Abstract:
As far as the history of Islamic banking and finance concern, it is noted that a unique feature of
banking and finance operation consist of risk sharing mechanism which is called profit and loss
sharing (PLS) paradigm. The profit or loss of the operation is determined by pricing benchmark
which is considered as an important element in the practices of financial institutions in Sri Lanka.
The purpose of using pricing benchmark is primarily related to reducing information asymmetries
concerning the value of traded and non-traded financial assets. The pricing benchmark became a
debatable topic in Islamic financial institutions in Sri Lanka since there seems no differences
between conventional and Islamic banking practices in setting the pricing mechanisms. This study
examined the pricing benchmark and its impact on Islamic financial institutions in Sri Lanka. The
primary objective of this study is to investigate the reasons behind the application of pricing
benchmark to determine profit sharing rate as pricing for their financial products and its impact on
the practices of Islamic Financial institutions in Sri Lanka. The data was collected from primary
sources such as interview and the secondary sources such as literature survey. The sample of the
study consisted of Islamic financial institutions in Sri Lanka. The findings of this study reveals that
application of pricing benchmark to determine profit sharing rate is unavoidable as per the central
bank regulations which is challenging to the shari’ah compliance. And also the impact of pricing
benchmark has been found from both side of Islamic financial institutions and customers. The
outcome of this study will provide information to the policy makers, especially to Shar’ah advisers,
and regulators to mitigate the obstacle to set an alternative pricing benchmark for Islamic financial
institutions in Sri Lanka to comply with Shari’ah perspective.
