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Islamic finance and reconstruction of Sri Lanka

Sri Lanka has been devastated for the last three decades by the ruthless war. The Lion’s share of the budget had to be diverted to combat terrorism. No major developments were carried out.

The commitment, sacrifice, patriotism and above all the able political leadership prevailed over the challenges and betrayals. The motherland Sri Lanka was lucky enough to be liberated from terrorism. It is the bounden duty of every patriotic citizen of the country to do his/her best to rebuild the country which lags behind other similar countries by at least 30 years.

Huge investment is indispensable for the reconstruction of the country that is destroyed by the war. Sadly, the global economic meltdown hinders the flow of investment. The irony is that the conventional financial institutions as well contributed to the world economic crisis.

Some of them collapsed, while most of them were badly affected. It is noteworthy that the Islamic financial institutions held up against the global economic tsunami. This opened the eyes of the economists and bankers and made them towards the Islamic financial institutions.

The main reason for the survival of the Islamic Financial institutions in the global economic downturn is its stand against “Riba”- Interest-. Islam vehemently prohibits all forms of Riba. In the Islamic perspective, money is a measuring and exchanging tool and not a commodity in itself, it requires that one should not receive guaranteed income from money alone. If money generates money - without any effort or risk - it is Riba “interest”.


Islamic financial products such as Murabaha (Finance), Ijara (Leasing) and Sukuk (Bonds/Securities) are more appropriate in the Sri Lankan context

The conventional banks, of which the interest is the lifeline, take care of the investors only. The consumer/customer has to pay the interest at any cost to the conventional banks. Such inflexibility of the banks was one of the major reasons for the collapse of the world economy.

Islamic financial institutions are considerate of both the parties, namely the investors and consumers. Islamic financial products such as “Murabaha” (Finance), “Ijara” (Leasing) and “Sukuk” (Bonds/Securities) are more appropriate in the Sri Lankan context, as they are not exploitive, but share the profit or loss of the customer/consumer.

Vatican on Islamic Finance

Vatican’s official newspaper Osservatore Romano said in an article in its issue of March 3, 2009 “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service.”

Author Loretta Napoleoni and Abaxbank Spa fixed income strategist, Claudia Segre, say in the article that “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the “‘car industry or the next Olympic Games in London” The Islamic finance has crossed its Middle East borders and stepped into non Islamic countries such as UK, USA, Germany, France, Japan and Thailand.

The West, realizing the potential and profitability of the Islamic finance- compete with each other to make their respective countries the hub of the Islamic financial institutions.

Islamic Financial Hub in UK

United Kingdom has already recognized Islamic Finance as an alternative finance system and made necessary fiscal and tax adjustments to put it on the same footing as conventional services. The first fully-fledged Islamic bank, the “Islamic Bank of Britain” was opened in 2004. There are now five (05) fully-fledged banks and at least 22 Islamic windows banks.

A total of 18 Sukuk issues raising 10 billion dollars have been listed on the London Stock Exchange, which is second only to Dubai.

International Financial Services London’s Director of Economics Duncan McKenzie, says: “The UK has benefitted considerably from supportive government policies intended to put Islamic services on the same footing as conventional services. Evidence of London’s growing role in Islamic finance is shown in the UK being the only western country to feature prominently, eighth with assets of 18 billion dollars in a global ranking of Sharia compliant assets by country.”

As per the UK Trade and Investment’s Chief Executive Officer Sir Andrew Cahn: “Despite its origins overseas, Islamic finance has found a natural home in the UK. Though no sector is immune to the global financial crisis, Islamic finance has shown great resilience”.

Capital of Islamic Fi nance in France

France is seeking to dislodge London and become Europe’s new centre for Islamic Finance, driving to attract billions in investment from Muslim countries.

The Finance Minister Christine Lagarde, announced France’s intention to make Paris “the capital of Islamic finance” and announced several Islamic banks would open branches in the French capital in 2009. Based on a report prepared by the Ministry of Finance, the senate is looking at ways to eliminate legal hurdles, particularly levies, for Islamic financial services and products in France and the potential for listing companies on the Paris Stock Exchange.

The French Government has recently approved changes to legislation to allow Islamic “sukuk” bonds to be issued and the Qatar Islamic Bank has applied to be the very first bank to begin activity in the reformed French system.

Sovereign Sukuk in Germany

In 2004, a 100 million pounds Sukuk, structured as a Sukuk Al Ijara, was issued in the federal state of Saxony-Anhalt in Germany. The Federal Republic of Germany guarantees the debts of Saxony-Anhalt. The certificate holders receive a variable rent benchmarked to the EURIBOR over the rented period. This sovereign Sukuk is listed on the Luxembourg Stock Exchange.

East Cameron Gas Sukuk in USA

The first Sukuk to have originated from the United States tapped the market in 2006. The unique feature of the East Cameron Gas Sukuk was that it was the first ever Sharia compliant gas backed securitization rated by Standard and Poor’s.

The $165.7 million Sukuk originated from Houston based East Cameron Partners, whose reserves are located in the shallow waters off the shores of the State of Louisiana.

Sukuk and Bond

A bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal, whereas, the Sukuk holders claim an undivided beneficial ownership in the underlying assets.

Consequently, Sukuk holders are entitled to share in the profit or loss generated by the Sukuk assets as well as being entitled to share in the proceeds of the realization of the Sukuk assets.

Sukuk and infrastructure facilities of Sri Lanka

Sukuk or rather Sharia complaint “Bond” has developed as one of the most important mechanism for raising huge capital for investment in infrastructure facilities.

Multinational corporations and governments use Sukuk issuance as an alternative to conventional bonds as the earlier one is consumer friendlier.

Sri Lanka, for the last several decades, has been enjoying better bi-lateral with Middle Eastern Muslim countries. Sri Lanka and the Muslim world express mutual respect and support to each other in international forums.

This relationship was further cemented after the present Government took office under the leadership of Mahinda Rajapaksa.

Therefore, Sri Lanka has every legitimate right to expect its friendly Middle Eastern countries to invest here in huge projects using the Islamic financial products such as “Sukuk”, “Murabaha” and so on.

Sri Lanka on its part should create a level playing field in order to attract Islamic financial products so that they can compete with their conventional counterparts.

Sri Lanka should bring in necessary legislative amendments to the statutes or rather “Gazette” notifications to put Islamic financial services on the same footing as conventional financial services.

In substance, Islamic financial services and conventional financial services are more or less the same even though the forms are different. Since, the tax statutes consider both substance and form, necessary amendments are to be made to the statutes as USA, UK, France and Germany have already done to their respective statues, so that Islamic financial services can be accommodated as an alternative financial system.

If the level playing field is created, Sri Lanka would soon become the hub of Islamic Finance.

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