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COUNTRY REPORT

Sri Lanka: Uncovering the Islamic Finance Framework

By Muath Mubarak
With the end of the civil war in the country that had plagued the economy for more than three decades, it is high time Sri Lankans began thinking about the development of the nation. Sri Lanka has to grow like other developed countries within a short time by exploiting untapped opportunities. The post-war period requires rapid development in all sectors of the economy, especially the banking and nancial sector. Unfortunately, the sector has seen lackluster growth due to the global nancial crisis. The crisis however has led experts and economists alike to consider an alternative nancial system. As one of the fastest growing industries in the world today, Islamic nance is growing at 20%-25% a year, according to analysts and rating agencies. It is forecasted that the industry will hold assets totaling US$4 trillion by 2012. In addition, seven of the top 10 conventional banks with an international presence have commenced Islamic banking. The following are the main barriers for the growth of Islamic nance in Sri Lanka (and most other emerging countries): Regulation Taxation Standardization Awareness Skill

Todays Challenges to regulators:

Regulatory/law: Existing banking regulations in most countries (including Sri Lanka) are based on the conventional banking model, meaning the need for separate consideration for Islamic banks and nancial institutions. Accounting, transparency and surveillance. An Islamic nancial system needs sound accounting procedures and standards. Western accounting procedures are inadequate because of the differing nature and treatment of nancial instruments. Well-dened procedures and standards are crucial for information disclosure, building investors condence, and surveillance. Shariah compliance. Emerging nancial markets are trending towards Islamic banking.

The Islamic nance framework

Islamic nance and Takaful are not unfamiliar to the Sri Lankan business community. The concept was introduced a decade ago, and several initiatives via seminars and workshops have also been undertaken by companies and organizations to create public awareness and educate the masses and ofcials concerned. The Banking Law of Sri Lanka was amended in 2005 to allow both commercial banks and specialized banks to operate on a Shariah compliant basis. But there is no specic law for Shariah compliant nancial transactions. For example, the denition of deposit in the law provides the same treatment for deposits in conventional banks and Islamic nancial institutions, which disadvantages these institutions in terms of taxes and statutory requirements. On the other hand there is an initiative by the Securities and Exchange Commission of Sri Lanka to enact a law on securitization to facilitate the issuance of asset-backed securities through the creation of special purpose vehicles (SPVs) and for the regulation and supervision of securitized transactions. One of the key principles of Islamic nance is that almost all the nancial transactions should be backed by real assets. The proposed law can lead to the promotion of Sukuk in Sri Lanka. According to ofcials, infrastructure development in the country can be nanced via Sukuk, with Middle East and other foreign investors possibly interested in participating.

There is an initiative by the Securities and Exchange Commission of Sri Lanka to enact a law on securitization to facilitate the issuance of assetbacked securities through the creation of special purpose vehicles and for the regulation and supervision of securitized transactions
Conclusion
The increasing acceptance of Islamic banking and nance in Sri Lanka is apparent. There are now eight institutions in the market and ve educational institutions offering Islamic nance courses as well as workshops to generate awareness among Sri Lankans. So, in order to nurture this industry in Sri Lanka, it is critical for us to rst understand the principles and advantages of Islamic nance. Muath Mubarak works for First Global Group, a Sri Lanka-based conglomerate of companies involved in the Islamic nancial industry. He can be contacted at muath.2009@gmail.com

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27th November 2009