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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 1587

Islamic Finance catching up the world

By Quintus Perera – Asian Tribune
Colombo, 22 April, (

Salient characteristics of Islamic finance are Establishing Shariah compliance mechanism; Issue guidelines on prudential issues & addresses the unique characteristics of Islamic financial contracts, ensuring a level playing field, indicated Ms Yvette Fernando, Director, Bank Supervision , Central Bank speaking on “Regulatory framework for Islamic Financial Institutions” at a conference on Islamic Banking and Finance held in Colombo and also the discussions were centered on how best Sri Lanka could be positioned to capture a slot in this fast growing market.

Responding to a query from the audience, she said that any investor whether Islamic or otherwise, when they do not get a reasonable return on the investment from licensed banks, they come to the Central Bank calling for relief, so they would introduce appropriate regulations to be applied to all the financial institutions to safeguard the interests of the investors.

The day long programme was organized by the Chartered Institute of Management Accountants (CIMA) Sri Lanka Division and the Bar Association of Sri Lanka (BASL).

She said that regulating of financial institutions is important for high leverage, systemic importance; Public confidence and the ultimate objective is to preserve the financial system stability.

She said that there are two regulatory approaches such as single regulator and multiple regulators. In the formulation of regulations of core principles of BIS, Statutory requirements, Prudential grounds and Market developments are considered. She said that the main areas covered by regulations are Capital, Risk management, Governance and Compliance.

She said the bank supervisors must set prudent and appropriate minimum capital adequacy requirements for banks that reflect the risks that the bank undertakes, and must define the components of capital, bearing in mind its ability to absorb losses.

The Central Bank regulations on capital are directions on maintenance of Capital Adequacy Ratio, on ownership of Issued Capital Carrying voting Rights and determination on Foreign Participation in the Share Capital of a licensed commercial bank incorporated or established in Sri Lanka among other regulations.

Ms Fernando said that in the case of Credit Risk Management the bank supervisors must be satisfied that banks have a credit risk management process that takes into account the risk profile of the institution, with prudent policies and processes to identify, measure, monitor and control credit risk (including counterparty risk).

Supervisors must be satisfied that banks establish and adhere to adequate policies and processes for managing problem assets and evaluating the adequacy of provisions and reserves.

She said that Islamic banks are governed by similar regulatory framework as in conventional banking which involves such things as Capital adequacy, Risk management, Liquidity management, Financial transparency & market discipline and Corporate governance.

Ms Fernando said that the salient characteristics of Islamic finance are Establishing Shariah compliance mechanism; Issue guidelines on prudential issues & addresses the unique characteristics of Islamic financial contracts, ensuring a level playing field.

With the amendments to the Banking Act introduced in 2005 existing regulations on Islamic Banks in Sri Lanka are the definition of ‘deposits’ & ‘accommodation’ and the incorporation of new permitted business under Schedules II & IV.

She said that Islamic Banking operations should be conducted strictly within the existing regulatory framework applicable to the licensed banks. The respective banks should maintain separate books of accounts for their Islamic Banking Operations.

Data on Islamic Banking should be included under a separate column in the statutory returns submitted to Central Bank in order to enable a clear demarcation between the accounts relating to conventional banking and Islamic Banking.

Ms Fernando said that the regulations promote strong risk management systems and governance in financial institutions. Success of prudential regulations depends on the acceptability and behaviour of market participants and the directors and senior management has the ultimate responsibility of managing the affairs of the institution with a view to safeguarding the interest of their customers.

Shibly Aziz, President BASL said that the Bar Association intends to partner with leading professional organizations so that they can give service to the business community not only to lawyers involved but also non-lawyers involved.

He said they feel that this is the correct time to do this as there is definite upsurge in the economy of Sri Lanka now and said that there is a tremendous potential in Sri Lanka for Sharia compliant products.

Reyaz Mihular, Partner - Head of Advisory Services, KPMG Ford, Rhodes, Thornton & Co speaking on ‘Accounting for Islamic Finance’ said that accounting for Islamic Financial Instruments includes Modes of Sale, Financing and Investment and Murabaha, Bai Al Salam and Istisnaa comes under sale. Mudarabah, Musharakah, Wakalah come under Finance and Ijarah (leasing), equity and real estate come under Investment.

He said that the primary reasons for Islamic finance standards are to provide a benchmark for the industry; shape the market and define characteristics of the industry and promote sophistication and maturity of the industry.

He said the intricacies of Islamic banking and finance practices are conceptually different from conventional practices. Islamic banking standards cover intricacies of Islamic financial transactions to give true and fair view of financial positions of Islamic financial institutions.

Homogeneity to Islamic banking and finance practices enhances confidence of users of Islamic financial transactions; harmonize and converge financial reporting; prove greater clarity for interpretation of financial statements of Islamic financial Institutions. Greater transparency on the financial statement of Islamic financial institutions to benefit customers and other stake holders.

Islamic Finance is now considered not as a religious product while a series of financial products are developed to meet the requirements of a specific group of people and around US $ 500 billion in assets around the world are managed according to Sharia law with an annual growth of 10%.

The other speakers were: Dr M A M Shukri, Director, Naleemiah Institute of Islamic Studies spoke on ‘What is the Shariya’; Faizal Salieh, Managing Director, Amana Investmens Ltd spoke on ‘Introduction to Islamic Finance; Ishrat Rauff, Managing Director/CEO, Adl Capital Ltd spoke on ‘Stock Market Investments from a Sharia Perspective’; Suresh R I Perera, Principal – Tax and Regulatory, KPMG Ford Rhodes Thornton & Co spoke on ‘Tax Issues’ and Javed Mansoor, Attorney at Law spoke on ‘Legal issues and corfporate governance for Islamic Financial Instruments’ .

- Asian Tribune -

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