Amana Bank pioneers in Islamic banking

Indunil Hewage

Amana Bank has been successful in delivering significant advantages to Sri Lankan customers through its wide range of innovative and cutting edge banking solutions. Amãna Bank Managing Director / Chief Executive Officer, Faizal Salieh in an interview with Daily News Business in discussion about the presence of Amana Bank in Sri Lanka and Banking Industry, its future challenges in the industry.

Some excerpts of the interview

Q: Amana is ambitious of playing a leading role for Islamic finance. How do you see the industry progressing in Sri Lanka?

A: We are indeed the lead players in Sri Lanka in many ways. We pioneered Islamic finance far back as 1997 and were instrumental in bringing the first level of changes to the Banking Act in 2005 to facilitate the evolution of Islamic banking. We pioneered many of the Islamic Finance products in use in the market today; formed the first licensed commercial bank based on the principles of Islamic banking in August 2011. Negotiated and brought in a substantial amount of foreign equity investments into the Islamic banking sector during the height of the conflict period and the global financial crisis. We still continue to be the market leaders.

The industry is still in its nascent stage, but has the potential for growth both in the context of the unique value proposition it carries and the global interest and growth, Islamic Finance has generated particularly in the aftermath of the global financial and economic crisis. The industry is seeing the emergence of a number of conventional banks and finance companies opening ‘Islamic windows'; market awareness is on the increase, particularly among Non-Islamic customers on the UVP of Islamic finance; regulators are beginning to understand and respond favourably to the business model of Islamic finance; many new products are being introduced. The Government has made a policy statement in support of creating a level in the playing field, between Islamic finance and conventional finance in the field of taxation although we are still to see a uniform cascading at the Inland Revenue Departmental level.

Q: Many non-Muslims in Sri Lanka are interested in Islamic-compliant banking instruments. Why is this?

A: It is this unique value proposition that Islamic banking offers that attracts all customers irrespective of caste or creed. This UVP is built on the principles of fairness, equity and justice which are the cornerstones of the business model. Transparency is a fundamental component in all the transactions, there are no hidden costs or small prints.

The model essentially works on a profit/loss sharing system and not on pre-determined and fixed interest rates.

Some of the outstanding features are that Islamic banks do not profit from the genuine difficulties of their customers; there is no penalty for delayed payments by customers, who are in difficulty, even if the bank charges a penalty under circumstances where a customer tries to abuse the system or take undue advantage, such penalty would not be taken into the bank ‘s income but channelled to charity as the purpose of applying, such penalty would be to act as a deterrent to abuse.

The model does not allow the bank to profit from economic uncertainties in that speculative transactions and dealing in uncertainty are prohibited. People who have experienced Islamic banking, value the fairness of its principles.

Q: What do you think could be done to address the shortage of experts in the Islamic Banking segment ?

A: There is certainly a shortage of expertise both at the Sharia scholars level and the banking practitioners level globally, this is a serious constraint to the expansion and development of the industry worldwide. There is no immediate solution to this human resource problem. universities are beginning to introduce Islamic finance courses at academic level and professional institutes, such as CIMA have also introduced similar courses.

Q: What future challenges do you see for Islamic banking in Sri Lanka? What suggestions do you have for the betterment of the industry?

A: I see a great future for Islamic banking both at the global and local levels. As the world goes through cycles of economic and financial crises and instability from time to time, people have realized over the time that many of these situations are due to the fundamental weaknesses embedded in conventional economic theory, particularly monetary theory and its application and have begun researching for alternatives, therein lies the challenge for the principles of Islamic economics, finance and banking to provide a uniquely different alternative solution and build the platform for a refreshingly new model.

In terms of the challenges that Islamic banking faces worldwide, Topping the list is an enabling regulatory, legislative and fiscal framework. Other challenges include the need for standardization of contracts, simplification of documentation in transactions, harmony and uniformity in the application of Sharia decisions and interpretations across banks and financial institutions, uniformity and transparency in financial reporting and ofcourse adherence to good corporate governance standards.

The response of international accounting standards to accommodate the accounting characteristics of Islamic finance is also a challenge. Another fundamental challenge is the maintenance of the purity of transactions on an ‘end-to-end’ basis by Islamic banks, when there is aggressively competing in the market, particularly against conventional banks. Yet another key challenge is the development of new and simple products that can meet the changing banking needs of customers.

Inter-bank money market transactions are still at an early stage of development and there is a strong case for an appropriate Sharia-compliant instrument as an alternative to the Treasury Bill for banks to keep surplus liquidity with the Central Bank. Managing and investing surplus liquidity in appropriate Sharia-compliant and revenue generating instruments is a real challenge for the industry in the present phase of its life cycle.

Q: What additional role could Amana bank play in Sri Lanka’s economic development?

A: We have some project ideas in mind and shall pursue it in due course, as we move forward and strengthen our balance sheet. The Government's infrastructure development budget is over USD 20 billion.

This offers considerable scope for sovereign sukuks. There has been some protracted in-depth discussions with the authorities on sukuks.

The sukuk product structure has certain pillars which might appear conceptually difficult to the authorities and we are in the process of evaluating various alternative product forms to progress in this direction.

The main area of our focus is the SME sector. This is where we are concentrating our strategies on. SMEs are the backbone of the economy and is widespread across the country. We also tied up with MoneyGram recently to provide a conduit for foreign currency remittances by Sharia-conscious Sri Lankan expatriates to their motherland.

Q: What are the factors that contributed to overall Amana Bank’s performance for the last year?

A: We are relatively a new and small bank. We started banking operations in August 2011 and completed a full year of business only last year. Whilst we are pleased with the growth of our customer deposit base, the growth of our financing assets (or “lending” to use a conventional term) was adversely restrained by the credit ceiling imposed by the Central Bank on all banks since March last year. As a new and small bank it hurts us much more than the bigger banks and had a telling effect on our operating profitability. Nevertheless we were able to post a respectable bottom line, subject to audit, in 2012.

As for the factors that contributed to our performance, I would say that our presence and reach in the right areas where there is demand for our services, the fairness with which we transact business, the dedication of our staff and the strengths of our strategic shareholders are the key factors that play a significant role in the bank's overall performance.

Q: How would you rate Sri Lanka in comparison to other regional Islamic finance players?

A: The key measures for such a rating, I think would lie in, (a) the availability of an integrated enabling environment, (b) the size of the market, (c) the level of development and linkages with the capital market and (c) the number and quantum of cross border deals done. In this respect, Sri Lanka takes a stand behind countries like Singapore, Thailand, Malaysia and Pakistan, but ahead of India. W do have the potential to position ourselves competitively and this would require an integrated approach by the relevant authorities and the industry operators and fast tracking in decision making. Examples outside the region include UK and South Africa.

Q: What are the measures taken to increase Deposit base?

A: The bank is implementing a plan to expand its reach and distribution network across the regions where there is a demand for our services; we have opened two new branches in January this year and have introduced our own ATMs as well as tied up with Combank's ATM network so that our customers will be provided with better convenience. Further we have introduced a number of deposit and saving schemes as measures to widen our deposit base.

Q: What are the measures taken to curtail the expansion of NPA?

A: Our NPA which is presently around 1% is well within the total banking sector average of 4%. A robust risk evaluation process at the point of origination of credit and a close account performance and monitoring system are in place to manage NPAs.

Q: What is the future growth strategy plan?

A: It is a combination of expanding reach, conveniences and new products with a strong strategic focus on the Consumer and SME business segments.

Q: What are the measures taken to improve capital and governance structure for future growth?

A: We are in the process of raising additional capital to strengthen our balance sheet to support our aggressive expansion plans as well as prepare for the higher statutory capital requirements that would come into progress in 2015. We are following the standards of good corporate governance set by the Central Bank. We believe both these are important for the bank's future growth.

Q: What is Amana bank's future strategy for the SME sector?

A: The SME sector is a primary focus area in the bank's strategic plan. It is a sector we are closely associated with. We want to increase our involvement in this sector through a number of initiatives which include scaling up our customer relationships from transaction banker to primary banker, using a separate and relevant credit scoring model to evaluate SME credit, introducing SME relevant products and services, establishing SME desks and centres and educating our customers in this segment on how to manage their businesses in order to achieve long term sustainability.

Q: What are your plans for branch expansion and products expansion?

A: We have an aggressive branch expansion plan this year. We have 16 branches at present, plans are on the way to increase this number to a significant amount. We have already introduced some new products at both ends of our balance sheet and will soon be adding some more on the asset financing side this year.

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