Islamic banking in Sri Lanka: an alternative banking system

Abstract

The Banking system in Sri Lanka and all over the world is based on the interest system. Interest bearing money is almost like the law of nature where money generates money. However, an alternative banking system called Islamic banking which prohibits charging of interest and is based on profit/loss sharing system became popular in many countries. Global Islamic banking assets attained compounded annual growth rate (CAGR) of around 19.7% from 2013 to 2018. Also, the Global Islamic Banking assets expected to hit USD 1.6 trillion by 2018. The Sri Lankan Banking system has undergone many changes in the recent past with deregulation of banking system paving way for new banks in Sri Lanka. However, Islamic banking which has emerged as a global phenomenon lately has not evolved as a full-fledged system in Sri Lanka. The research paper tries to explain the concept of Islamic banking and discusses the various financial products offered by the Islamic banks. It weighs the various pros and cons of Islamic banking in Sri Lanka. SWOT analysis and Porter’s Five Forces Model are used to provide a thorough analysis of feasibility and scope of Islamic banking in Sri Lanka. The paper reveals that Sri Lanka has a great potential for Islamic banking provided necessary changes in the regulations and guidelines are made to evolve it has an alternative system of banking. The law makers should view it from an economic point of view rather than a religious view for its successful implementation and for the welfare and upliftment of financially excluded sections of society that do not participate in conventional banking due to their religious beliefs.