Despite growing participation from Sri Lanka’s financial institutions since the introduction of legislation for Islamic finance, the financial and banking assets of the country’s Islamic finance industry account for just 0.5% of the total for the country. REBECCA SIMMONDS recounts the development of the sector as it seeks to unlock Sri Lanka’s Islamic finance potential.
Legal and regulatory
Islamic finance is regulated in Sri Lanka through a 2005 amendment of the country’s 1988 Banking Act No. 30 which allows both commercial and specialized banks to operate on a Shariah compliant basis. Whilst the banking laws have been amended in favor of Shariah compliant finance, the issue of taxation for Sukuk has yet to be addressed, with double taxation remaining an issue for the development of the country’s Islamic debt capital market.
Business environment
The Muslim population of Sri Lanka has been assessed as 10% of the country’s whole with an economic contribution to the country’s GDP as high as 15%. Despite Sri Lanka’s drop from 65 in 2013 to 73 out of 144 countries in the World Economic Forum Competitiveness Index for 2014/2015, the country’s president Mahinda Rajapaksa has indicated that finance could become a sixth ‘hub’ within the government’s development plan to leverage on the Chinese government’s revival of the old China Silk route and become an economic center for the region.
Banking and finance
Sri Lanka has a number of Islamic finance institutions offering Shariah compliant banking, leasing and Takaful options. Ten of these institutions are banks, offering products through Shariah compliant windows, such as the Muslim Commercial Bank (MCB Bank) which has an Islamic banking unit which has offered Shariah compliant banking in Sri Lanka since March 2006. Amana Bank, perhaps the country’s most widely promoted Islamic bank, was incorporated and licensed by the Central Bank of Sri Lanka in 2009 and Hatton National Bank (HNB) established its fully fledged Islamic banking unit HNB Al-Najah Islamic in 2012. Commercial Bank of Sri Lanka provides Islamic finance products through Islamic window Al Adalah Islamic Banking and earlier this year, Pakistani bank, Habib Bank commenced Islamic banking operations for the first time outside of Pakistan in Sri Lanka, offering trade facilities, working capital finance and treasury facilities.
Leasing and Takaful and investment are also an active part of Sri Lanka’s Islamic finance industry, with companies including Amana Investments (established in 1997), Lanka Orix, Amana Takaful and Richard Pieris Finance participating to grow the reach of the industry. However, despite engagement by the Islamic finance sector, uptake and expansion of the industry’s market share has been slow. Total Sri Lankan Islamic finance assets presently stand at LKR3.5 billion (US$26.73 million) compared to the country’s conventional financial and banking assets which stood at LKR7 trillion (US$ 53.46 billion) as at the 30th June 2014. According to industry experts, growth of the Islamic finance sector’s assets is occurring at a rate of 25% a year, but given the low starting point it will still take an extended period for the industry to make a notable impact.
In May this year Amana Capital, a subsidiary of Amana Investments and the country’s only fully Shariah compliant investment bank, was working on the issuance of Sri Lanka’s first public listed plantation debenture on behalf of People’s Bank, an issuance that was concluded successfully in June for Kotagala Plantations. In October, Amana Capital launched the Amana Candor Shariah Income Fund, a joint initiative between Amana Capital (as technical partner) and Candor Asset Management (See IFN Vol. 11 Issue 42). The Shariah compliant fund, one of the four in the country has been launched with the mandate to invest in Mudarabah securities issued by Sri Lankan financial institutions with an investment grade or higher. As with other areas of the sector, Shariah compliant unit fund management has struggled to find a solid foothold in Sri Lanka due to a lack of awareness and competition from the country’s conventional sector.
Challenges and opportunities
As with many rapidly developing countries, Sri Lanka’s SME sector represents a large opportunity for finance providers, as financing for SMEs in the country particularly on the part of small business owners within the Muslim community and women is scarce. The demand for Islamic finance in Sri Lanka is present – industry experts estimate the market potential for the industry to be LKR300 billion (US$ 2.29 billion) although currently the majority of this is being serviced by conventional finance.
Outlook
Despite the lack of traction in terms of market share, the Islamic finance sector in Sri Lanka is growing and is a bandwagon that even conventional banks are jumping on board giving weight to the industry’s potential for future growth. With a focus on education, outreach and expansion in sectors where Islamic finance finds a natural fit; leasing, SME and microfinancing, the potential of the country’s Shariah compliant financing industry could be discovered.