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Interest-free Banking in Sri Lanka
By Shuhada
(Click "Sri Lanka" label on bottom of the article for more)


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.


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.



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