Strategically located in an important crossroad of trade and commerce, Sri Lanka has been referred to as the pearl of the Indian Ocean, which also speaks about the rich natural resources, geographical and climatic diversity the island nation is blessed with, along with the ethno religious mix.
When it comes to Islamic finance, Sri Lanka is one of the Muslim minority countries that has a significant Islamic finance footprint. While Muslims make up 9.7% of the population which is approximately 2 million out of the total population of 20 million (Census, 2012), it is noteworthy to mention that individuals affiliated to other religions have become both proponents as well as subscribers to Islamic finance in Sri Lanka. This is evidenced by the those involved in lobbying regulatory changes and amendments, key personnel in associations and organizations advocating Islamic finance, employees holding strategic roles as well as at operational level and those who provide advisory on legal, accounting, operational etc and a significant composition of clientele. Given this backdrop it would be more than appropriate to mention that one of the first savings accounts to be opened at an Islamic finance institution in the early days of the industry was of a church belonging to one of the Christian denominations. Islamic finance was introduced in Sri Lanka in 1997 within the existing legal and other frameworks. The subsequent amendment made in 2005 to the Banking Act No 30 of 1988 essentially facilitated Murabahah and Musharakah modes of transactions, which propelled Islamic banking and finance in the country. However, this legislative enactment remains to date as the only such provision, even though it does not directly allude to operations of Islamic banking and is a case study scenario where Islamic banking could be operated within a secular financial legal framework.
|Table: Analysis of the current Islamic finance ecosystem in Sri Lanka|
|Finance and leasing companies||7|
|Capital market operators **||2||2|
|Islamic finance education providers||4|
|Microfinance companies||Several institutions|
|* A composite Takaful provider split its operations to General and Family due to regulatory requirements
** Includes asset management companies
*** Operating within the existing model
|(Source: Author’s own)|
Review of 2020
The beginning of 2020 witnessed a rebound of economic activities in Sri Lanka from the aftermath of the Easter Sunday terror attacks and political instability in 2019. This was doubled with the optimism of political stability with a general election scheduled toward the middle of the year. Islamic banking and finance were at a critical juncture during 2019 given negative social effects of the Easter Sunday terror attacks, where some of the Islamic banking and finance institutions were compelled to either subtly rebrand themselves, reduce their marketing and social presence, scale down their operations or operate in the side lines. However, 2020 saw the Islamic banking and finance industry of Sri Lanka, which was making its way back with a slow but strategized movement, face a new challenge brought by the onset of the COVID-19 pandemic. The Islamic banking and finance industry was not directly impacted due to the large concentration of business financing portfolios consisting of SMEs, emerging corporates and corporates, as opposed to retail or consumer financing – the industry has been resilient enough to weather these adverse effects.
This could be attributed to the strong risk management and prudential regulations compliance within the industry. Data on Islamic microfinance operations are not readily available to assess or comment on same. The timely intervention of the government and the Central Bank of Sri Lanka has helped businesses and consumers during this period, which in turn contributed to the smooth operations of Islamic banking and finance institutions. 2020 saw for the first time Islamic banking and finance institutions directly participating in a government- sponsored refinancing scheme ; the previous refinance schemes made available through international agencies or the government have been deemed to be Shariah non-compliant. It should be noted that Amana Bank, the only fully-fledged Islamic bank in Sri Lanka, was able to secure 10th place based on disbursement volumes out of the 27 commercial and specialized banks which subscribed to this central bank-sponsored Saubhagya COVID-19 Refinance Scheme. 2020 also saw the groundwork being set by a Takaful operator to issue a Sukuk facility, which upon successful completion, would be the first time a non-bank or financial institution issues Sukuk in Sri Lanka. Sri Lanka was included in the top 15 at 14th place out of 81 countries in the Global Islamic Economic Indicator for 2020. It is noted that the main contributor of Sri Lanka’s ranking is Islamic finance, which speaks volumes on the efforts and potential of the industry.
Preview of 2021
In November 2020, the government presented its budget for 2021 as part of its long-term strategy as opposed to the traditional year-on-year budget. This budget is designed as a development budget with an ambitious targeted economic growth of 5.5% for 2021. The government is to make legal provisions to provide tax pardons for entrepreneurs with a view of enabling infusion of much needed local and foreign funds. The budget also provides tax exemptions to the agriculture, livestock and fisheries sectors, REITs and dividends of foreign companies provided the funds are invested in Sri Lankan sovereign bonds or Sri Lankan stock market. The government also intends to maintain the budget deficit at 9% and manage the same from local and international currency-denominated debt at maturity. However, this will prove to be challenging given the global economic slowdown as well as downgrades in sovereign ratings. Despite this the government is on the stance that its foreign debt management strategy is to avoid a total rolling over of upcoming maturities. At this juncture the country is poised more than ever before to tap in to the sovereign Sukuk market which will not only provide the much-needed impetus for the national economy but also deepen the Islamic capital market while expanding the Islamic finance ecosystem.
Geo-strategically located, the pearl of the Indian Ocean is poised to be a regional hub of Islamic finance and rebuild its economy. Given the depth of its Islamic finance ecosystem, which has made these strides with minimal state sponsorship, Sri Lanka needs that little push of direct state involvement to realize the full potential of Islamic finance. In this regard it is high time to revisit and introduce regulations, legal enactments, taxation and accounting standards enabling Islamic finance to progress to the next level. As Shariah governance is key to conferring confidence in the overall industry, it is also prudent that a central Shariah supervisory board is formulated at this juncture.