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Sri Lanka – A closer look at its Islamic banking framework

with one comment

By Suapi Shaffaii

Facts and Figures

  • Single legislation and regulator for banking system:Banking Act No.33 of 1988 and
    the Central Bank of Sri Lanka (CBSL)
  • Banking Act was amended in 2005 to insert provisions on Islamic banking in Schedule II and IV
  • CBSL issued a directive on Islamic banking in 2005
  • Amana Investment Limited and Ceylinco Islamic Investment Corporation are the two Shariah compliant institutions in Sri Lanka
  • There is no explicit provision on the Shariah governance framework

The history of Islamic finance in Sri Lanka could be traced back in 1997 with the establishment of Amana Investment limited to operate an interest free bank. In 2003, Ceylinco Islamic Investment Corporation (CIIC) was set up to capture the untapped takaful market. But it was only in 2005,a legislative breakthrough was finally effected with the amendment of the Banking Act 1988 to legalise the operations of Shariah compliant banks. While the credit should be given to Amana Investment for their constant lobbying to the CBSL on the Islamic banking framework, it remains to be seen as far as legal framework of takaful business is concerned.

SnapShots of the Legislative Amendments
There is no specific mention about Islamic bank in the legislation except the directive issued by the Supervision Department of CBSL. There is also no attempt by CBSL to define Islamic banking but there are two elements of Islamic banking which have been clearly provided in the legislation:

  • receipt of money for investment in a business venture based on the profit loss sharing (PLS; and
  • buy and sale (and sale and buy back) transactions based on deferred payment terms.

The Shariah concepts of Mudaraba and musyarakah would be likely applied in the first element. While Murabaha, Musyarakah Mutanaqisah, Bai’ Salam and even the controversial Bai’ Bi Thaman Ajil and Bai’ Inah concepts would fit in the second element.

There should have been some flexibility in describing Shariah compliant transactions in a legislation in anticipating future emerging transactions. It is sufficient to have an enabling provision with the detailed framework to be taken up through subsidiary legislation. Islamic banking is a highly innovative business and it moves at a speed that, from the perspective of a regulator, a lengthy and complicated legislative intervention processes may post obstacles to its rapid growth. From the bare reading of the provisions, it appears that banking transactions in Sri Lanka are merely confined within the sphere of the aforementioned two Shariah elements. Unless the banking legislation is amended, other tangible Shariah principles providing wider business ventures to the Islamic banking institutions would not see themselves anytime soon. To make a case, I just do not see how the description would cover Ijarah as another potent and less controversial Shariah tool for a business entity to venture into leasing business not to mention the issuance of Ijarah dominance Sukuks.

CBSL has further enhanced the legislative framework of Islamic finance by having in place the followings:

  • The definition of deposit in the Banking Act to include money received for the purpose of Islamic banking business; and
  • The issuance of a directive for the setting up of Islamic windows or even for full fledged Islamic banks . Window institutions need to have separate books of accounts and the existing prudential regulation is still applicable to them.

It may be inappropriate to wholly categorise the money received or invested under the Islamic banking business to fall under the definition of deposit akin to the commercial banking concept. Islamic banking business comprises two tiers of transactions, first, retail business which involves deposit taking and second, investment business in accordance with the PLS concept. The former would tally with the nature of deposit definition while the latter would need to stay out of the deposit league. The investment accounts are not guaranteed and maintained in accordance with the pre-agreed arrangements between the bank and their customers. They are not maintained the way the deposit accounts are. This goes similarly to the issue of deposit insurance.


Written by Suapi Shaffaii

July 9, 2008 at 2:01 pm

One Response

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  1. I will appreciate if I could know the proposition of size of Islamic banking industry to total banking industry of Sri Lanka.



    July 31, 2009 at 9:54 pm

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