Sri Lanka expects to devise Islamic finance specific regulations this year following ongoing consultations with the industry, though the first commercial bank on alternative finance has been licensed on existing rules, an official said.
"We are open for discussion and change, going forward," Yvette Fernando, director, bank supervision at Central Bank told a forum in Colombo.
"We welcome any input for separate regulation." Fernando said at the moment commercial banks practicing Islamic finance must meet existing regulations. The Central Bank has licensed the first commercial bank, Amana, to operate Islamic finance. Fernando said the central bank wanted to devise rules specific to Islamic finance this year. Islamic finance which is based on Islamic or Sharia law, prohibits the charging of interest and structures advances and deposits on the basis of profit or loss sharing.
Islamic finance is regulated in many countries including Britain and is a fast growing niche in global financial markets. Practitioners say in Sri Lanka where the Islamic finance is still evolving there is a dearth of investment avenues for new banks.
At the moment a commercial bank operating on Islamic finance principles has no earning asset to invest assets to meet liquidity requirements. The money must be kept in cash, while competing commercial banks can invest in interest earning Treasuries. Countries like Malaysia have issued government bonds tied to specific projects called 'Sukuk' which are yet to appear in Sri Lanka.
Practitioners have suggested the possibility of holding gold as a liquid asset. Fernando said her department and her officers were studying Islamic finance instruments closely and said that regulators would have to clearly understand such products. She also warned that the public must also be fully aware of the nature of some deposit product where there may not be a yield. "If not they will complain to the regulator," Fernando said. "Already there are complaints." She said as the regulator Central Bank will have to act.
source: Lanka business online