The first ever Islamic Finance Country Report in Sri Lanka was launched by KPMG Ford, Rhodes

Sri Lanka’s first ever Islamic Finance Country Report in Sri Lanka was launched by KPMG Ford, Rhodes, Thornton and Co. in collaboration with the Research Intelligence Unit.

The publication titled ‘Islamic Finance Country Report – Window of opportunity in Sri Lanka’ provides insight into the demographics of the Islamic finance market and an in-depth analysis of the trends in the industry together with the future position and a series of interviews with key professionals in the field, the Research Intelligence Unit said in a statement.

Islamic Finance was first introduced to Sri Lanka as early as 1997.

However the landmark evolution was the amendment made to the Banking Act No. 30 of 1988 in the year 2005 in order to permit licensed commercial banks and licensed specialised banks to offer selected financial instruments such as Murabaha and Mushakraka.

Islamic Finance has garnered an increased interest in the last few years and has the potential to develop the capital markets of Sri Lanka and assist with the development of infrastructure along with encouraging foreign investment in Sri Lanka.

At present there is a State Bank and two licensed Commercial Banks that operate Islamic finance windows with many other potential players on the verge of venturing into the market.

Sri Lanka has witnessed an important milestone in that the Central Bank of Sri Lanka has permitted the operation of a fully fledged Islamic Finance Bank and recently an Islamic Fund was launched facilitating investment in listed securities and this Report will no doubt assist the entrance of new players and investors into the market both foreign and local alike.

Amana Bank Limited Chairman Osman Kassim, Chief Guest at the event, during his address, commented on the development of the Islamic Finance industry in Sri Lanka and also mentioned that the country’s strategic geographic location provides a window of opportunity for Sri Lanka to service the Islamic Finance needs in the SAARC region.

Also at the release, Chief Executive Officer of the Research Intelligence Unit Roshan Madawela, spoke on how the publication provided information on both the demand and supply side of the industry.

He went on to comment on how the methodology used provided insight into product profiles, customer profiles, market penetration levels, the labour market dynamics and growth potential of the industry.

Commenting at the event, Partner and Head of Advisory of the Firm Reyaz Mihular said, “KPMG Ford, Rhodes, Thornton and Co. has continuously endeavoured to eliminate the barriers faced by the Islamic Finance industry and this publication provides an overview of these challenges and opportunities.”

source : Lanka business today

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 Today from Sri Lanka

imagesIslamic Finance Today (IFT), a quarterly magazine exclusively devoted to the Islamic Finance and Banking industry which is published in Sri Lanka has earned a top place among other leading Islamic financial publications worldwide.


A recent research report titled Islamic Finance and Economics as Reflected in Research and Publications by Dr.Nazim Ali of Harvard Law School, Massachusetts lists Islamic Finance Today (Sri Lanka) as one of six Popular Islamic Finance Journals, alongside others such as Islamic Banker (United Kingdom), Sharikah Islamic Business and Finance (Switzerland), Investor’s Magazine (Kuwait) and Business Islamica and Islamic Business & Finance (United Arab Emirates). IFT has also been cited as a primary source of information in Reports such as Islamic Finance 2009 compiled by Islamic Financial Services London (IFSL).


Islamic Finance Today is published by Pioneer Publications (Pvt) Ltd, a Sri Lankan-based publishing house and a subsidiary of the First Global Group, a conglomerate of companies involved in the field of Islamic Finance. The magazine which is presently in its second year of publication delivers to its discerning readership a mix of exclusive contributions on this very happening industry by a number of leading scholars and academics, interviews with leading personalities in the field and news, events and finance reports to keep readers updated on the latest developments in the industry.

 Source : sailanmuslim

Islamic Finance workshop in Sri Lanka

Themed “Islamic Finance – Reality or Myth” the first workshop organised by RAM ratings will be held on March 19 at the Cinnamon Grand Hotel.

In this workshop, the presenter, Roslan Abdul Razak will not only share his knowledge but also his vast experiences in Islamic Finance throughout Asia, said Country Manager, Acting CEO – Sri Lanka Kingston Ng. He said that some of Roslans achievements include pioneering Malaysia’s maiden Islamic Sukuk and his involvement in the clearance system for Islamic Banking in Malaysia. Ng said that there is a substantial Islamic population in Sri Lanka and they also have a substantial amount of savings but according to the Islamic law there are constraints for them to invest in normal savings products.. The market players who saw this opportunity established investment companies and education companies.

But still there is a necessity for a basic understanding of Islamic finance.

This is a first in a series of seminars on Islamic finance said Ng.

source : sunday observer

CIMA discussion on Islamic Finance Perspective of the global economic crisis

CIMA Sri Lanka Division announces an evening discussion on “The Global Economic Crisis: an Islamic Finance Perspective” on February 18, 2009.

Is the current global crisis an economic crisis or a financial crisis? Do the causes lie only in the greed of human beings, the greed of investors and in the breed of investment bankers and their exotic investment banking product structures as believed by some; or do they also lie in the core economic theory that provided the framework upon which the world’s economic and banking system has been designed, built and driven?

The presentation by Faizal Salieh, Managing Director and Chief Executive Officer of Amana Investments Limited will attempt to answer these questions by viewing the current global crisis from an Islamic finance perspective; examining the core conventional economic and banking theory framework and analysing the fundamental causes of the problem in the context of that framework. It will also assess whether the core principles of Islamic finance and banking could help in the formulation of a sustainable future solution?

source : sundaytimeslk

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

ABC Investments launches first Islamic Credit Card in Sri Lanka

colomboABC Investments launches first Islamic Credit Card in Sri Lanka


The ABC Investments Limited (Barakah Islamic Financial Services) ceremonially launched its first Islamic Credit Card in Sri Lanka at Holiday Inn Hotel, Colombo recently. This Card is tittled ‘ABC Barakah Credit Card.’ Also, this is the third Islamic Credit Card in the region. First in Malaysia, second in Pakistan and third in Sri Lanka. The first Islamic Credit Card in the World was launched in 2002 by ABC Islamic Bank in Bahrain.

ABC Investments Managing Director M.I.M. Razeek speaking at the launching ceremony said, “The ABC Group originating from shipping, freight forwarding, plantation, insurance convention, Credit Card, Islamic Investments under ABC Investments Ltd. The ABC Investment Limited (Barakah Islamic Financial Services) being operated strictly following the principles of Islamic Shari’ah Board. Every step is only upon the approval of its Shari’ ah Supervisory Board. The Board is led by Ash Sheikh Niyas Moulavi.

This Cards are issued in four types: – ABC Barakah – THAHAB (Gold) Card; ABC Barakah – ZAITOON (Olive) Card; ABC Barakah – BALAATEEN (Platinum) Card and ABC Barakah – MALA ( Elite) Card

The ABC Barakah has established three branches within the eight months. The branches are City Branch in Colpetty, Colombo, Pettah Branch in Main Street and Hill City Branch in Kandy. They hope to open more branches in the Eastern Province in Kattankudy, Eravur and Kalmunai.

Ash Sheikh M.I.M. Rizvi Mufthi, President of the All Ceylon Jamiyathul Ulama, Secretary Ash Sheikh Abdul Nazar and ABC Investments Shari’ah Board President Ash Sheikh Niyas Moulavi also addressed the launching ceremony.

source : bottomline

Sri Lanka leasing giant to sell Islamic securities

images36Sri 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.

source : lbo