri Lanka is well poised to become, will help minimize further economic impacts.

For economic revival, the government is focusing on stabilizing exchange and interest rates to attract foreign investors and fuel GDP growth. This, along with measures for improved sovereign ratings, is expected to bring back foreign participation to capital and debt markets.

The spillover effects from the expected recovery of the global economy would positively impact external demand, resurgence in tourism, inflows of worker remittances, foreign direct investments (FDIs) and reinstatement of country limits for lines of credit.

The government’s efforts toward strengthening the production economy will support domestic industries, and improve the overall productivity of the economy. While the export-oriented manufacturing sectors are expected to be strengthened with the establishment of dedicated industrial zones, the opening up of the Colombo Port City for foreign and local investment would bolster the country’s services sector in particular.
Accordingly, the real GDP is expected to grow by 5.2% in 2022 while the trade gap is estimated to recover up to -5.5% from the forecasted -6.2% by the end of 2021.

The easing of import controls in 2022 will help the revival of the MSME sector which is considered to be the backbone of the Islamic banking and finance industry in Sri Lanka. Such measures will help Islamic financial institutions to further penetrate the unbanked and the underbanked segments of society.

Realizing the value and importance, the regulators are promoting green/sustainable finance initiatives. The government’s drive toward renewable energy for power generation will provide more project financing opportunities for banks, which the Islamic banking and finance industry is ideally positioned to support, through Sukuk, for which the government is exploring suitable legislation to facilitate the same.

Plenty of emphasis is being given for the digitalization of financial services, driven by the regulators’ initiative to create a ‘cashless’ society in the future, and 2022 will see greater transformation and acceptance for digital services.

Conclusion
With the much-awaited post-COVID-19 economic resurgence, and the anticipated FDIs mainly targeting the Port City project, there would be ample opportunities for Islamic banking and financial institutions to act as key catalysts. Sukuk and syndication prospects are something to be on the lookout for, with due facilitation from the country’s regulatory front, in order to support public and private sector projects.

Having acknowledged the people-friendly benefits and the universal value proposition of the Islamic banking and finance model, especially how it helped to overcome pandemic-related challenges, customers have taken it upon themselves to advocate Islamic banking and finance to the larger community, which will help position Sri Lanka as an ideal hub to grow Islamic banking and finance in the South Asian region.

Mohamed Azmeer is CEO of Amana Bank. He can be contacted at [email protected].