Rekindling the spirit of Islamic banking and finance

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By Shehana Dain

The Sri Lanka Islamic Banking and Finance Industry (SLIBFI) conference was held for the seventh consecutive year in order to create a platform for stakeholders to engage in important discussions and much needed networking.
This event organised by UTO Educonsult brought to life the key event in the IBF (Islamic Banking and Finance) calendar and was themed ‘Rekindling the Spirit’. Since the amendments made to the Banking Act No. 13 in March 2005 the IBF industry seemed to be a lucrative platform for more players to join. As a result profusion of stakeholders and professionals were present at the conference to engage in important discussions and much needed networking.

According to a study by Ernst& Young, although Islamic Banking still makes up only a fraction of the banking assets of Muslims, it has been growing faster than banking assets as a whole, growing at an annual rate of 17.6% between 2009 and 2013. For the first time in history in 2013, the combined profit of participation banks crossed the $ 10 billion mark. By 2019, it’s estimated that collective profits would touch $ 37 billion as the industry continues its double-digit annual growth of 19.7%. The growth of the IBF industry in par with global trends is picking up pace in Sri Lanka, which is highly visible with the local conventional banking and commercial sector creating Islamic Finance Units.

“Comparing with conventional banking industry Islamic Finance institutions depend on each other so they should not look at each other as competitors; they should consider them as partners, without making liquidity their prime enemy – CEO Commercial Leasing and Finance Krishan Thilakaratne”

Being the key event partner of the event, Adl Capital Associate Director Azad Zaheed noted that this year’s SLIBFI theme ‘Rekindling the Spirit’ is timely when looking at the IBF industry in the country. In his speech ‘The way forward’ Zaheed stressed, “With Sri Lanka’s focus on creating an investment climate conducive to attracting foreign investments there exists an opportunity for the IBF sector to step in and play a pivotal role in the island nation’s march towards prosperity.”
He went on to say, “The oil rich economies of the Middle East are the global drivers of Islamic finance and hence they could be the potential point to attract investment.”

The way forward

“The progress of the IBF has been steady. It has demonstrated to what is referred to as organic growth ensuring stability and the Islamic banking growth in Sri Lanka. The industry has not taken any short cuts; it has evolved in an organised and disciplined manner. Most importantly is inside the boundaries of legal frameworks and regulations,” Zaheed commented on the current market situation of the IBF Industry.

He pointed out that after nearly two decades in operation, what we see is a phased out expansion in the industry especially in terms of reach and balance sheet growth. “Yet one must notice that the full potential of Islamic Banking and Finance is yet to be realised.”

Zaheed stated some of the solutions that he felt were most relevant saying that the industry is in need of a collective voice that is well positioned to channel a common cause to present relevant matters and engage in meaningful discussions with the regulatory bodies and also on Sharia matters. He further professed that an umbrella organisation comprising of all IBF service providers will be 12-4-Sthe voice for the entire industry. The role and scope of this association will be primarily to take the industry forward.

The area of commercial banking was the next aspect Zaheed looked into; he elaborated that product innovation and development is a must and noted that many industry players in Sri Lanka have faced the absence of broader product menu cards which has taken a toll in the market. “We are yet to witness Education Finance, Agriculture Finance and Project Financing taking place on a larger scale.”

He also noted that IT systems in harmony with local accounting standards will provide the essential push towards growth. “The support of a reliable IT system to support IFI operations remains an industry concern especially for new entrants. The cost of procuring technology from overseas appears to be prohibitive due to exorbitant costs. However it’s pleasing to note that at least a few IBF service providers have used their in-house skills to overcome this problem.” He stressed that the need of the hour is local IT providers whom have developed specific product models to come up with the total turnkey solution in order to provide access to the industry to a cost effective locally engineered IT system sooner rather than later.

Growing in muscle and spine
Quoting a much respected senior banker Zaheed said, “The Islamic banking and finance sector has grown but has grown big and fat and where it’s found wanting is in muscle and spine.” He further commented saying, “That quote sums up where we are today. We have grown in balance sheet size; we have grown in some extent some individual institutions have reached out but I think there is much more to be achieved. Where is the muscle and spine?”

Zaheed highlighted that while preserving its distinct identity and staying true to its core principals IBF is no longer exclusive to the Muslim community and raised a question again highlighting, “With all the growth trends of the IBF industry globally how many institutions have penetrated the Sri Lankan market to attract people and business that rest outside the Islamic faith. Has its presence been felt at the grass roots in the villages?”

“The industry is crying out for trend setters; it basically needs leadership, a sense of direction; the proposed formation of the association may address that issue.”

Zaheed further stated that there is a need for out-of-the-box thinking, stressing that there have been frequent complaints by the stake holders and customers about the rigidity of rules rather than the spirit of the rules specially with regard to funding, the SME and micro sector as well as being totally non-accommodative to the start-ups. He also called upon the industry to revisit their funding policy, perhaps explore means of having in place a policy which is more conducive and in harmony with the essence and the spirit of Islamic Finance.

“Today nobody wants to be a Middle Eastern player, nobody wants to be a European player or UK player; everybody wants to be a global player. This requires you to go out there and create your alliances – KPMG Managing Director Riyaz Mihular”

The need for paradigm shift

The key knowledge partner of the event KPMG Managing Director Reyaz Mihular said, “In 2014 Islamic Finance assets grew by over 40%. I think within a year we have doubled the amount of institutions that’s coming up from 12 to 28.”
“But is this enough? Have we done enough?” was a question raised by Mihular. He noted that this is where the need for paradigm shifts occurs.

In his speech he called out to all service providers to give full effect to the underline concept of Islamic finance ‘justice and equity’ in the products and services that they offer to the market. “Have we really examined the concepts underlined with finance and introduced products and services which will give full effect to the concept of justice and equity that Islamic finance advocates,” he added.

Mihular further highlighted that by branding your service Islamic finance institutions, the industry closes a frontier or a door and it maybe the right time to think about a new name which incorporates very clearly the principles of justice and equity in whatever you do.

“Journey towards further growth and consolidations is expected to be enduring yet it remains a journey which must be undertaken; there is no turning back and it needs to be undertaken collectively with all stakeholders moving forward – Adl capital Associate Director Azad Zaheed”

“If you’re going to give full impact to the concept of Islamic finance you should know that Islamic finance is all about private equity, how many institutions do we have in our midst that can proudly say that we are top quality private equity practitioners?”

Noting that risks have to be undertaken in order to strive for success Mihular said; “If we are going to a paradigm shift we have to get out of our comfort zones and while doing that we will win some and lose some; you have to get out of that mentality of a banker – I win the client loses. In Islamic banking you win some you lose some.”
He explained further saying that when we take private equity approach to business you win some you lose some. Questioning whether we have the capacity and the ability to do that, he noted, “Until we do that we will never have Islamic finance in its true sense; people are going to laugh that we are also anther rebranded banking service.”

Big fish in a small pond
“We are quite happy being the big fish in a small pond because again it’s a comfort zone. How many of our industry players have gone out and ventured into strategic alliances with bigger players outside.”

Mihular questioned the stake holders, “Do we have regional aspirations or are we condemned to Sri Lanka only?”
“If we are happy servicing the Sri Lankan market only, it will make the Islamic industry in Sri Lanka big players in a small pond,” he explained. He further stated that if we are going to have a paradigm shift in the industry strategic alliance is a must because Islamic finance is all about structured finance and being dependent upon locally developed structures in different financial institutions is a waste of time when there are big institutions out there that have done huge amounts of structures.

“Do we have the courage and the ability to make strategic alliances? As these alliances always have some difficulty because you have to give up some of your personal independence,” said Mihular stressing on the consequences a less influential company has to pay to become regional.

Raising FDI for infrastructure development
During the panel discussion themed ‘Contemporary Topics by Industry Experts’, the moderator Calamander Capital Director Mafaz Ishaq posed the key question on how to raise Foreign Direct Investment (FDI) for infrastructure development in par with private public partnerships. Mihular explained saying that the Islamic finance industry particularly in the Middle East has surplus liquidity and they are looking for good avenues to invest. He stressed that the problem they find in Sri Lanka is the small market volume and detest of allocating costs to have a separate team in the country to study the market has blocked such FDIs coming into the country.

But as solution for that concern Mihular professed, “If we have a good player here who can do the ground work, who can do the number crunching, take the deal to them. I’m sure a lot of them will be interested because everyone is looking at growth markets where a lot of infrastructure and catching up is left to do and Sri Lanka is such a place.”
Another important factor brought up in the panel discussion by him was, don’t wait for the regulatory system to change in order to take the first step. He urged institutions to be the first to make changes then regulations will adjust.

Adl Capital CEO Ishratt Rauff highlighted the importance of showing the Government the fact that it’s very much cheaper to go ahead with infrastructure with Islamic Finance institutions as there is a lot of surplus cash.
Amana Bank CEO Mohomed Azmeer opined his thoughts on this perspective citing examples from UK and its success story to attract FDIs via Islamic Finance stating that the primary reason behind their success was the significant changes made to the regulatory and legal framework as a result of that strong governance and regulatory framework to protect the stake holders which led to UK being one of the strongest Islamic finance sectors.

It’s important to note that while attracting FDIs you should have a level playing field to carve those funds that are coming. So if we can work together with the regulators and the framework we can move forward.”
Commercial Leasing and Finance CEO Krishan Thilakaratne said, “We have been talking about FDIs for quite a long time but not many have flown into the country. The reason that FDIs have not come is because we don’t have banks or companies that have adequate balance sheet values.” He further highlighted that it’s up to the big players who are in the Islamic finance market to build the balance sheets to show the maximum potential in order to encourage FDIs.
The third presentation of the day ‘Perception of consumers towards IBF’ was conducted by an APIIT lecturer Nazeefa Fawzer based on a study for a doctoral thesis. Several other panel discussions also took place at the event: ‘Structured Debt, Credit Cards and Capital Market initiatives’, ‘The evolution of IBF in Sri Lanka over two decades’, ‘Attracting FDI and the sessions ended with a discussion on ‘Rekindling the spirit of IBF’.

Pix by Upul Abayasekara

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