Saudis Offered Islamic Investment in Sri Lanka

31 May 2008
RIYADH -- A leading Shariah-compliant financial services provider in Sri Lanka has called on Saudi corporate clients to invest in the Colombo Stock exchange for attractive dividends.

Mohammed Riyas, director of Sales and Business Development of Colombo-based Amana Securities Limited, said that he had come to offer unique services to Saudi clients to identify and trade in companies complying with Islamic Law based on the parameters prescribed by internationally accepted Shariah scholars.

"Our unique portfolio of services will include a white list of stocks that comply with Shariah parameters and provide access to local and foreign funds that require Shariah-complaint investment avenues. "

Riyas said that Amana Securities Limited has displayed a clear vision and leadership by launching the DJIM Amana Sri Lanka Index, a pioneering distinction that brings global exposure and a wider vista of investment opportunities.

"It is one of the 20 companies permitted to trade on the Colombo Stock Exchange," he said.

The Lankan bourse has 235 listed companies representing 20 business sectors. The market capitalization in March was 835.3 billion Sri Lankan rupees (SR28 billion) and the CSE recorded its highest daily turnover of 33.4 billion Sri Lankan rupees (SR1.151 billion) on April 1. It is one of the top performing markets in Asia, with an average annual index growth rate of 27 percent.

Share trading in Sri Lanka dates back to 1896 when the Colombo Brokers Association commenced the share trading in limited liability companies which were involved in opening plantations in Sri Lanka.

"The trading activity was automated with the installation of the Automated Trading System in 1997," he said, adding that the technology introduced by the bourse has significantly enhanced its competitiveness and has provided a more efficient and transparent market. The exchange is currently in the process of introducing a debt securities trading system for trading of fixed income securities.

Companies listed on the exchange have seen a large increase in foreign investment following the improvement in the security situation in the country.

"Besides reputed international company like Marks & Spencer, Maxis, the largest telecommunications company of Malaysia, and Bharti Airtel of India have invested a substantial volume in the communication fields," he noted.

Buoyed by improved investor confidence due to positive political developments and strong corporate results, the exchange has continued to achieve strong growth in 2007, as the ASPI passed the 3,000 mark for the first time in its history on February 13 reaching a record high for the seventh consecutive day.

Speaking about Sri Lanka, Riyas said that the island with a population of 24 million enjoys a 92 percent literacy rate, second to Japan among the ASEAN countries.

"Its per capita income is $1,617, next to Maldives in the region," he said, adding that his country has the highest number of CIMA qualified accountants in the world after Britain. He added that the island country is strategically located only 25kms from a major international shipping lane 14,000 ships sail through the channel and can be a launching pad for investments in the region.

Jasakallah: www.zawya.com
© Arab News 2008

Sudan promotes Islamic concept banking in Lanka

The Central Bank of Sudan has stepped in to provide technical assistance to ABC investments Ltd, to open out a new dimension in trade and finance under the Islamic concept for the benefit of all communities in the country.

The financial transactions of the newly formed Investment and Finance Company will be carried out under profit sharing basis regulated by rules and guide lines of the Islamic faith. The Sudan Central Bank has signed a Memorandum of Understanding with ABC Investments and AL Zubair Charity Foundation to assist the company to develop various innovative financial instruments and Islamic financing, where Sudan has a long history.

The ABC group will be able to set up business in Sudan in the future under this strategic partnership. Addressing a media conference in Colombo last week, Managing Director of the ABC Investments M.I.M Razeek said that the MOU will provide several benefits to Sri Lanka including training of staff, manuals and banking documentation in addition to funding arrangements for projects both in Sri Lanka and Sudan. He added that ABC Investments plans to introduce good practices of savings and investments within the country.

The company which provides Barakah Islamic financial services has devised strategies to increase the 300 million deposit mark before December while operating just in Colombo Razeek said, “They will set up branches in Kattankudy in the island's east and Kandy in the central hills by January”. ABC Investments maintains 1000 accounts in Colombo and hope to reach 10,000 within a year as it moves into the other regions. It will cater to the needs of clients in Matale and Katugastota areas from Kandy and by March open a unit in Puttalam.

Jasakallah: Sunday Times July 2007

Going Rural

Sri Lanka Islamic investment group to go rural

July 22, 2007 (LBO) - ABC Investments, a new Sri Lankan Islamic investment group, plans to expand their business with branches outside the capital Colombo, especially in areas with large concentrations of Muslim people.

The firm which provides Barakah Islamic financial services, looks to cross the 300 million deposit mark before December while operating only in Colombo.

They plan to move into Kattankudy in the island's east and Kandy in the central hills by January.

At the moment they manage 1000 accounts in Colombo and hope to reach 10,000 within a year as they move into the other regions.

“We will manage both Matale and Katugastota areas from Kandy and by March open a unit in Puttalam (in the north-west) as well,” says Managing Director of the ABC Investments Mohammed Razeek.

These are areas with significant concentrations of Muslim people who make up the island's third largest ethnic group after Sinhalese and Tamils.

The Islamic finance firm also said that they want to become a full fledged Islamic bank as soon as regulators allow it.

“The Central Bank is studying the Islamic banking concepts at the moment and once the provisions are altered in the banking act we are ready to become a fully fledged bank,” Razeek said.

Sri Lanka has allowed Islamic banking to be carried out in licensed commercial banks as a regulated and legal activity.

The firm says that senior Muslim ministers in the government are backing moves to allow Islamic banks in the country.

The firm also says that they have a strong funding backing from different countries and has already signed a Memorandum of Understanding with the Central Bank of Sudan to get experts to work with the firm.

These professionals will help the firm in their takaful insurance sector.

“We will be working closely with Sudan and we will also look at Bahrain and Malaysia for the funding in takaful insurance,” Razeek said.

The firm hopes to get funds from Al Subair Charity foundation and is looking to invest 100 million rupees as they plan to start off with general insurance.

ABC Investments also plans to provide apartments to middle and lower class sectors as part of their real estate programme.

The investment group has already purchased 150 perches in Piliyandala, near Colombo, where they plan to start their project for middle class housing.

“We will not go into providing luxury apartments as a lot of companies already have done that.”

ABC Investments is one of the recent investment groups looking to promote the Islamic financing concept in Sri Lanka.

First Global Group, another investment company, recently concluded a seminar ‘Know It All’ to educate the business community on Islamic banking.

Jasakallah:

ABC Insurance Company Ltd

ABC Insurance Company Ltd
	Tel	011 230 3560
	Fax	011 230 3566
	E-Mail	marketing@abcinsurance.lk
Address:	21 Navam Mawatha Colombo 2

Amana Takaful Ltd

Amana Takaful Ltd http://www.takaful.lk
	Tel	011 259 7430
	Fax	011 259 7429
	E-Mail	info@takaful.lk
Address:	98 Baudhaloka Mw Colombo 4

Benefits of Islamic banking

Islamic banking and the finance industry is growing at an annual rate of 20%. Many international as well as local institutions have stepped into this multi-billion dollar booming industry by establishing its Islamic wings and units. International giant banks such as HSBC (HSBC Amanah), Citi Bank (Citi Islamic) and Standard Chartered have already established their Islamic units and functioning in the Middle East region.

In Sri Lanka, despite the Muslim population being just 8% of the total population, a considerable growth is reported in the past few years with the establishment of Amana, Ceylinco Profit Sharing, First Global and a new comer ABC Barakah. Recently it is reported that the largest state owned commercial bank, Bank of Ceylon intends to commence its Islamic banking unit in early 2008. All these new entries imply that this alternative banking system has drawn the attention of Muslims as well as non-Muslims due to its unique developmental characteristics.

The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing. In profit sharing of a financed project, the financier and the beneficiary share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur. The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project.

In contrast with conventional finance methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest; instead the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub-segmented under profitability.

One of the unique and salient characteristics of Islamic banks is that the integration of ethical and moral values with its banking operation. The ethical and moral consideration of Islamic banks cannot be detached and their behavior should be consistent with the moral and ethical standards laid down by the Islamic Shari’ah.

Unlike the conventional banks, the financing of Islamic banks are restricted to useful goods and services and refrain from financing alcoholic beverages and tobacco or morally unacceptable services such as casinos and pornography, irrespective of whether or not such goods and services are legal or not in a given country.

In contrast with conventional banks, Islamic banks do not consider only the credit worthiness and interest rate as standards; instead they must apply Islamic moral/ethical criteria in their provision of financing. This adds another merit for Islamic banks since there is a benefiticial impact on the productivity in the economy as it reduces the social and economic cost of such harmful products and activities.

Another important characteristic which forms the basis for the development of Islamic banks is the relationship with depositors. They deal with their customers on investment grounds rather than a pre-determined fixed interest rate. They invest the money of their depositors on high profitable projects after going through a strategic analysis in order to give a substantial return to their depositors.

Thus in Islamic banking industry, each bank will attempt to out-perform other banks if it wants to attract funds from investors. And the ultimate result is that a high return on investments for the investors, which is unlikely in a conventional bank where it deals with their depositors on a pre-determined fixed interest rate.

Furthermore Islamic banks eliminate the barrier between those who save and those who invest, and bring them closer to the real market. The nature of the financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony with real market and developmental changes in it.

It is important to highlight some of the challenges faced by the Sri Lankan Islamic banks. Although there are many, the most important challenges are the lack of Islamic banking professionals and the lack of Shari’ah scholars who have specialized in Islamic economics. Further the Shari’ah board should have a fair influence on the bank’s operational and strategic planning. For this process to be successful, the Shari’ah boards of our Islamic banks should absorb Islamic scholars based on their technical expertise rather than their popularity.

By K.H.Azam Ahamed
Sunday Times January 2008

Ceylinco Profit Shairing Investments Corporation Ltd.

The popularity of the profit sharing concept is on the increase and as a responsible corporate citizen we had an obligation to initiate this concept nation wide for the betterment of the stability of the economy. This led to the incorporation of the Company in May 2002.

	Tel +94-11-5512626 +94-11-5512627
	Fax +94-11-5512629 +94-11-2506729
	Email ceyislamic@eureka.lk
	Address No: 01, Melbourne Avenue, Colombo 04.

Interest-free Banking in Sri Lanka

Background

Banks in any developing nation are essential components of the growth mechanism,facilitating the flow of funds across and within borders. Commercial banking in Sri Lanka was made into a stable institution, with commonly understood practices, by the British during their time of partial then full occupation of the island. The National Savings Bank is the oldest of its kind and inheritor of a very old tradition of savings dating back to 1832. Governor Wilmot Horton, who also introduced rupees and cents to the country in place of British currency has been credited with its inception. In 1885 the post office savings bank as established. The National Savings movement was instituted in 1942 during World War II followed by the savings certificate section of the postal department. Currently more the 30 banks, some owned and run by private individuals, operate in Sri Lanka under regulation by the Central Bank.

Non-interest financing has traditionally been restricted to the informal sector, with transactions taking place within the Islamic communities whilst formal banking practices have remained un-Islamic throughout the post-independence period. As a minority group, the majority of Sri Lankan Muslims are forced to partake in the formal banking system which operates by flexing different forms of interest based services.

The arena

The first interest free bank to be formed on the island was the Amana Investment limited, a sister company of its Malaysian kindred. Since being formed in 1997 as a small investment company it has expanded healthily, meeting a pent-up demand for Sharia compliant financial products, and is now a middle scale institution.

Its mission is to ‘propagate the concept of the viable alternative to modern day interest based banking in the form of a banking system which is Shariah compliant’. Presently it provides services equal to the conventional banks and investment companies. The investment firm has two branches in the capital Colombo and several more scattered throughout the country.

Until recently, the institution had no competition from other Islamic Finance Institutions. However, the formal financial sector is now at a critical juncture where its cannot afford to ignore the demand for Islamic Banking. This was materialized most recently when one of the islands top insurance firms, Ceylinco Insurance, set up Ceylinco Islamic Investment Corporation (CIIC). Entering the market in 2003 it is now competing for a share of the Islamic customer base.

CIIC Ltd says it will operate as a commercial financing institution functioning on the basis of Islamic principles under the ‘Shariah’ concept and will operate purely on profit sharing basis providing fund management, financial facilities and services to all people with viability and capability to sustain it self and grow in the process. CIIC currently has three branches.

Financial products

Foremost amongst operations will be the functioning of Murabaha. Under this concept the asset or goods are purchased by Ceylinco Islamic {which should own the asset/ goods even for a short time} and sell to the client at cost plus a negotiated profit. The sale may also be on a deferred payment basis. CIIC would engage in ‘buying and selling’ of assets (goods as allowed under shariah) including land & buildings. Operations are expected to expand and cover trade finance, imports and exports, an area that is already handled by Amana Investments.

With regard to Mudarabah, an investment account where one party is the investor (rabbulmal) and the other fund manager (mudarib), the former will agree to provide funds and CIIC (the fund manager), the expertise. Similar services are available from the Amana organization.

Islamic leasing known as Ijara is very similar to the western concept of an opening leasing. When the asset is purchased it will be under the ownership of CIIC but in the possession of the lessee. The rent will be fixed after surveying the market. At the end of the lease period the asset will be offered for sale at market value to the lessee. Under this concept both CIIC and Amana extend leasing facilities towards vehicle, house hold items, office equipment, manufacturing, trading & service industries, and consumer items.

Marketing Strategies

Amana Investment Ltd., does not have a marketing strategy, but the marketing division's functions are focused on maintaining a high standard of customer services. Its doors are open at any time, even after normal operation hours a customer can walk into the company and is able to obtain information. Marketing takes place in and ad hoc manner and there is no rigid strategy plan in place. Each branch does its own marketing and the business development manager is responsible for implementing the decisions.

Likewise, CIIC also operates sans a marketing strategy. As it is in its infant stage it does not have a marketing division. Assistant managers take the responsibility for the marketing function. According to the manager of Amana Investment Ltd., this flavor comes from the top-level directors and flows to the bottom level employees. Customer satisfaction is highly valued. Furthermore, manager of Amana Investment stressed emphasis on the internal customer concept. They have been conducting training programme to enhance the relationship between employees (internal customer) and break traditional boundaries in order to provide value added services to end (external) customers. Amana obtains services from professionals in order to develop a marketing culture within their organization. They obtain training from professional bodies such as the British Council in Sri Lanka.


Channels of distribution in services perform to extend beyond the sale and services function to cover liaisons with advertising and public relation agencies (eg. Trustee Board of Mosque). Gathering of this information is necessary for planning and marketing activities. Product development at Amana is the manager’s responsibility. Similarly, CIIC branch official’s liaise with trustees of Mosques to acquire fund and investment opportunities. Nevertheless, the most important distribution channel for both institutions is a branch.

Both firms have located their branches where the Muslims population density is high. Interest free banking in Sri Lanka faces a considerable trouble in locating their branches due to the fact that the Muslims community within the country live in a highly scattered way. Even the non-Muslim customers can be target and the data shows a growing interest in ethical investments amongst the wider population.

Outlook

When considering the future of the two firms in Sri Lanka we can expect fierce competition for acquiring funds for interest free investments both between each other and from new entrants. Already the signs are positive. June 1999 witnessed the commencement of operations of Amana Takaful, an alternative insurance system that is Sharia complaint. Operating with strategic alliances with some large players like Takaful Malaysia and Asean Retakaful International Labuan Limited, the organization has also enjoyed strong growth, be it form a small base. Whilst not in direct competition with CIIC or Amana, it has an authorized share capital of over Rs 1 billion ($10.5 million) and a paid-up capital of Rs 75 million. Takaful financial products include commercial and private fire protection, home insurance, accident cover, motor insurance, marine cargo insurance, family protection plans.

Intelligence reports reveal that ‘ the Sri Lanka market is gathering momentum towards the 'Islamic Concept' of financing and under the new Banking Act which is in the final stages in the parliament, all commercial banks and the designated banks operating in Sri Lanka would be permitted to have a 'window' for operation under the Islamic concept.

The legislation will legalize the operations of Islamic Banking in Sri Lanka and would enable institutions to meet fully the demand for Sharia compliant financial products. Expected to be passed shortly, it will provide opportunities to new entrants, and strengthen the hand of exiting players.

By Shuhada

Al-Baraka Bank and Takaful Pakistan sign MoU for Shariah complaint insurance services

Al Barka Islamic Bank and Takaful Pakistan Limited signed a Memorandum of Understanding (MoU) here on Friday to provide all kinds of Shariah complaint insurance services or to the Al- Barka Islamic Bank and its consumers..

The Chief Executive Officer of Takaful Pakistan Limited Jamil Akhter and Country Head Al Barka Islamic Bank Mr Shafqat Ahmed singed the documents on behalf of their respective organizations.

The MoU is considered as an important step for the financial sector to promote Islamic banking and industries, said Takaful Pakistan Limited CEO Jamil Akhtar addressing the audiences. He said that Takaful Pakistan Limited would play an important roll in growth of Islamic banking and economic sector. Besides operating in Muslim countries, there are more than 108 Takaful (Islamic Insurance) companies operating successfully in the non-Muslim countries such as USA, England, India, Srilanka, and Japan, Mr. Akhtar added.

New UAE Islamic insurance (takaful) company to capitalise on 30 per cent annual growth

Mithaq Lil-Takful, a new Islamic insurance company has been launched in Abu Dhabi with a paid up capital of Dh150 million to capitalise on business growing by 30 per cent annually.

The Shariah-compliant company has got the approval of the Abu Dhabi Executive Council (ADEC) to start its operations in the country.

“The ADEC has given its approval for the establishment of the Abu Dhabi-based Islamic insurance company with an initial capital of Dh150 million. The company’s 45 per cent shares have been subscribed by the founding members, well-known businessmen, while the remaining will be floated to through an IPO,” said Abdullah Saeed Al Qubaisi, chairman of the founding committee of Mithaq Liability Insurance Company.

Al Qubaisi said: “Getting the approval of the Abu Dhabi Executive Council after similar approval from the Emirates Securities and Commodities Authority is another very important step in the incorporation process of the company, which will be followed by an IPO.

This development is happening at a time when the UAE is witnessing a very rapid economic growth which gave birth to a sharp growth of the insurance market, particularly Shariah-compliant liability insurance products. This has created the need for more new liability insurance companies to meet the growing demand for this type of insurance product.

He pointed out that the UAE insurance market is witnessing a rapid growth rate currently at about 30 per cent per annum, while the annual premiums of insurance firms in the UAE is estimated at about Dh480 million, according to the feasibility study.

He said: “Mithaq” will be offering a comprehensive, high quality and Shariah-compliant insurance services. It will provide a low-risk investment opportunity and would be supervised by a committee of competent Islamic scholars of high reputation to strictly follow the principles of Islamic finance. Mithaq Liability Insurance Company will offer its IPO in early 2008.

World’s largest re-takaful firm set up

Dubai Banking Group (DBG) will join hands with Malaysia’s investment arm Khazanah Nasional and Asian Capital Reinsurance (ACR) to create the world’s largest re-takaful (Islamic reinsurance) company with a total capital of $300 million (Dh1.1bn).

Dubai Banking Group and Khazanah will each hold 40 per cent stake, while ACR will own the remaining 20 per cent in the new company, which is called ACR ReTakaful Holdings, said a statement by Khazanah.

Khazanah owns 32 per cent of ACR and accordingly it will be the largest effective shareholder in ACR ReTakaful. The new firms will have two operating companies to be based in Kuala Lumpur and the Middle East.

Minister for Cabinet Affairs and Chairman of Dubai Holding Mohammed Al Gergawi signed the deal in Dubai yesterday with Khazanah’s Managing Director Dato’ Azman Mokhtar.

Azman said the establishment of a re-takaful operator is the latest in a series of initiatives undertaken by Khazanah to support the development of Islamic financial services in which Malaysia has been at the forefront.

“We believe ACR ReTakaful is poised to become a major player in the global re-takaful business, not least due to the extensive pan-Asian business networks of Khazanah and DBG, as well as the expertise provided by ACR,” he said.

Dubai Banking Group was formed on Tuesday through a consolidation of Dubai Islamic Investment Group and Dubai Bank with combined assets of more than $10bn.

The group operates as a global Shariah-compliant investment company, focusing on investing in Shariah-compliant assets in the Islamic sector, which is expected to continue to grow at a very high rate. Dubai Banking Group has investments in Islamic financial institutions in the UAE, including Dubai Bank, and in Kuwaiti-based Al Fajer Re-Takaful, as well as Malaysia’s Bank Islam.

Emirates Business contacted Dubai Banking Group officials, but no comment was available.

However, recent studies showed a need for re-takaful companies to fill the gap in the insurance sector, especially in the Islamic world. Statistics showed the current takaful industry reached around $2.6bn, increasing by 20 per cent annually.

The takaful and re-takaful sectors continued to show rapid growth momentum, and is being recognised as one of the major components of the overall Islamic financial system, indicating high growth potential in years to come due to the present low rate of Islamic insurance market penetration.

There are an increasing number of takaful companies around the world trying to benefit from the booming industry. There are more than 110 takaful companies around the world, including 23 companies in the GCC. The re-takaful industry is still in its early stages, especially in the Middle East region.

Experts believe the ongoing infrastructure developments and trade activities in the Gulf will lead to high demand for re-takaful services.

Experts said the dramatic growth of the global sukuk market could potentially become a key supporting factor for strong growth of re-takaful industry. Currently, the global sukuk market, denominated in international currencies, is estimated to have exceeded $80bn.

Although the size of the market is modest by global standards, the sukuk market is experiencing remarkable growth, increasing at an average rate of growth of 40 per cent per annum. Issuance of sukuk with longer tenure will match investment and risk management needs of re-takaful industry with long-term liability. This, in particular, will greatly spur the growth potential of investment-linked products.

George Oommen, Executive Director of Insurance at Dubai International Financial Centre, expects the total takaful market will surge to $7.5bn by 2015. He said the takaful and re-takaful market has started gathering momentum and looks set to continue as more and more Islamic finance instruments become available.

IIFM developing standards for Commodity Murabaha

An Islamic financial standards body yesterday said it had created standard documentation for one of the booming industry’s most common transactions, which it hopes will make such deals quicker and cheaper. Lack of standardised documentation and practices has been repeatedly highlighted by the Islamic finance industry as one of the key constraints on the rapidly growing sector.

Islamic law is open to interpretation, which leads to differences in banking practices depending on the financial institution’s advisors.

The Bahrain-based International Islamic Financial Market (IIFM) hopes its Master Agreement for Treasury Placement, which is in the final stages of gaining approval by Islamic scholars, will become a standard document.

“Each bank takes its own different decisions. What we are trying to do is put together a document which is a benchmark document that the industry can use,” IIFM chief executive Ijlal Alvi told a conference on the future of Islamic finance.

Assets invested according to Islamic guidelines have been growing at roughly 20% a year worldwide, reaching $900bn in 2007, and are set to $2tn by 2010, accountants Ernst & Young estimated.

By far the most common Islamic financial transaction is commodity murabaha, which involves a bank buying a commodity for a client, and the client paying the bank back the cost of the commodity plus a bank charge or “profit rate” at a later date.

The contract helps banks manage liquidity, and can be used by the client to secure cash by selling the commodity on again, effectively buying money from the bank for the cost of the profit rate.

Islam bans interest, and stipulates that deals must be based on tangible assets – money cannot be made from money alone.

Alvi and other bankers at the conference said the response to the standard document had been positive, and expected widespread acceptance. However, the document is not mandatory as the IIFM is not a regulator with punitive powers.

Commodity murabaha deals have come under criticism in recent years on fears that it is just a paper trail to circumvent Islamic law, with no real prospect of a physical commodity changing hands.

Jasakkalh: islamicfinancenews.wordpress.com/category/islamic-finance/products/murabaha/

Sri Lanka leasing giant to sell Islamic securities (Sukuk)

Sri Lanka’s Peoples’ Leasing Company (PLC), the island’s top vehicle financier, plans to raise more than 500 million rupees through Shariah compliant asset-backed securities, officials said.

“There is tremendous potential for this type of product,” says People’s Leasing chief D P Kumarage. “We have been involved in Shariah compliant products since 1995.”

The issue called ‘Sukuk’ will be structured with the help of Islamic finance specialist First Global Securities and Investec capital. In the first tranche the firms are hoping to raise between 250 to 500 million rupees.

“The meaning of ‘Sukuk’ is that it is a Shariah compliant bond or an Islamic bond, which is issued in a securitized basis,” Muhammed Thowfeek, managing director of First Global Group said.

“The Sukuk is structured in such a manner where there is an underlying asset. The return for the investor comes in from the lease rental which comes in from the asset base.”

People’s Leasing says it has already built up a portfolio of around one billion rupees of Shariah compliant assets which could be securitized.

The Colombia branch of the Deutsche Bank has been appointed as the trustee to manage the securities issue.

In recent years the global Sukuk market has grown and Thowfeek says a surge is expected in 2008 as Shariah compliant banks seek capital to match the assets.

In the 2007 third quarter alone, around 77.3 billion dollars of Sukuk issues had taken place which was double the amount compared to the same period of 2006.

A recent estimate by rating agency Standard and Poors said the demand for Islamic finance would increase to four trillion dollars in the next five years.

Thowfeek says Sri Lanka could use the process to raise funds for large infrastructure projects.

“There is a lot of liquidity in the Middle East,” he says. “Oil prices are now 100 dollars so there are opportunities to raise funds with Shariah compliant products.”

First Global says even ’sovereign Sukuks’ could be issued.

First Global says the market remains untapped mainly due to the lack of awareness and attitude that Islamic finance is confined to Muslim or Islamic countries.

Jasakkallah: islamicfinancenews.wordpress.com/category/islamic-finance/around-the-world/sri-lanka/

How Islamic banks are different from conventional ones

By Sohail Zubairi, Senior Vice President and Head of Sharia Coordination Dept, Dubai Islamic Bank.

The differences between Islamic and conventional banks have become all the more important since an increasing number of local and foreign banks in the region have started their own separate Islamic institutions or are testing the market through "Islamic windows". Still others are looking at the idea of allying with players that are already established in the field.

While various countries and locales try to outdo each other and play greater roles in the development of Islamic banking, it was in Dubai that Islamic banking came to life in the true sense of the term. The concept, crystallized in Dubai and made concrete on a small scale in 1975, has since taken the world by storm in less than 30 years. I feel we are witnessing a silent revolution across the globe in the world of finance.

What makes an Islamic bank different from a conventional one? How real is the divide? Why should one choose an Islamic bank over a conventional bank? How do Islamic banks manage to provide higher returns to their customers, compared with conventional banks? These and similar questions remain unanswered in the minds of many observers.

Let us start with a discussion about how an Islamic bank treats the deposits it receives from its customers, be they from an institution or individual, compared to the way a conventional bank treats deposits. A conventional bank borrows funds from its depositors at a predetermined rate of interest, and lends the same to its customers, again at a pre-fixed rate. The interest rate paid by the bank to depositors is considerably lower than the interest rate it charges to its borrowers. This difference becomes the bank's profit.

Furthermore, while the conventional bank holds the sole authority to raise the interest rate on the funds lent by it to the borrowers at short or no notice, the depositors who lend their money to the bank are deprived of such discretion. They receive the rate fixed by the bank while accepting the deposit for an agreed period.

When it comes to Islamic banks, the first and foremost difference is that the Islamic banks do not borrow funds from the customers (depositors). Neither do they lend the funds to entrepreneurs.

An Islamic bank accepts funds from individuals and institutions in the capacity of a fund manager, under a fund management contract. The provider of the funds is called the Rab Al Mal, the Islamic bank is called the Mudareb and the transaction is referred to as a Mudaraba.

An Islamic bank receives funds from the customers through their current accounts, investment saving accounts and investment deposit accounts. The current account funds do not attract any return, and hence are excluded from the Mudaraba. The Islamic bank guarantees the safe return of these funds.
It is important to note that Sharia does not allow combining the guarantee with return. This is the reason that the Islamic banks are allowed to guarantee the current account funds since they do not provide any return on them. Furthermore, since the holders of investment savings account and the investment deposit accounts (fixed deposits) are paid return on their funds, the Islamic bank is not allowed to guarantee these funds.

The deposits received by an Islamic bank in investment savings and investment deposits accounts are part of the Mudaraba, and therefore receive a proportionate share of profit. These funds are put into a common pool that the bank draws on for its day-to-day fund deployments.

Withdrawals from the investment saving accounts are restricted to two times a month, and the lowest balance during the month is considered part of the common pool. The investment deposit accounts are placed for different fixed periods such as one, three, six, nine and twelve months and beyond.
How is a customer's deposit channeled through an Islamic bank's system en-route to deployment and the subsequent retrieval? What happens in a situation where an Islamic bank may incur a loss in deploying money as a Mudareb (fund manager) on behalf of the Rab Al Mal (fund providers)?

To shed light on these questions, we need to consider the Mudaraba concept in its historical context. As we already know, a Mudaraba is a marriage of convenience and provides benefits for both parties, i.e. the fund provider and the fund manager. The fund provider may not have the time or the expertise to efficiently utilise his capital and earn profits.

Similarly, an entrepreneur may have potentially profitable ideas and skills, but lack the needed capital. Mudaraba allows the fund provider to hand over funds to the fund manager under an arrangement which safeguards the interests of both parties and, at the same time, provide an adequate and Halal (Sharia-compliant) return.

The residents of Makkah had practiced Mudaraba even before the advent of Islam, due to their location at the crossroads of ancient trade caravan routes. Credible Mudarebs carried goods and/or money for investors and had to be accountable to them.
When the caravan returned, the profit and loss account was prepared, allowing the Mudareb to claim his share of profit and then return the original capital, along with the profit, to the investor be it in cash or kind. In ancient Makkah, almost every investor knew every Mudareb. Credibility in the community was key for anyone hoping to conduct Mudaraba transactions.

Islamic era

In the Islamic era, the Mudaraba was fine-tuned to eliminate certain elements which were not compliant with Islamic principles. These included making the Mudareb liable for any financial losses, even in the absence of misconduct. This meant Mudarebs became liable for losses due to theft or robbery while goods or capital were in transit.

Mudarebs also became liable to pay interest on the capital invested if they failed to produce the returns desired by the original fund provider. In today's world, Islamic banks have found ways in a credible manner fulfill the roles of Mudareb and investor at the same time.
Islamic banks are ideally positioned to aggregate capital from small and large depositors alike, while researching and discovering lucrative investment opportunities where this capital can be profitability deployed.

The following adaptations allow an Islamic bank to practice a Mudaraba role today, while respecting Sharia:

a) There are many investors and scores of entrepreneurs, compared to the one-to-one equation prevailing in olden days;
b) The bank acts as an intermediary, enjoying investors' confidence and receiving their funds a concept which did not exist before;
c) The intermediary acts as a Mudareb (agent) with a large number of Rab Al Mals (investors);
d) The projects/commercial transactions proposed by the entrepreneurs are financed by the intermediary rather by than the investors directly;
e) Investors and entrepreneurs do not have a direct relationship and therefore have no rights or obligation towards one another;
f) While investors deal with the bank purely on a Mudaraba basis, the bank is free to invest funds via any financing or investment option, such as Murabaha, Musharaka, Mudaraba, Istisna, Salam, Ijara, Sukuk, etc (see glossary);
g) As it is an unrestricted Mudaraba, there is no specified period or limit to the number of investment channels / projects for the bank, and it is an on-going investment process.

Readers will notice how, in the triangular association between the investor, intermediary and entrepreneur, the investor remains a passive participant, as in the olden times. Investors are not permitted to interfere in the Mudaraba's transactions, and wait to share the profit or bear the loss (that is, if the loss is not caused by the negligence of the Mudareb).

The Islamic bank has come to play the roles of a Mudareb and a Rab Al Mal at the same time.

There are two questions we can now examine: how a customer's funds are channelled through an Islamic bank, and how a loss is handled
When an investor hands over funds (i.e., makes a deposit) to the Islamic bank, the bank enters into a Mudaraba agreement with him.

The agreement appoints the bank as trustee (or agent) to manage the investor's funds. This arrangement allows the bank to place the investor's funds into a common pool.

The common pool may or may not include some of the bank's own funds, such as paid up capital, reserves and provisions and retained earnings besides current account funds. Both practices are acceptable under Sharia, albeit with a different treatment to the two types of funds.

While the bank bears responsibility for the investment for its own funds through the common pool, the depositors too carry the risks on their investment as owners of the funds. The bank does not bear the investment risk for depositors neither the depositors bear the investment risk for the bank but jointly they bear the risk of the performance of the common pool prorate.

A conventional bank borrows funds from depositors, and hence "owns" such borrowed funds. This means the conventional bank bears all the risk when it lends these funds to a third party. Islamic banks do not "borrow" funds from depositors and therefore do not assume "ownership" of these funds.

The banks' responsibility to their depositors instead follows from the fact the banks have merely assumed the role of a trustee or agent and "handle" the depositors' funds, thus having fiduciary capacity and the responsibility related to such capacity.

Elaborating this point further, it is evident that in a purchase contract, the title to the subject matter of the contract gets passed to the purchaser who then assumes all ownership risks, including loss of or damage to the purchased object.

The conventional banks, upon entering into a deposit contracts with its customers, effectively "purchase" the funds from the depositors and therefore acquire "title" to those funds which then automatically exposes them to the ownership risks connected to those funds.

As such when they lend the same funds to their borrowers, it is at their own sole risk and responsibility and not of depositors' who "sold" their funds to the bank and therefore have passed the title to those funds to the bank.

The deposit contract is deferred one, whereby the purchaser i.e. the bank settles the purchase price upon completion of the deferred period i.e. the deposit period when it pays the depositor the purchase price, which is comprised of the principle amount of the deposit plus the interest.

The scope of Islamic bank's agency is to manage deposits by investing them within the Sharia parameters. The agent is free to manage the funds without day-to-day interference by the depositors. From the overall profit generated by the bank's investment activities through the common pool, it shares a pre-agreed ratio of such profit. The rest of the profit, usually a greater chunk, is distributed among depositors.

If there is no profit, the agent is entitled to nothing. If there is a loss, it will be borne by the depositors, unless the loss was caused by the agent's breach of trust, default or negligence. All of this is well documented under the Mudaraba agreement signed with the Islamic bank by a depositor at the time of opening the deposit account.

Once the Islamic bank receives funds from a customer under a Mudaraba, these funds become part of a common pool. The bank uses the pool to meet its daily requirements while entering into financing and investment activities with entrepreneurs and individuals.

The above arrangement entails that there is no direct obligation binding the depositors and the entrepreneurs. Both of them have rights and obligations connected to the intermediary - the Islamic bank. The bank is both the fund manager (Mudareb) and the investor (or Rab Al Mal).

There are tens of thousands of depositors who appoint the Islamic bank as their agent and trustee, and scores of entrepreneurs and individuals who invite the bank to invest in their projects or transactions. Once the funds are routed through the common pool and deployed, there is no way to identify whose specific funds are being used to fund which particular entrepreneurial venture.

In case of a genuine loss on the deployment of funds, the Islamic bank debits it to the common pool, where the profits generated by the bank are also credited. This means any loss gets spread out across the overall portfolio.

The portfolio of provision for bad and doubtful debts in an Islamic bank is traditionally low compared with conventional banks.

Why is this?

It is mainly because its transactions are carried out on asset/investment-backed basis. Each Islamic financing or investment structure, be it Mudaraba, Musharaka, Murabaha, Istisna, Ijara or Salam, either have an underlying asset, or there are transactions in which the goods or assets have moved. This is opposite to a conventional bank's position whose lending is not necessarily linked to a transaction involving an asset.

As such, the value of a transaction carried out by an Islamic bank is automatically restricted to the value of underlying goods/assets or investment, thereby providing an automatic safety value, insulating the bank from chances that the customers may overstretch their position, leading to difficulty in payment or become insolvent.

To put it in other words, as per Sharia the Islamic bank's primary consideration to invest is the merit or soundness of the project/transaction, which is its first way out. The person behind the project or transaction - though is also fairly important to gauge (as the bank is acting as trustee for its depositors), it takes the second position while assessing the investment risks in a transaction / project.

This is in contrast to the conventional banking system in which the lending by a bank is usually clean, luring a customer to borrow beyond its requirement.

Conventional lending products, especially the overdraft, bills discounting and working capital loans if not utilised judiciously, more often than not, may adversely impact a borrower's debt serviceability. This is the reason an Islamic bank is barred by Sharia from indulging in activities leading to trading in debt.

Money defined

Can money be called a "commodity"? What do Islamic scholars say about this idea?

The old argument that money is a commodity and hence can be traded is strongly disputed by Sharia scholars who say that money is merely a medium of exchange, and hence cannot be regarded as a commodity.

According to Sharia, one can enter into a transaction where one exchanges money for some kind of goods, but it is forbidden to "buy or sell" the money i.e. to lend it at interest.

Such transactions are Sharia-compliant: one party gives money, the other gives some permitted asset, commodity / goods or services in return. When one party, however, gives money and expects to receive higher money in return, this is where the Sharia scholars become concerned.

What is a commodity? The economic definition of a commodity is a product that can be "sold" to make profit. A trader's nightmare is to have his previously-sold goods returned to him. It is equally undesired by an accountant to record a "sales return entry". In the light of this, we can understand how commodities are indeed intended to be sold at a profit, with no intention of having them returned.

This might remind one of the note that appears at the bottom of many shop bills "Goods once sold will not be taken back or exchanged".

Let's apply this logic to money. The trader of money (lender) parts with his "commodity" (money) with a clear intention to not only make a "profit", but also to have the "commodity" returned to him after an "agreed period".

In case of delay, the lender not only insists for the immediate return of his commodity, but may also threaten the borrower with legal action. He will also try to increase the amount of "profit" due to him, given the delay in returning the commodity.

Will someone who trades in a particular commodity resort to such measures in order to get his "sold" commodity returned to him? From the perspective of Sharia scholars, therefore, money cannot be classified. as commodity. As such "trading" in money, or the view that money is a "commodity", leaves much to be desired from the perspective of Sharia.

Moving story

When we go to a conventional bank to arrange financing to purchase a car, we all have a good idea of how the process works.

The conventional bank provides a loan to the customer's account for the customer to purchase the car, and charges a pre-agreed rate of interest on the loan. We also have a good idea about the penalties that follow in case of a delay in repayment of the loan. If the customer account misses a payment, the bank charges penalty.

When a customer defaults, he feels the bite of three layers of interest on his loan: there is the "normal" interest, the "penalty" interest and the compounding effect of both of these, when added to the loan. From a legal perspective this is all fine, as the customer agreed to the loan after the conventional bank disclosed all the various conditions attached to it.

In this hypothetical transaction, readers will note how money is involved at both ends. At the start of the transaction, the bank extends the loan to the customer to purchase the car. After receiving the loan, the customer starts repaying it in installments. The amount coming back to the bank from the customer is certainly greater than the amount the bank originally loaned to the customer.

We can now compare this process with the process of buying a car through an Islamic bank. When a customer goes to purchase a car through an Islamic bank, after he initially approaches the bank, he is asked to provide specifications of the car he wishes to buy. The customer visits a showroom and selects the car he wants the bank, in effect, to sell to him.

The Islamic bank receives the full specifications (including the purchase price) of the car selected by the customer. The specifications come in the shape of a pro forma invoice from the dealer addressed to the bank. The bank then obtains a "Promise to Purchase" from the customer, meaning the customer will purchase the car from the bank upon the bank purchasing it from the dealer.

Upon completion of all required formalities, the bank sends its representative to the dealer, along with a manager's cheque favouring the dealer for the full payment. This is all according to the pro forma invoice issued by the dealer to the bank.

The bank's representative makes the payment to the dealer and obtains the commercial invoice (which represents title) and keys (which denotes possession) to the car for the bank. Subsequently, he hands over the title and possession of the car to the customer, who is usually present in the showroom, or later at mutually convenient place and time if the customer is not available at that time.

All this activity is documented at the time of the transaction. This example provides us with critical insight into how an Islamic bank differs from a conventional one when it comes to structuring transactions. The Islamic bank is not parting with money in our hypothetical example. Rather, the bank is selling an asset to a customer, one it has purchased from a third party.

The car is sold by the Islamic bank to the customer under a Murabaha contract, at a sale price including the bank's purchase costs and its profit, which has been agreed to by the bank and the customer. The Murabaha amount is then payable by the customer to the bank according to an installment schedule, usually spread over three to five years.

Due process

Working on the longstanding theory that the conventional bank does not deal in goods, but in documents, the bank shows the customer as the buyer in the letter of credit. Under the loan against trust receipt (LATR) facility, the bank allows the buyer to have access to the goods, without first settling the import bill.

The importer gets possession of the goods, sells them in the market and pays LATR amount, which includes interest, to the bank, in an agreed period of time. The bank does not part with title to the goods until the LATR is fully repaid by the customer - even though it claims to deal only in documents, and not in goods.

If the customer finds the goods to be spurious or not commensurate with the specifications mentioned in the letter of credit established by the bank, the bank disassociates itself from such undesirable situation, insisting it merely dealt with in the documents and has no responsibility towards the goods. . The bank then claims the full amount of LATR, along with penalty interest, in case of delay.

In case of delay in repaying the LATR, the bank levies penalty interest. In case of non-payment, the bank endeavours to exercise its right to the title in order to retrieve the goods, which by then may have been sold by the importer.

An Islamic bank also finances the import of goods - but in a different manner.

It is done by way of a Murabaha, whereby the customer approaches the bank with full specifications, prices and sources of the goods. The bank then establishes the letter of credit in its own name as buyer.

Once the goods have arrived at the port and the documents have been received by the bank, whereby the commercial invoice exhibits title and the bill of lading / airway bill representing the possession, the bank transfers both the possession and the title to the goods to the customer under the Murabaha sale contract.

This is because, under Sharia, the sale cannot take place unless the title and possession of the goods are held by the buyer. (See box for an hypothetical illustration of how Islamic banks differ from their conventional counterparts on this point.)

Default Penalty?

If Islamic banks do not charge delay penalties, might that not encourage some customers to default?

Unfortunately, some customers may indeed take undue advantage of an Islamic bank’s respecting the Sharia principles.

These customers are extra careful to meet with all their commitments when it comes to dealing with conventional banks, so as to avoid penalty interest charges, but sometimes they accomplish this feat at the cost of their obligations to Islamic banks.

Sharia scholars have noted how delay penalties act as an effective deterrent against this failure to pay. They have since agreed to allow Islamic banks to charge such penalties on their customers’ past-due obligations.

This has been approved with the condition that the amount collected through these penalties will not be added to Islamic banks’s profit, but must be donated to charity in a transparent manner. This must be done in such a way so that the customer receives proof that the penalty charged has actually been given to a charity.

Alternatively, the customer may also be asked to pay the penalty not to the bank but to a charitable organization of his or her choice and submit the receipt to the Islamic bank. The receiving charity organization should be advised that the donation represents interest payment, so that it can refrain from utilizing the donation for purposes where the Zakat funds (Islamic charity) are utilized.

Islamic banks have therefore started to insert delay penalty provisions in their Murabaha, Ijara and Musharaka agreements. In some recently concluded high-profile transactions, a list of charitable organizations slated to receive funds as a result of any penalty interest charges has been appended to ensure clarity in this matter. Under such agreements, the lead bank, acting as the agent for the other participating banks, is pre-authorized to collect penalties from the customer and donate them to charity.

One more point in this regard: conventional banks can participate in Islamically-structured transactions. Islamic banks are barred from taking part in a conventional financing transaction. Conventional banks that participate in Islamically-structured transactions will not agree to the idea of donating penalty interest income to charity. They will instead request that they be paid any penalty amount owing in proportion to their participation in the overall transaction.

Sharia scholars have allowed this arrangement to proceed, so that each conventional bank participating in an Islamically-structured transaction can be paid in this fashion. All remaining penalty-derived money is donated to charity.

The above arrangement has started to see results. Permitting delay penalty charges has reduced some of the differences between the conventional and Islamic banks in terms of ensuring that customers meet their financial obligations.

We should not overlook the fact that accumulated penalty interest charges do not increase the Islamic bank’s overall profitability. These charges become profits for the conventional banks, however.

Lease of life

Leasing is a service commonly offered by conventional as well as Islamic financial institutions. An asset is given on lease to an interested party for a certain period of time, and an amount is charged as rent.

There are two kinds of leases: operating leases; and financial leases. In simple terms, under an operating lease, the leased asset goes back to the lessor upon completion of the period of time covered by the lease. Under a financial lease, the asset becomes property of the lessee upon successful completion of the lease term, since the rent paid by the lessee adequately covers the cost of the leased asset plus the lessor's profit for the entire lease term.

In their ordinary course of business, conventional and Islamic financial institutions do not handle operating leases. A good example of an operating lease is the rent-a-car business, where the vehicle is returned by the lessee to the rental company upon completion of the period for which the car was hired. On the other hand, financial leasing is commonly used by these institutions for high-value assets such as aircraft, marine vessels, real estate, etc.

When an Islamic bank enters into a financial lease, it purchases the asset and gives it on lease to the interested customer. In addition to acquiring ownership rights over the asset, the Islamic bank also assumes full ownership obligations and the risks associated with it.

The ownership risks demand the bank should act like any normal owner in any given situation relating to the asset. As such, in the event the asset sustains damage, thereby reducing or completely eradicating its usefulness to the lessee, the Islamic bank reacts one way, while the conventional bank reacts in a completely different manner.

What do I mean by "different"? Does an Islamic bank stop charging rent to the lessee in such a situation? Yes, it does. This contrasts with the conventional bank which, when it acts as a lessor, would continue to charge rent irrespective of partial or total damage to the asset.

Staying afloat

Take the example of a marine vessel leased on Islamic lines. In terms of Sharia principles, it is prohibited to continue charging the lease rent if the vessel sinks, irrespective of whether or not the lessee was at fault.

Comparatively, a conventional bank, in the capacity of lessor, will continue to levy the "lease rent" despite non-existence of the asset, the very subject of the lease agreement.

Not only that, the bank will also impose a penalty interest on delay in payment of the rent, which is imminent in this type of situation where the lessee finds itself deprived of the commercial benefit of the usufruct connected to the asset.

Assume you were the one who entered into the lease agreement with the conventional bank for the vessel. You are using the vessel to carry cargo to different destinations and earn freight fees. Some of the money you earn is going towards servicing the lease rent owed to the bank and the remainder is being utilised to meet the expenses involved in running the business and the remainder is the profit, which is driving factor for you to enter into the transaction.

Unfortunately, one day, the vessel suddenly sinks. Your income stream comes to an abrupt end - yet you must continue to pay the lease rent to the conventional bank who had leased you the vessel. How would you feel?

The abrupt end of the valuable income stream flowing from the vessel's operation to the unfortunate lessee, which he was using to service the lease rent, would not deter the conventional bank from continuing to demand the rent, plus compound and penalty interest.

Having been a conventional banker for a major part of my banking career, I know the ruthlessness of an interest-based banker when it comes to dealing with a "defaulter". I can see how, despite having sympathy for a defaulting borrower due to his genuine helplessness, my colleagues from conventional banks are compelled - against their will I am sure - to take extreme action against him.

Let us see how differently and fairly an Islamic bank would deal with a situation where a leased asset gets damaged. First, let us look at the partial loss situation. Renowned Sharia scholars have set guidelines for such a situation, given that the leased asset is actually owned by the lessor Islamic bank.

In the case of partial damage to the leased asset not caused by the lessee, the lessor Islamic bank would be responsible for repairing the damage. The lease rent would pause during the repair period. There is flexibility in this situation. Instead of completely halting the rent during the repair period, it can be reduced in proportion to the reduction in the effective usage of the asset by the lessee.

The lessee's consent, however, would be essential in determining the reduced amount of rent he would be required to pay during the repair period. If the lessee's negligence led to partial damage to the leased asset, he will be fully responsible for repairing the damage in order to restore the asset to its normal effective use. At the same time, the lessee will continue to pay the lease rent in full, since the damage to the asset was caused by him. Here, the lessor's consent would be necessary if the lessee would like to pay the reduced rent.

Sharia also covers situations where the leased asset is ruined beyond all use or repair. If the asset was wrecked through no fault of the lessee, the lease rent will stop from the date of the asset's destruction.

The lessor Islamic bank will wait for the realization of the insurance claim. During the period between the occurrence of the total loss and the payment of the insurance claim, the lessor bank – as the owner of the asset - will remain out of pocket.

Please note the lessee will not be required to pay any lease rent from the date of such total loss, since the underlying leased asset exists no more. If the lessor bank experiences any shortfall in the realization of the insurance claim, it will bear such losses itself and will not seek any compensation whatsoever from the lessee.

What if the lessee was responsible for the destruction of the asset? Will he continue to pay the lease rent to the Islamic bank? No. Sharia principles require that in a situation where the leased asset exists no more, irrespective of the lessor's fault, the lessee's negligence, an act of God, force majeure, etc, the lease rent must come to an immediate end.

Here, too, the lessor Islamic bank will wait until the realization of the insurance claim. The Islamic bank will ask the lessee for compensation only if the insurance proceeds were less than the claimed amount, since the lessee caused the damage to the asset.

This position, adopted by Islamic banks that enter into leases, is totally different from the leasing practices of conventional banks. It sets a high standard of fair play and equality for all parties concerned in leasing transactions.

Endless opportunities

My foray into Islamic banking has brought me face to face with some complicated transactions. I have learned a great deal, for example, from having to structure complex financial deals in ways that avoid interest and satisfy other requirements of Sharia.

At times, conventional banks taking part in a Sharia-compliant transaction in a co-financing environment made the task difficult by demanding the elimination of certain clauses in financing agreements based on core Sharia principles.

Sharia offers endless opportunities to create financing structures that can facilitate complex transactions and also ensure that the needs of all parties involved are satisfactorily met.

This is in contrast to conventional banking practices. There has been little in the way of true innovation where conventional banking practices are concerned since they took shape about 200 years ago. Each and every conventional banking product, no matter how it is labelled, centres around the underlying loan and interest paradigm.

Where is innovation if you simply replace the wrapper by retaining the underlying loan with interest model unchanged?

Islamic banking is barely 30 years old. We are just beginning to grasp its full potential as a way to help corporations, entrepreneurs and individuals attain their financial goals.

To understand this, we need to take a closer look at how Sharia shapes Islamic banking procedures and practices. We then need to compare this to the banking practices prevailing elsewhere. This comparison will demonstrate the Sharia principles are free from exploitative practices and work well for both individuals and businesses.

Any financing transaction conducted by a conventional bank invariably results in an interest-based debt. Under the Islamic modes of financing, there are two basic types of contracts that create a cost-free debt borne by the client, and the contracts where the bank invests its own equity through or with the client.

Jasakkallah: islamicfinanceandbanking.blogspot.com

Islamic Banking and Finance in Sri Lanka: A Paradigm of Success

Sri Lanka’s modern financial sector has undergone significant reforms since the early 1990s, notably to reduce the government’s role as a direct financial provider. A wide range of institutions offer financial services, including public and private banks, development finance institutions, merchant banks, investment banks, specialized financial institutions, microfinance institutions, leasing companies and insurance companies.

There is also a burgeoning stock exchange. The government is taking steps to strengthen the institutional and regulatory framework for financial services. A remarkable recent evolution is the reform and reorganization of the Central Bank of Sri Lanka (CBSL).

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, CBSL acts as financial adviser to the government.

Currently, more than 15 foreign banks have set up branches in the island nation. What is more significant is that some of these branches have been established for more than 100 years. Sri Lanka also has more than 10 local banks, including two that are state-owned (Bank of Ceylon and People’s Bank).

Sri Lanka is one of the few non-Islamic countries to have legislation for the Islamic banking sector. Following amendments to the Banking Act No 30 of 1988 in March 2005, there is now adequate flexibility for conventional banks to establish Islamic banking windows and launch Islamic financial products. However, efforts in strategic marketing communication to promote and raise awareness of these products are still in the infancy stage.

CBSL has already authorized Islamic banking to be carried out in licensed commercial banks as a regulated and legal activity. However, CBSL is studying the Islamic banking concepts and once the requirements are legislated in the Banking Act, Sri Lanka would have increasing opportunity to establish a full-fledged bank. Meanwhile, senior Muslim ministers are also backing an initiative to allow full-fledged Islamic banks to operate in the country.

Sri Lankan Muslims have long awaited the entry of a full-fledged Islamic financial institution that can provide them the opportunity to invest or deposit their money in a Shariah compliant manner. Islamic microfinance institutions in the rural areas are also keen to capitalize on this need, but most are offering limited service in small communities with a high density of Muslims.

The country has the potential to become an Islamic banking hub for the South Asian region. Nevertheless, only if CBSL expresses its interest and development initiatives does Sri Lanka stand a chance of competing and establishing itself in the market. Therefore, government organizations, monetary authorities and the private sector must work with Islamic banking institutions to achieve this objective.

In light of this, it is high time that Sri Lanka came up with a strategic framework on the Islamic financial sector in order to address the needs of all segments of the community. There are specialized local and overseas institutions and professionals, some of whom are experts in Islamic banking; others may have good managerial skills to contribute to the promotion of Islamic banking and its concepts. Therefore, it is paramount to include such specialists in a discussion on building a conceptual framework for Islamic banking and finance in Sri Lanka.

Players in Islamic finance

The market value of the Islamic banking sector in Sri Lanka is estimated at LKR 70 billion to LKR 100 billion (US$634 million to US$907 million). Islamic financial services providers currently active there include Amana Investments Limited, Ceylinco Islamic Investment Corporation (CIIC), Muslim Commercial Bank (MCB), National Asset Management Limited (NAMAL), First Global Investments Group and ABC Investments.

Amana Investments, established in 1997, leads the country’s Islamic financial services market. Its subsidiary Amana Takaful Ltd (ATL) began operations in June 1999 and is acknowledged as the market leader for Takaful services (commonly perceived as the Islamic alternative to conventional insurance). ATL was listed on the Colombo Stock Exchange in late 2006.

CIIC made its entry in 2003 and is fully backed by Ceylinco Insurance, one of the leading conventional insurance providers in Sri Lanka. CIIC offers both selected Shariah compliant and Takaful products.

New kid on the block MCB — owned by MCB Pakistan — commenced operations early this year. It offers both Islamic and conventional financial products.

NAMAL 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 the NAMAL Amana Equity Fund early this month. 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 Shariah compliant.

First Global Group is a public limited finance investment company that deals with Shariah compliant investments and financing products and services. Domestically, it is the first institution to promote training and career development programs related to Islamic banking and finance.

Finally, there’s ABC Investments, a relatively new Islamic investment group that claims to have strong funding backing from different countries. It has a memorandum of understanding with the Central Bank of Sudan in which the latter’s experts will provide assistance on training and development to ABC — especially in its Takaful segment — and will be working closely with leading Islamic financial countries for the funding in Takaful as they plan to start off with general insurance.

Barriers in Takaful industry

The Takaful concept is steadily gaining acceptance in Sri Lanka, where there are now 13 licensed insurance companies. Takaful was introduced in 2002 with the entry of ATL, which recently created history in Sri Lanka and the Islamic financial services industry worldwide when it was ranked 203rd in the world’s first comprehensive “Top 500 Islamic Financial Institutions” published by The Banker, the global finance magazine of the Financial Times Group, in its November issue. ATL accounted for US$5.55 million worth of Shariah compliant assets.

A second Takaful operator, Ceylinco Takaful Limited, made its debut in mid-2006. Sri Lanka Insurance Corporation Limited — the republic’s largest and strongest composite insurance provider with LKR 50 billion worth of assets under management — has also announced its intended foray into Takaful. Two of the country’s largest insurance operators (Ceylinco Life and Sri Lanka Insurance Corporation) also plan to offer Takaful products.

The Sri Lankan market, including that for Takaful, faces several challenges, however. One is the current legal environment, which is deemed unfavorable to Takaful operations. Other hurdles are reluctance on the part of regulators to introduce the necessary changes in law to encourage the development of Takaful, a lack of investment opportunities that are Shariah compliant and acceptable to the insurance regulators, a high capital requirement, severe competition, consumer resistance to a new form of insurance based on religious principles and the fact that Muslims represent only about 9% of Sri Lanka’s population.

Overcoming these barriers is more crucial for the Takaful industry in Sri Lanka. Its operators should make a concerted effort to convince insurance regulators to accept the salient features of Takaful and treat it as a new business model. They could also form strategic alliances to promote their products.

Human resource needs

Sri Lanka should aim to produce highly skilled practitioners and professionals as well as specialists and researchers to develop human capital needs for its Islamic banking and financial services industry, both at local and international level. Shariah scholars are scarce but they are highly critical to the success of the republic’s Islamic banking industry and its growth.

International Center for Education in Islamic Finance recently established the faculty of Islamic banking and finance, the first in Sri Lanka. It is hoped that the faculty will fulfill the need to produce a pool of Islamic professionals for the fast-growing global Islamic banking and financial services industry.

by: Riyazi Farook,
He is Master’s student at Middlesex University London and has a postgraduate diploma in marketing from the Chartered Institute of Marketing, UK and postgraduate diplomas in Islamic banking and insurance from the Institute of Islamic Banking and Insurance, UK.

thanks: Sunday Times - December 2007