Amana Takaful Sri Lanka gets General Insurance licence in Maldives

The Maldives Monetary Authority has granted the license for Amana Takaful (Maldives) Pvt. Limited, the Maldivian subsidiary of Amana Takaful Plc, to begin general insurance with effect from 4 March.

The company launched its operations in 1998 in collaboration with Takaful Malaysia, one of the largest Takaful operators in the world. It offers life and general insurance policies.

The consolidated loss of Amana Takaful Plc for the year ended 31 December 2009 was Rs. 8.547 million and accumulated group losses stood at Rs. 300.959 million.

source :


“UBS AG, the Swiss-based bank which is slashing staff to offset losses, sees growth opportunities in Islamic Finance and plans to expand in this market, its new head of Islamic finance, Armen Papazian said recently.” – Reuters

Almost everyday, we hear or see some news item such as the above related to the success and growth of Islamic Finance industry through mass media.

Interestingly, one could see an expansion of Islamic Financial institutions in the western countries as well. Still, an acute shortage of qualified manpower seems to be hampering the progress of this industry to a greater extent.

First Global Knowledge Centre (FGKC), the pioneer in the country in the field of Islamic Banking & Finance education has always endeavoured to fill this vacuum by conducting recognized courses, conferences and seminars for the past three years. It has now tied up with Al Huda Centre for Islamic Banking & Economics, Pakistan (Al Huda CIBE) to offer internationally recognized distance learning programmes in Sri Lanka.

Al Huda-CIBE is a well established name in financial industry, working for Education, Training, Promotion and Awareness of Islamic Banking & Finance in Pakistan as well as abroad. Offering distance learning programmes is an effort of Al Huda to promote Islamic Banking & Finance at mass level. Al Huda is jointly working with 12 international institutions as a partner for the development of this emerging industry worldwide.

Even in Sri Lanka the numbers are significant of those who are keen on getting themselves acquainted with the technical and theoretical knowledge of this industry but are unable to follow a regular study programme due to certain constraints. Time is one such impediment in the journey of gaining knowledge to the busy person and for some others distance and transport issues also matter.
Distance learning programmes are ideal for this category of knowledge seekers, and the internationally recognized Al Huda programmes will help them in achieving their goals. The following are available on distance study mode:

Post Graduate Diploma in Islamic Banking & Finance,
Certified Takaful Professional,
Certified Islamic Funds Manager,
Certified Sukuk Professional, and
Certified Islamic Microfinance Manager

Another salient feature is the special introductory fee given for students from Sri Lanka.
A handsome discount is offered for all these programmes which are indeed very much affordable.


Amana Implements New ‘Zero Tolerance’ Sharia Risk Management Framework

imagesIslamic Finance and Banking has turned out to be a buzzword with many institutions and companies wanting to benefit from the gigantic potential it has achieved over the last few years. For Islamic Finance to be true to its potential, the adherence to Islamic Sharia Law is of paramount importance. Sharia Law governs Islamic Finance institutions by prohibiting transactions that involve interest, uncertainty, speculation and products that are harmful to society. Islamic Banks are exposed to many risks such as credit risk, market risk, operational risk, liquidity risk etc, but the most vital risk is Sharia Non-Compliance Risk. In Sri Lanka, Amãna Investments has taken all measures in promoting Islamic Finance. It has further strengthened its compliance with Sharia by setting up a new and foolproof Sharia Risk Management Framework (SRMF), in May 2009. “The objective of the SRMF is to ensure a ‘Zero Tolerance’ culture in all our departmental activities” says Moulavi Siraj, Amãna’s in-house Sharia Supervisor. “If we fail to do so, the profit we make would be at risk.  We want to ensure that all profits from our advances are pure and eligible for distribution to our depositors”.  By implementing a strong Zero Tolerance Sharia culture into its business transactions, Amãna Investments is aiming to fulfill the objectives of Sharia and to reinforce the expectations of its growing customer base with regard to Sharia compliance.  “We have identified diverse areas in which Sharia Non-Compliance can occur. Such areas, where instances of non-compliance usually occur due to lack of knowledge, are when following policies and procedures during documentation, and during marketing and selling our products and services” explained Mr. Siraj.  He further stated “Amãna has developed a Sharia Risk Management Process which begins with the identification of potential risks by incorporating Sharia risks in the operating manual and the audit process. This will be followed by a process of measuring, monitoring and reporting on the risks. Finally, we will mitigate and control those risks from re-occurrence. For that purpose we have established three lines of defence in the pre-, present- and post-transaction stages”. To streamline the compliance process, the SRMF includes a rating system, the Sharia Risk scorecard, which rates all departments and branches based on their Sharia compliance. This  encourages  relevant departments and branches to put more emphasis and priority on Sharia. “We always persuade our staff to communicate to our customers the importance of Sharia over profitability” he added.

In carrying out and standardising the SRMF, Amãna Investments has continuously counsulted its strategic partner, Bank Islam of Malaysia, and its own Sharia Supervisory Council, consisting of eminent scholars of the calibre of Sheik Taqi Usmani,   Mufti Rizwe and Sheik Mubarak.  Amãna will look for further guidance from AAOIFI (the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions),  as well as  the Islamic Financial Services Board (IFSB) of Malaysia.  The Islamic Fiqh Academy, which operates from Jeddah and India is also consulted, when necessary. “We also take advice from the All Ceylon Jammiathul Ulama on matters relevant to Sharia”  said Mr. Siraj.

Mr. Siraj says that “Sharia training is a core requirement for all staff at Amãna.  Every new recruit to Amãna is given a thorough Sharia training before being sent out to meet customers. As part of the new SRMF, Amãna Investments will deploy a dedicated officer to supervise the Murabaha product transactions in particular to ensure compliance by customers.  By doing so, Amãna will be the first Islamic Finance organisation to take such a responsibility. 

Amãna Investments’ Head of Risk Management, Rizvi Mohideen, commented “We were the first to introduce Islamic Finance in Sri Lanka, and now we are  at the forefront of the industry, strengthening our compliance process through the new Sharia Risk Management Framework. Our Sharia team is well equipped to successfully implement this framework and reinforce the trust and confidence our customers have in our products and processes.”

Amãna Investments currently operates 14 branches in the island, including the central, eastern and southern regions of Sri Lanka.  Recently the Central Bank of Sri Lanka issued Amãna Investments a Letter of Provisional Approval under the Banking Act to establish Amãna Bank as the country’s first Islamic Commercial Bank, subject to certain conditions such as raising a minimum capital of Rs.2.5 billion.  Amãna’s products are now being transacted by a number of corporate, SME and individual customers,  irrespective of their ethnic backgrounds and drawn by the principles of equity, justice and fairplay, by which the institution carries out its business transactions.

source : dailymirror

Islamic Finance – The Benefits and Post Crisis Position

 imagesMalaysia International Islamic Financial Centre – Malaysia’s latest offering

To encapsulate Malaysia’s almost 30 decades of expertise and experience in Islamic finance, the Malaysia International Islamic Financial Centre (or MIFC) was launched in August 2006; sukuk origination has been identified as one of the 5 pillars that will solidify the country’s position as an international Islamic finance hub. The other 4 pillars are: Islamic fund and wealth management; international Islamic banking; international takaful business; and human capital and thought leadership.

The sukuk market provides an avenue to channel excess funds and savings from resource-surplus countries, such as oil-rich Gulf nations, to the Asian region – given the latter’s massive infrastructure and other commercial funding requirements. There are still funding and investing opportunities, especially in real estate, financial services and infrastructure (power, oil and gas, and roads). More importantly, the sukuk market could convert Asia’s export surpluses into investment opportunities, rather than investing in the sovereign debts of advanced economies. The Islamic finance market can step into these areas that would traditionally have been filled by the conventional market.

Following the liberalisation of foreign-exchange administration rules in Malaysia, several foreign multilateral development banks and agencies, quasi-sovereign agencies and multinational corporations have joined local companies in tapping the domestic sukuk market for funds. There is no doubt that sukuk has become a global phenomenon, attracting increasingly more issuers from a larger pool of countries. Indeed, Shariah-compliant financing is set to continue providing issuers with non-bank alternatives to longer-term funding.

Under the MIFC, service providers are welcome to use Malaysia as a platform for Islamic financial activities, leveraging on the nation’s comprehensive system and conducive environment for Islamic financial activity. The incentives include new licences for conducting foreign-currency businesses, attractive tax incentives and facilitative immigration policies. These measures lead to operational cost efficiency, a shorter learning curve, less time to market, access to new markets and surplus funds. They have been designed to provide operational flexibility, cost efficiency and an encouraging environment for Islamic finance in international currencies, making Malaysia even more attractive to foreign investors.

What makes Malaysia an

international Islamic finance hub?

The rapid and undeniable growth of Malaysia’s sukuk market has been nothing short of remarkable. As a pioneer in the Islamic capital market, Malaysia has set standards and provided leadership by example on many fronts, for instance:

The Malaysian Islamic capital market has all the hallmarks of a sound and efficient setting for fund-raising and investment activities, placing it ahead of other financial centres. Malaysia’s Islamic capital market effectively replicates the service elements that are expected in any established conventional capital market.

Principles of

Islamic finance

The cornerstone of Islamic finance is based on the principle that funding is not provided for monetary returns. Rather, Islamic finance is based on contracts of exchange. Hence under such contracts, assets or services will be exchanged for monetary consideration, or for other assets. This gives rise to sale and purchase contracts or leasing contracts. Another positive development is the increasing interest in Islamic asset-backed securities and the ongoing research and development towards the use of the partnership-based contracts of Musharakah and Mudharabah in the sukuk market.

The encouraging response to the nation’s sukuk issuances, especially from Middle Eastern investors, has paved the way for Malaysia to further explore the international Islamic financial arena. There has been a notable shift from debt-based bonds, premised on cost-plus-sale agreements or cost-plus production agreements, to lease-based or profit-sharing sukuk, including the issuance of convertible sukuk, following the shift towards a wider variety of Islamic investors. It is only natural that products are tailored to meet the requirements and preferences of specific target markets. This is because each market regulator and institution has its own Shariah board; opinions on permissible structures vary from country to country as well as from one investor group to another. There is now a tendency for Shariah boards to comprise both local and internationally prominent scholars, qualifying them to address issues and operate across the different schools of thoughts.

On the national front, the shift in the types of sukuk has also been partly influenced by the additional tax incentives accorded to specific types of sukuk.

Islamic finance’s position in the capital market after the current financial turmoil

The Islamic financial market has undoubtedly also been afflicted by frozen credit markets and the current confidence crisis, along with the backlash from the global financial mayhem. Nonetheless, it has mostly escaped the direct fallout from the sub-prime crisis that had begun in the United States, thanks to the Shariah prohibition of investing in the kinds of instruments that had sparked off the current chaos. This is perhaps because of the “built-in antibody” that Islamic finance has in the form of its Shariah conformity, which has provided some degree of stability and resilience in facing the current global financial turmoil.

Once market conditions attain some semblance of normalcy, RAM Ratings expects it to be business as usual. Sukuk issuance is envisaged to resume its impressive growth, fuelled by massive investment and financing needs, notably of countries in the Gulf area and Asia. In this context, Islamic finance, and sukuk in particular, is an emerging asset class that will sit well with investors across the globe.

Moving forward, we also foresee Islamic ratings playing a catalytic role in advancing the growth and development of domestic sukuk markets, and in promoting cross-border issuance and investments, especially inter-regional flows between Asia and the Middle East. The Malaysian sukuk market has benefited from having a reference benchmark for credit risks, as the rating of Islamic securities in Malaysia – similar to conventional debt instruments – have been compulsory since 1992. Bonds rated by RAM Ratings account for 75% to 85% of the domestic sukuk market.

This series of articles on non-conventional financial instruments is brought to you by RAM Ratings (Lanka) Ltd.

sourece :  dailymirrorlk

Elimination of Tax Bars for Islamic financing

colomboby Suresh R. I. Perera

Islamic financing is the ‘in thing’ in the world of financial services. ‘Murabaha, Mudaraba, Ijara’ are some of the ‘buzz’ words. The latest financial instrument to enter the Islamic financial services sector is the ‘Sukuk’, an Arabic term, – the plural of SAKK – the origin of the English word cheque. The list is not exhaustive. ‘Musharaka, Ististina, Tawarruq, Salam’ are some of the other buzz words.

The cross – cultural penetration of Islamic finance is manifesting it’s impact in the largely non- Muslim markets too. Whilst Islamic financial products are being expanded to cover non – Muslim customers, there are many non- Muslim financial institutions venturing to offer these products that comply with Shari’ah principles. Whilst amendments to relevant statutes would further the cause of development of Islamic financing, tax considerations would be the determinant for monetary benefits to be in parity to its conventional counterparts.

Interest v profit

The basic tenet of the Islamic value proposition is the prohibition on the paying and receiving of interest (riba), and a fundamental belief in the sharing of profit and risk in the conduct of business.

The Qur’an Sura Al Baqara, verse 275 states that the Creator allowed trade but prohibited Riba, which is typically translated as interest. While interest is a I passive I income, profit is an earned income which is treated differently for tax purposes. Profit is considered an after tax item for the profit creator and a fully taxable item for the profit receiver. Herein lies one of the principal tax barriers for the smooth progression of development of the Islamic financial service sector. The growth of the current tax systems in most of the countries over the last century has been to address issues of a conventional financial environment and the system naturally poses many issues for Islamic financial instruments.

The concept of instrument is intrinsically embodied in tax statutes around the globe and the international treaties between countries for avoidance of double taxation. Income Tax Statutes in countries that follow the ‘source doctrine’ such as Sri Lanka, recognise interest as a separate source of income and contains specific provisions for the tax deductibility thereof, reliefs such as lower rates or exemptions. Invariably income statutes also impose withholding tax burden on the person paying interest as a collection mechanism by deduction at source.

As interest is considered haram, Islamic financial products avoid the payment or the receipt of interest by adopting sharing of risks & rewards or cost plus profit mechanisms. As opposed to providing interest bearing loans, the financier obtains the return by way of a share of profits for his equity finance which is intrinsically related to success of the venture.

Musharaka & Mudaraba are profit & loss sharing instruments whilst Murahaba is based on cost plus profit basis. Thus the critical tax issue that these instruments are exposed to is whether the profit element or the share of profits world be treated as interest for tax purposes and the application of the tax rules including the tax deductibility of the payments.

Battle between substance and form

The success and the viability of Islamic financial instruments as an alternate mode of financing in a particular jurisdiction would depend on adoption of the doctrine of substance over form by the tax authorities.

These instruments would flourish and appeal to the populace in a country in the same manner of its conventional counterpart where the tax authorities are governed by the economic reality and the substance of a particular transaction. In countries where the hands of the tax authorities are bound by the shackles of the legal form of the transactions, unless the tax systems are adapted for Islamic instruments by requisite amendments to the tax statutes, the two competing product-lines would experience inconsistent results. – More often than not to the detriment of Islamic financial instruments. – Whilst the Netherlands and Switzerland are examples of countries that analyse transactions by the substance and economic reality for tax purposes, UK tax authorities weigh heavily in favour of the legal form for ascertaining the tax consequences.

Murabaha (trade finance)

This is the alternative Islamic financial instrument available for a person who wishes to acquire an asset by obtaining a conventional interest bearing loan which is considered haram according to Shari’ah principles

This instrument is a means’ to fund a variety of acquisitions such as motor vehicles, computers, furniture, televisions, residential & commercial property etc. The financier purchases the asset identified by the customer, say at 1M euros and sells to him at a premium for 1.2M euros to be settled on deferred installment basis or the total price to be paid at a specified future date. The profit of 0.2M Euros made by the financier corresponds to the interest earned under a conventional loan. At the time of the commencement of the arrangement the title passes from the financier to the customer.

The crucial issue that arises from, a tax perspective with regard to the aforesaid Murabaha structure is whether the tax authorities would adhere to the doctrine of ‘substance over form’ to accept it as a financing arrangement for tax purposes or insist on the application of the tax laws based on the strict legal form. Most of the countries that follow English Legal Tradition would find the mechanics of Murabaha falling within a statute akin to ‘Sale of Goods Act’.

An interesting observation in this regard was made in a case decided by the District Court of Sri Lanka. The defence taken up by a company sought to be wound up, that the action was prescribed under the Prescription Ordinance, as the Murabaha structure was governed by the rules pertaining to sale and delivery of goods, was rejected in favour of it being a financing transaction. The relevant extract from the Order of the court in Case No. 92/ Co., where an application under the Companies Act was, made by Amana Investments Limited to wind up Greenwood Growers (Pvt) Ltd. is reproduced below.

It is stated in the Affidavit, filed on behalf of the company sought to be wound up, that since the relevant loan transaction is one of sale and delivery of goods, it has been prescribed in terms of the provisions of the prescription Ordinance. The Petitioner has submitted that the said transaction was not one of sale and delivery of goods, but a transaction to provide a financial facility.

The Petitioners have further stated by their written submission that the loan amount claimed to be owned to them has been accepted as a loan payable by the company sought to be wound up in its final accounts according to the report of the provisional liquidators. The report of provisional liquidators confirms that the final accounts of the company sought to be wound up has been prepared as at 31.03.2001, and that it states the amount of the loan and the interest thereon as an amount payable therein. Therefore the company sought to be wound-up has admitted that the loan was payable as at 31.03.2001. It is evident ex facie that since it has to be treated as an acknowledged debt it would be governed by Section 12 of the Prescription Ordinance and that it is not governed by the provisions relating to sale and delivery of goods. Therefore it cannot be stated that the debt claimed by the Petitioner has been prescribed.

Would tax authorities in Sri Lanka be sufficiently liberal to accept a fundamental principal of taxation -’substance should override the form’ to allow the development of this mode of financing still in it’s infant stage ?. To date the issue remains controversial in Sri Lanka as the authorities concerned have not clearly ruled on this.

If the authorities opt to look at the form over the substance, some of the fiscal consequences of this alternate mode of financing would differ from an interest bearing loan; its conventional counterpart. As the title transfers twice – initial purchase by the financier and then the onward sale to the customer – the indirect tax implications could impact the profitability due to the existence of two tax points.

If buy – sell operations are not excluded under the VAT / GST statute in a particular Jurisdiction and the statute imposes input tax recoverability, the cost to the ultimate consumer of a product provided under a Murahaba arrangement could be higher than obtaining a conventional loan. To eliminate this impediment, Singapore for instance has permitted the financial institution to claim the GST attributable to the purchase in full, whilst exempting the mark-up on selling price.

The exclusion of wholesale or retail sale of goods from transactional VAT under Sec.3 of Value Added Tax Act No. 14 of 2002 may provide relief whilst denying the input tax claim to the financier, provided the transaction does not involve an importation, whilst exposing it for the turnover tax levied by the Provincial Councils in Sri Lanka. Though the above would be the tax consequence if form takes precedence over the substance, if Sri Lankan tax authorities accept the structure as a pure mode of financing, the profit derived by a bank would be subject to a profit VAT at 20% only.

The liability of a bank carrying out a conventional loan transaction is restricted to the interest element for the purpose of ‘Economic Service Charge’ (ESC) levied under Act No. 13 of 2006. However a Murabaha arrangement exposes it on the total sales proceeds, if the ESC Act follows the form of the transaction. i.e. 1.2M euros as opposed to the mere profit element of.0.2M euros. If the entity does not have sufficient income tax payable to set off the incremental ESC, this would turn out to be a cause to deplete the competitive edge of Murabaha. On the other in the battle between substance and form, substance emerging victorious could wipe out the disadvantage.

Diminishing Musharaka

Whilst a Sharl’ah compliant alternative of conventional housing finance could be carried out using Diminishing Musharaka, Murabaha or Ijara, where these arrangements involve two transfers of’ title, i.e. execution of two transfer deeds, where the financing entity is required to purchase the asset and sell it to the customer, the liability to stamp duty twice becomes unavoidable as most countries levy stamp duty on transfer of immovable property. This impediment has been successfully removed in UK by providing specific relief from stamp duty and land tax.

source: island lk