FEATURE

The next milestone: Islamic banking and inance in Sri Lanka

With a civil war behind Sri Lanka, MUATH MUBARAK highlights the mechanisms needed by the Islamic nance industry to facilitate the countrys economic development.
Today, Islamic nance is a thriving industry partly because the benet derived from the Islamic economic system is more benecial to society than that oered by prevailing conventional banking practices. Some developing and developed countries; namely, Australia, Canada, France, Hong Kong, India, Malta, Singapore and Thailand, are actively engaged in building this young and niche market by making amendments to their regulations and legal frameworks. principles that healthy competition among Islamic nancial institutions (IFIs) with more innovative business strategy can grow and in turn, develop the economy. This is a strategic investment issue for foreigners from the GCC and other interested parties to invest in Sri Lanka. The Islamic Finance Focus Group was formed of industry experts in the eld of IB&F to work with regulators and other authorities. Following this, law and tax suggestions were proposed in the countrys budget 2011 in order to eliminate the tax barriers and help IFIs to compete and strategically position themselves on a level playing eld in the global nance sector. This proposal of tax reformation must consider stamp duty, value added tax, nation-building tax, tax returns and withholding tax. It will be a wideopen and unique banking segment to experience the true Islamic banking. There is room to make certain concrete and visible changes in order to allow Islamic nance to prevail in the country. Corporate governance, compliance and risk management of Islamic banks are also very important to fuel the industrys healthy growth. The relevant authorities must make the required changes to mitigate future risks such as corporate failures, scams and collapse of the banks which can occur in the absence of sucient corporate governance codes. Once the system is in place it will be easy to monitor the banks operations and issue guidelines to direct the nancial institutions and banks. This can be done by implementing prudential regulations ratios such as capital adequacy, liquidity and risk management and other nancial measurements. Even though the Islamic capital market in Sri Lanka has a long way to go, some initiatives have given birth to new ventures aimed at identifying and assisting Islamic nance investors to invest in the country. The absence of capital and money market regulations for Islamic nance institutions will hinder the growth of this market segment. Continuous lobbying with the relevant authorities will help address these issues. Recent IPOs in the country have illustrated the expansion of listed companies and can encourage foreign direct investments, particularly from GCC investors. These investors can also invest more eectively if the current system is reformed. A strong foundation for the growth of this industry has yet to be laid down. Lack of research in Islamic banking in Sri Lanka has prevented the market from identifying the industrys precise growth rate or asset size. Another issue is the lack of human capital in the industry in Sri Lanka. There are more than ve institutions which have been educating the public about the industry while creating some public awareness and promoting the industry by inviting world renowned speakers, scholars and experts. Yet there is a huge gap between knowledgeable and experienced industry professionals in the market and the demands of the industry. This is a global issue and needs to be addressed to take this industry to the next level. With Sri Lanka at peace and making an eort to be the Miracle of Asia, this will pave the way for the country to grow in leaps and bounds. Rapid infrastructure developments will require signicant capital funding. The country can easily attract investors, particularly Islamic nance investors, to these lucrative projects. Muath Mubarak works in the nance control department at Barwa Bank in Qatar and he can be contacted at muath.2009@gmail.com or muath@rstglobal-group.com.

The miracle of Asia

Following the end of Sri Lankas civil war, the government is committed to ensuring the countrys long-term economic development. It has already achieved several successes, including establishing the rst fully edged Islamic bank. There was a period where Islamic banking and nance (IB&F) was unlikely to respond to the changes needed to meet the aspirations of IB&F in the country. These include providing the basic and more innovative products. Over the last decade, there have since been many eorts put forward to develop the local industry, such as the establishment of the countrys rst Islamic bank. There is a pivotal need to review and assess all underlying legal and tax systems to nurture, direct and protect the industry. Otherwise this emerging industry will not facilitate economic development in the country. This understanding has led countries with complicated tax regimes, such as the UK and US, to the process of reforming and restructuring their tax laws and other relevant regulatory requirements to attract Islamic investors. It is a longterm plan involving constant review to overcome disputes with more workable solutions. It is only by ensuring Sri Lankas legal and tax systems are aligned with Islamic

19

8th June 2011