| July 29, 2010 (LBO) - Informal entities that have been operating as Islamic financiers in Sri Lanka will have to get their houses in order and become fully compliant with supervisory regulations ahead of a new law on deposit taking, an industry official said.
"Some IFIs (Islamic financial institutions), because the owner is a well-known figure, have been able to raise a lot of money," Faizal Salieh, managing director of Amana Investments, a Sri Lanka-based firm, told a forum in Colombo organized by Educonsult, a consultancy.
"The business finance act is coming around the corner and it will make it difficult for people who do not get their house in order."
He said there were "mom and pop shops" in "nooks and corners" with "large sums" in their balance sheets.
Islamic finance operates by being compliant to Shariah religious law, where formal interest is not charged but returns come as a profit share.
Salieh said a forum had been established with the participation of KPMG, an accounting firm, to help informal firms gain knowledge on becoming compliant with official regulations and also discuss and raise issues affecting the sector.
Analysts say various unregistered firms are taking deposits due to a loophole in Sri Lanka's laws related to finance business which is expected to be closed with a new law, where deposits are more broadly defined.
Salieh said Sri Lanka does not have an entirely separate framework for regulating Islamic finance as does the UK, but that the conventional regulations have been 'tweaked' to permit it.
He said Islamic financial institutions should be compliant with supervisory regulations though the market sometimes placed a lot of faith in the existence of a 'Shariah council,' at the institution. But there may be no link with regulatory compliance.
"While the Shariah council is knowledgeable in matters of Shariah compliance they do not really run the IFI," he said.
"If the board and the management have run the company down, the Shariah council has to answer to the market.
"The business ethics of the IFI managers and the people who sit on the board are equally important.
"Today banking and finance is about truly understanding risk and managing."
To take the industry forward, a supply of banking professionals who understood Shariah compliance as well as those who knew about risk management and the supervisory framework was needed, he said.
Islamic financial products were also negatively affected by the country's tax laws, such as the economic service charge, he said. Discussions were underway with the authorities to resolve such issues.
The Amana Investments group is promoting a bank, which has received provisional approval from the Central Bank. The firm has raised more than 3.0 billion rupees as initial capital.
"Most players in the industry are waiting for Amana Bank to happen," Salieh said. "We have a tremendous responsibility. We need to do things right for others to follow." [More]
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