ISLAMIC FINANCE IN SRI LANKA

Introduction
Sri Lanka is a democratic socialist republic which gained independence in 1948 from
colonial powers. The President is the head of state; wielding executive powers based
on the French model, and is elected for a term of six years. The national legislature is
the parliament, with 225 members elected for five years. Local government is
devolved to nine provincial councils elected once every four years.

Sri Lanka is an island in the Indian Ocean that has a population of about 19.7 million
and having a Muslim minority of about 8%. Majority Sinhala Buddhist and about
12% Tamil Hindus. Colombo is the Commercial hub and the capital is Sri
Jayawardenapura. This country is famous for its Tea and Gems, Rubber, Coconut,
Spices and garments being major exports. Colombo is the main port and Katunayake
International Airport is the only International Airport that is about 26 Km away from
Colombo.

The monetary unit in Sri Lanka is the rupee (LKR), which consists of 100 cents
(US$1 approx LKR 110). In addition to being the island’s monetary authority and the
sole bank of issue, Central Bank of Sri Lanka acts as financial adviser to the
government.

CURRENT SCENARIO
Sri Lanka is one of the few non-Islamic countries to have legislated for Islamic
banking. The revised Banking Act No 30 of 1988, as amended in 2005, allows both
commercial banks and specialized banks to operate on a Sharia’a compliant basis.

Presently MCB Bank, People’s Leasing, LOLC and the new entrant BOC are the
CBSL regulated institutions offering Islamic Financial services. There are other
market players those who are not regulated. The pioneers, Amana Investment has just
obtained the provisional licence and yet to be launched.

The market size is about LKR 100 Billion and only about 10% has been penetrated by
the existing players.
There had been isolated Islamic Financial operations limited to its locality in various
parts of Sri Lanka prior to 1997. In 1997, Amana Investments pioneered well
formulated Islamic Finance Operations.

INSTITUTIONS OFFERING ISLAMIC FINANCE SERVICES

Islamic Windows – Banks – Regulated by Central Bank of Sri Lanka (CBSL)

1. Muslim Commercial Bank – Islamic Unit -

2. Bank of Ceylon – Islamic Unit

Islamic Windows – Finance & Leasing Companies– Regulated by Central Bank of Sri
Lanka (CBSL)

1. Peoples Leasing Company – Islamic Unit.

2. LOLC – Islamic Unit

Islamic Investment Companies – (These institutions are presently not regulated)

1. Amana Investment Limited – The First well established Islamic Finance

operation was commenced in 1997 -
(Just received provisional Licence for opening of a Commercial Bank)
2. Ceylinco Profit Sharing commenced operations in 2002.
(Not functioning after failure of Parent Company and its subsidiary Golden
Key Credit Card Company)
3. First Baraka established in collaboration with Central Bank of Sudan (for
technical support) in 2007.
(Awaiting Finance Company Licence)
4. First Global Investments established in 2008.
(Awaiting Banking Licence)
5. Aluthgama Investment Fund – Aluthgama (ALIF)
(Operations diversified to Educational sector)
6. Islamic Services Society – Akurana – now incorporated as ISS Islamic
Financial Services Ltd
7. Crescent Islamic Financial Services Ltd – Mawanella

Islamic Micro Finance providers

1. Daim Investment Ltd – yet to commence operation (not regulated)

2. Muslim Aid Sri Lanka – (NGO) – (not regulated)
3. Serendib Micro Finance – (not regulated)

Takaful Insurance- regulated by Insurance Board of Sri Lanka (IBSL)

1. Amana Takaful Ltd – Islamic Insurance

2. Ceylinco Takaful Ltd – Islamic Insurance – Business suspended for by IBSL
effective 5th August 2009.
Securities and Capital Market

1. Amana Securities – Stock Brokering (regulated – SEC)

2. Amana Capital – Capital market
3. Amana Asset Management
4. Dow Jones Islamic Market Amana Sri Lanka Index – Tracks the performance
of Sri Lankan companies that comply with Sharia’a-based investment
principles.
5. NAMAL Amana Equity Fund. – The objective of the equity fund is to achieve
significant growth over the medium to long term by primarily investing in
equity securities that are Sharia’a compliant. NAMAL Unit Trust is the first
fund management company in Sri Lanka licensed to manage unit trusts.
Together with Amana Capital (a subsidiary of Amana Investments), it
launched this fund.

Islamic Finance Training Providers

1. First Global Knowledge Centre (Islamic Finance training provider –

Accredited agent for Securities & Investment Institute [SII] – London) and
organisers of Islamic Finance Seminars
2. Asian Institute of Management (Islamic Finance training provider)
3. Institute of Business Studies (Islamic Finance training provider – Accredited
agent for Institute of Islamic Banking & Insurance [IIBI] – London)
4. Ceylinco Business School (Islamic Finance training provider – Accredited
agent for International Centre for Education in Islamic Finance [INCEIF] –
Malaysia and AAOIFI – Bahrain) - (Not functioning)
5. Institute of Bankers of Sri Lanka – (Islamic Finance training provider)

Islamic Finance Publications

1. Pioneer Publications – publisher of ‘Islamic Finance Today’ magazine.

Other Service providers

1. Ram Ratings – Rating Agency / Organisers of Islamic Finance Seminars

2. KPMG – Tax consultants and Auditors – Facilitators of Islamic Finance
Industry Focus group
3. The Research Intelligence Unit – Research agency
4. First Global ‘Al-Rahn’ Pawning Centre – Sharia’a compliant Pawn Broking
5. UTO-Educonsult – Organisers of Islamic Finance Seminars
6. SAIF Capital – Consultants – Islamic Financial Services

Following the new legislation; some of the existing conventional banks are expected
to open Islamic banking windows with a view to preventing their Muslim customers
from migrating to Islamic banks. HNB, NTB, NDB, PANASIA are seriously
considering introducing Islamic Financial Services. Peoples Bank also has given the
green light to commence Islamic Finance Services.

Market size
 According to Mr. Kapila Jayawardena – MD-LOLC, that Sri Lanka is an unsaturated
market where Islamic Finance is concerned as only around 10 percent of the market
has been penetrated so far by the other players around. He noted that research has
revealed that the total Islamic asset base in the country is as much as Rs.100 billion
and that so far the existing Islamic Financial service providers have only managed to
tap about LKR. 10 billion. (Islamic Finance Today – April 2008)

According to a latest publication of Amana Investments, which is in operation for

over 10 years, their deposit base grew from LKR. 1.5 Billion as at March 2003 to
LKR. 5 Billion as at 31st August 2008. (Amana Share Issue proposal)

People’s Leasing Company (PLC) has a Lease portfolio of about LKR 900 Million.
First Global structured a Islamic Bond (Sukuk) in tranches of LKR 500 million each
and are awaiting Securities and Exchange Commission (SEC) approval.

Ceylinco Profit sharing has over 11000 depositors and deposits over LKR 1 billion.
First Barakah has deposits over LKR 300 Million. (market intelligence)

Amana Takaful has an asset base of over LKR 1 billion as at 31.12.2008. (Annual
report)

Regulatory Bodies
Following regulatory bodies govern the financial systems and institutions in Sri
Lanka.

Registrar of Companies of Sri Lanka

The Registrar of Companies is the regulatory body that incorporates the business
entity

Board of Investment of Sri Lanka

Any institution that would be bringing in Foreign Direct Investment is to register with
Board of Investment of Sri Lanka (BOI) in addition to registering with Registrar of
Companies.

Central Bank of Sri Lanka

Central Bank of Sri Lanka (hereinafter referred to as “the Central Bank”) was
established as the authority responsible for the administration, supervision and
regulation of the monetary, financial and payments system of Sri Lanka.

Securities and Exchange Commission of Sri Lanka

The Securities and Exchange Commission of Sri Lanka is the capital market regulator
in the country and monitors the Colombo Stock Exchange.

Insurance Board of Sri Lanka

The insurance industry is regulated and supervised in terms of the provisions of the
Regulation of Insurance Industry Act No. 43 of 2000 of Sri Lanka (hereinafter
referred to as the RII Act). The Insurance Board of Sri Lanka was established under
the RII Act.

Regulatory Matters
AMENDMENTS TO COMPANIES ACT

Under the current Banking Act any Banking business in Sri Lanka must be
incorporated as a company. The Registrar of Companies is the regulatory body that
incorporates the business entity.

The new Companies Act was enacted on 20th October 2006 and was signed by the
Speaker of Parliament in March 2007. This came into effect from 3rd May 2007. As
per the new Act, the constitutional document to be forwarded to the Company
Registrar among other things is Articles of Association. (The memorandum of
Association has been dispensed with the new amendment to the Act). The company
can adopt the default set of Articles given in first schedule to the Act with or without
modification or even exclude it. Although it is not mandatory, the object clause has to
be included in the Articles, in order to obtain a licence to operate a financial
institution.

The new amendment to the Act has strengthened the Banks, by removing the Doctrine
of Ultra Vires rule of our Company law. Act has also addressed following areas.

• A third party entering into contract

• No constructive notice section
• Major transaction has been defined
• Solvency Test
• Imposes statutory duties on Directors of a company

AMENDMENTS TO BANKING ACT

The current legislation governing Banking in Sri Lanka is the Banking Act No.30 of
1988 with its subsequent amendments. The recent amendment (Act No. 02 of 2005 )
that was passed on the 10th December 2005 is the 4th amendment to the Banking Act
that introduces some major changes to the law relating to Banks and their regulation.
Currently, Banks are classified as Licensed Commercial Banks and Licensed
Specialised Banks with Schedules known as Schedule II and Schedule IV detailing
the permissible forms of businesses that could be undertaken by such Banks.

With this amendment, Islamic Banking has been included to their lists of permissible
businesses under schedule II and IV. Hence both Licensed Commercial Banks (LCB)
and Licensed Specialised Banks (LSB) are permitted to offer Islamic Banking
products.
Deposit – a definition

The Banking Act No. 30 of 1988 as amended by Banking (Amendment) Act No. 2 of
2005 has given the definition of “deposit” as given below:

‘“Deposit” includes a sum of money accepted from any person as a business on terms
under which it will be repaid with or without interest or a premium, and either on
demand or at a future time or in circumstances agreed to by or on behalf of the person
making the payment and the person accepting it, provided that the persons accepting
the money is a person who in the usual course of business, lends money or makes
available the use or the benefit of the money so accepted to third parties and, also
includes any sum of money accepted as provided in paragraph (y) of Schedule II and
paragraph (nn) of Schedule IV;’

Paragraph (y) of Schedule II and paragraph (nn) of Schedule IV to the Banking

Act referred to in the definition describe Islamic banking products in the nature
of deposits.

Accordingly only certain categories of institutions are legally authorized to accept

deposits of money from the public. Licensed commercial banks, licensed specialized
banks and registered finance companies have been given authority by the Central
Bank of Sri Lanka to mobilize deposits from the public under the existing laws.

However, co-operative societies registered under the Co-operative Societies Law No.
5 of 1972 and building societies incorporated under the National Housing Act have
been exempted from the requirement to obtain a licence from or to register with, the
Central Bank for the purpose of taking deposits. Furthermore, any legitimate
nonprofit oriented organization can accept deposits but only from its members, and
that too, with the written permission of the Monetary Board of the Central Bank of Sri
Lanka.

Under these circumstances, the institutions that are offering

Islamic Financial Services must ensure that they are registered
with the regulators to avoid legal constrains and to safeguard the
Islamic Finance Indsutry in Sri Lanka.

http://azharseylan.wordpress.com/islamic-finance-in-sri-lanka/