Sri Lanka: Reaping The Dividends of Peace

Although the Islamic finance industry in Sri Lanka is still at a preliminary stage, Roshan Madawela and Martha Mustafina are optimistic that it will grow at double digit rates over the medium to long-term.

The Sri Lankan economy is considered as one of the emerging economies in Asia with GDP growth exceeding 8% in 2011 and per capita incomes doubling from US$1,062 in 2004 to over US$2,800 in 2011. The positive economic outlook has created opportunities in varied sectors and has resulted in an influx of foreign direct investment to the country. Sri Lanka’s predominant services sector, which accounted for 59% of the GDP in 2009, was one of the key contributors to the economy as companies recorded strong financial performance in the recent financial year and the negative effects of the global recession subsided.

The history of Islamic finance in Sri Lanka can be traced to 1997 when Amana Investments was established. Much water has flowed under the bridge since then. The high watermark of the evolution of the industry came when Banking Act No. 30 of 1988 was amended in 2005 to permit licensed commercial banks and licensed specialised banks to offer selected Islamic financial instruments. Today a state bank and a two licensed commercial banks operate Islamic windows and the indications are that many banks are on the verge of venturing into the arena.

There are many other institutions including Islamic micro-financiers offering murabahah, mudarabah, ijarah, wakalah, musharakah, diminishing musharakah, takaful, etc. Whilst this augurs well for the development of the industry, the central bank has permitted the opening of a fully-fledged Islamic bank; creating a new chapter in the development of the Shariah compliant banking in the country.

Recently an Islamic fund was also launched facilitating investments in listed equities.

Islamic finance could play a key role in the development of infrastructure projects and the capital markets of the post civil war era of Sri Lanka. The blooming of the industry and the development of Sukuk market have the potential to attract foreign investors to finance projects such as roads, bridges,
ports, airports and others.

Sovereign sukuk is a means of attraction of funds alternative to conventional sovereign bonds. Sri Lanka in its drive for rapid development should grasp opportunities that emerge due to the transition of Islamic finance into the mainstream global finance.

Supply side overview

The total number of players in the market currently stands at 37 according to a Research Intelligence Unit (RIU)/KPMG 2011 study. Of these, 12 are in the banking and finance sector, 10 are in the consultancy and advisory sector, six are in the education sector and the remaining nine are providing miscellaneous services.

In the industry as a whole, the majority of players (64%) are operating as windows of conventional financial organisations while 36% operate as standalone players. Given that the relevant regulations for Islamic banks to operate independently were only introduced in 2010, seven out of the 12 banks currently operate as window service providers.

In keeping with the economic and demographic characteristics of the island, the largest number of branches is located in the capital Colombo with 31 outlets, accounting for almost 50% of the total branch offices. Moreover, Colombo hosts all the head offices of each and every institution without exception. Kandy, recognised as the second capital of the island, follows in second place with nine branches. The districts of Ampara and Batticloa located in the eastern province have four branch offices each. The east has the largest proportion of Muslims, currently estimated at around 38%.

The product that tops the list in terms of current financial value is murabahah followed by mudarabah, musharakah, ijarah and diminishing musharakah, according to the RIU/KPMG study.

The most popular product in terms of market prevalence is mudarabah, followed by murabahah, diminishing murabahah and ijarah. Despite the size of the market, there are seven education service providers and five Islamic finance software developers.

Demand side overview

The customer base has grown at a steady rate since the turn of the millennium and since 2005 we can note an increase in the rate of growth. This is attributable to people’s increasing awareness of Islamic finance as an alternative. It is also possible to observe that the rate of growth slowed down a little in 2008, probably due to the impact of the global financial crisis that also affected Sri Lanka’s financial sector to some extent.

The overwhelming feeling among the customers in Islamic finance is one of extreme satisfaction with nobody wanting to register any complaint on the service standards. When asked to compare with conventional finance, the customers again give an overwhelming ‘thumbs up’ to Islamic finance. Even with the very high service satisfaction, many customers have registered areas for further improvement and facilities that are currently lacking in this sector. Topping this list is the need for ATM cash withdrawals, followed by a need for greater diversity in account types. Cheque books, current accounts and share investment facilities follow next in people’s wish list for Islamic finance.

Considering that Islamic finance is the ‘new kid on the block’, and many people are still unaware of its presence in the market, the sources of information on Islamic finance is an important consideration for all players. In this regard, it is interesting to find that the vast majority of existing customers (64%) still rely on word of mouth as their main source. Direct messages in the form of printed material figure next (29%) and other medium for information communication like radio and TV have had little or no impact at all.

The levels of awareness over time have also gathered momentum as most existing customers started becoming aware of Islamic finance after 2005 and the rate at which awareness is growing appears to be increasing. This has positive implications on the potential for the market to continue at healthy growth rates in Sri Lanka as more and more people find out about Islamic finance as a viable alternative.

Labour market issues

According to the findings of the study, the total number employed directly in the sector was 860 workers as per 2011. Of these, the Takaful sector accounts for some 59.3%, followed by banking and finance which make up 32.7% of the total workforce. Education follows with a total workforce of 30.

The study only focused on the people who are directly employed in the sector however, and has therefore not included workers who may have overlapping roles between conventional and Islamic finance. For example, for a bank with an Islamic finance window, the study included those that are directly working in the Islamic finance unit and omitted many who have duties that cover all areas. Consequently, if we include those with overlapping roles who contribute to the sector indirectly, the total work force in the industry is likely to be closer to around 1500. Of the total 860 employees covered under survey, 78% were found to be full time workers while 22% were employed as part-timers.

Of the total workforce only 13.4% have a diploma or above in Islamic finance which is indicative of the overall shortage of qualified professionals in the industry, not only in Sri Lanka, but across the globe. It is also the case that qualifications levels between organisations as well as within the finance, insurance, advisory and education sector varies greatly and there is no clear pattern. The largest single pool of qualified workers was found in the banking sector.

A total of five education service providers are currently in the sector. Of these two have been operating for over 10 years, two have been in business since 2007 and one started in 2010. This growth is a good indication of steady demand for educational qualifications in Islamic finance.

Outlook and forecast

Some noteworthy developments in the sector in Sri Lanka include:

  • Sri Lanka’s leading Bank of Ceylon has announced that it will enter the alternative banking services sector under Shariah law.
  • Crescent i-Fund, the first-ever open-ended Shariah compliant fund investing primarily in Sri Lankan equities, was recently granted approval by the Securities and Exchange Commission. A joint initiative of Comtrust Asset Management and Adl Capital, the fund is expected to fill the vacuum created by the paucity of investment opportunities in the country’s stock market for the Shariah conscious investor.
  • Amana Takaful has announced the launch of Sri Lanka’s first Shariah compliant unit linked insurance plan.
  • Amana Global, a fully-owned subsidiary of Sri Lanka’s Amana Takaful, has signed a deal with Islamic Banking and Finance Institute of Malaysia to offer training in Islamic finance.
  • Amana Bank signed a ‘technical advisory service’ agreement with its strategic partner Bank Islam Malaysia, an Islamic financial service provider in Malaysia, at an event held in Kuala Lumpur recently.

While the current growth in Islamic finance is being driven by renewed awareness of faith-based concepts and the internationalisation of the financial markets, Sri Lanka still faces limitations investment avenues for new banks.

At the moment a commercial bank operating on Islamic finance principles has no income earning asset in which to invest money set aside for liquidity requirements. The money must be kept in cash, while competing commercial banks can invest in interest earning treasuries.


The Islamic finance industry in Sri Lanka is still at a preliminary stage compared to the global hubs. The products that are readily available in today’s marketplace are some of the most essential yet basic products. There is room for growth in the market by way of introduction of some of the more large-scale instruments like sukuk and Shariah compliant real estate investment trusts. Perhaps, the more timely need would be the use of sukuk which have played a pivotal role in financing large infrastructure projects, particularly for the state, in various countries.

However, given the overall favourable economic prospects that the island economy is currently facing and the tremendous untapped potential of its Islamic finance service industry, we expect this industry to grow at double digit rates over the medium to long-term.

This article first appeared in Islamic Finance News (27 June 2012, Volume 9, Issue 24, Page 19 – 21).  For more information, please visit­­­