Sri Lanka’s Al-Falaah targets untapped market

BloombergColomboSri Lanka’s Al-Falaah plans to double its branch network and target small businesses as rebuilding after the country’s three-decade civil war revives the economy.The Islamic finance company, which started operations in 2008, will have as many as 10 outlets within two years, General Manager Krishan Thilakaratne said in a December 6 interview from Colombo. Sri Lanka has a Muslim population of around 1.6m, according to the CIA World Factbook, and less than 5% of them currently use Shariah banking, he said.“We want to get into microfinance because that is a huge market in Sri Lanka,” he said. The country’s $200mn of Islamic financial assets should double in the next two years, Thilakaratne said.President Mahinda Rajapaksa’s government announced in 2010 that it would grant Shariah-compliant financial transactions equal tax treatment, paving the way for a sukuk, although there hasn’t been any progress since then. The South Asian nation is rebuilding roads, ports, hospitals and aviation facilities after the fighting that ended in 2009, and sukuk could be used to fund this spending, according to RAM Ratings (Lanka) Ltd.“It is possible to see a sukuk issuance from Sri Lanka in the next few years,” Abas A Jalil, chief executive officer of Amanah Capital Group Ltd., an Islamic finance consultancy in Kuala Lumpur, said in a December 10 interview. “Rebuilding after the war requires large funds for infrastructure construction so sukuk would be the best instrument to finance it.”Gross domestic product increased more than 8% in each of the two years following the end of the civil war before expansion slowed to 6.3% in 2012 on falling demand for exports that include tea and textiles. Growth has picked up since then, with the $59bn economy expanding 7.8%  in the third quarter from a year earlier, the most since the period ended March 2012. Overseas sales surged 35% year- on-year in October, official data show.Al-Falaah isn’t considered a bank as it is the Shariah financial services unit of LOLC Group, a Sri Lankan conglomerate that has interests from agriculture to energy. It will roll out microfinance products in the fiscal year that starts in April, Thilakaratne said. The company, which currently offers Islamic savings accounts, trade finance and leasing services, has $50mn of assets and is targeting 25% annual growth in 2014 and 2015, he said.Sri Lanka has one full-fledged Islamic bank and lenders including Commercial Bank of Ceylon Plc, Bank of Ceylon and Hatton National Bank Plc that offer Shariah-compliant services, Suresh Perera, the tax and regulatory principal at KPMG Sri Lanka in Colombo, said in a Dec 12 e-mail. Amana Bank Ltd., the sole Shariah bank, had 16.7 billion rupees ($128mn) of assets and 13.3n rupees of deposits as of end-2012, according to its latest available annual report.The nation’s Islamic bankers aren’t developing products beyond the basic offerings as they haven’t received the requisite training, hampering the industry’s growth, said Adrian Perera, chief executive officer of RAM Ratings (Lanka).“Here, the institutions are very focused on hire-purchase, leasing, basic lending and deposits,” he said in a December 9 interview from Colombo. “There is a big demand for sukuk. They can’t actually get it structured and that’s the biggest thing.”Worldwide sales of debt that comply with Islam’s ban on interest have dropped 10% to $41.3bn so far in 2013 after reaching a record $46.4bn for the whole of last year, according to data compiled by Bloomberg.Average borrowing costs on global Shariah-compliant securities, rose 101 basis points, or 1.01 percentage points, in 2013 to 3.82%, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. That will be the first full-year increase since 2008.SriLankan Airlines Ltd., the state-owned carrier, obtained a $175mn Islamic loan last year from a consortium of lenders that included Abu Dhabi Islamic Bank PJSC, Al Hilal Bank and Noor Islamic Bank, according to a July 2012 report in the country’s The Nation newspaper.Sri Lanka’s economy has been relatively immune from outflows that have pushed down emerging-market stock markets and currencies this year. The country’s benchmark share gauge has risen 2.7% in 2013, while the rupee has fallen 2.4% against the dollar, less than half as much as the Malaysian ringgit, Philippine peso and Indian rupee. The yield on Sri Lanka’s 10-year government bonds has dropped 1.47 percentage points to 11.08 percent.“The environment looks conducive and fertile,” Raj Mohamad, managing director at Five Pillars Pte, a consulting company in Singapore, said in a December 9 e-mail. “We believe commodities and trade financing can be a low-hanging fruit coupled with some plain vanilla retail products.”