Islamic Finance in Sri Lanka That Never Say "Islamic"

The clause that opened Sri Lanka to Islamic banking has 63 words. None of them is "Islamic".

The clause sits in the Banking (Amendment) Act, No. 2 of 2005, which Parliament certified on 10 February 2005. It lets a bank accept money "for a fixed period of time for investment in a business venture of the bank on the basis that profits or losses of the venture will be shared with the person from whom such money is accepted".

The clause names no religion, no Sharīʻah board and no Arabic contract. Twenty-one years later, the industry that grew from it holds more than USD 1 billion in assets, according to Fitch Ratings.

Additionally, a state-owned bank, in a country where about 70% of people are Buddhist, won an Asian award for Islamic retail banking.

The silence in the 2005 clause explains much of this. It helped Islamic finance in Sri Lanka survive. It also helps explain why the industry is still small.

Islamic finance in Sri Lanka by the numbers

In October 2026, Fitch published a review of the sector. EconomyNext and Lanka Business Online reported its main figures for mid-2026:

• Islamic finance assets passed USD 1 billion.
• Islamic banking makes up about 91% of the industry. Takaful (Islamic insurance) makes up about 4%, and non-bank finance companies about 3%. Islamic funds and sukuk (Islamic bonds) are each below 1%.
• Islamic banking holds 1.3% of banking system assets and 1.4% of deposits. In 2024, the figures were 1.0% and 1.2%.
• Amana Bank PLC, the only full Islamic bank, holds about 60% of Islamic banking assets. Its assets grew 7% in a year, to LKR 215 billion (USD 641 million).

Fitch expects the sector to grow over the medium term. It names three drivers: better regulation, more political support and more conventional banks with Islamic windows. It also names the limits: few distribution channels, product gaps against conventional banks and an underdeveloped ecosystem.

Fitch also says that Sri Lanka has one of the highest Islamic finance penetration rates among countries where Muslims are a minority. Muslims were 10.7% of Sri Lanka's 21.8 million people in the 2024 census.

The law that never says "Islamic"

The 2005 amendment added the same 63-word paragraph to two schedules of the Banking Act. One schedule covers licensed commercial banks. The other covers licensed specialised banks.

In effect, the paragraph describes a Mudarabah investment account without using the name. In a Mudarabah, one party provides the money and the other party manages it. They share profit at a ratio that they agree in advance. The provider of the money carries any financial loss, unless the manager was negligent.

The clause asks for the same elements: a fixed period, a business venture, and profits or losses shared "in a manner determined at the time the money is accepted".

Islamic insurance came first. Amana Takaful started operations on 25 September 1999. Banking followed the 2005 amendment. LOLC set up its Al-Falaah Islamic unit in 2007, according to Euromoney. The state-owned Bank of Ceylon opened an Islamic banking unit in 2009 and launched the BOC An-Noor brand in 2010, as the Sunday Times reported.

The Central Bank licensed Amana Bank as a commercial bank in February 2011, according to the Daily FT. Its first shareholders show how international the project was. Bank Islam Malaysia held 20%, AB Bank of Bangladesh 15%, the Islamic Development Bank 10% and the Sri Lankan tea exporter Akbar Brothers 10%.

The 2015 challenge

In June 2015, the Buddhist nationalist group Bodu Bala Sena met the Governor of the Central Bank to oppose Islamic finance, the Tamil Guardian reported. Its argument used the silence of the 2005 clause. The group said that these banking systems "had been introduced through the weak points after the Banking Act-2005 was amended". It added: "Sharia law is not a law in Sri Lanka".

The argument did not stop the industry. Amana Bank, BOC An-Noor and the windows still operate eleven years later.

A reasonable reading is that the neutral wording helped. The clause does not bring Shariah into Sri Lankan law. It permits a contract that shares profit and loss, and any licensed bank can offer that contract.

India said no to the same idea

India discussed Islamic banking for almost a decade. In 2008, a committee on financial sector reforms, chaired by Raghuram Rajan, noted that "certain faiths prohibit the use of financial instruments that pay interest". In February 2016, the Reserve Bank of India (RBI) recommended an Islamic window in conventional banks as a gradual first step, according to Business Standard.

In November 2017, the RBI closed the question in a reply to a right-to-information request: "Taking into account, the wider and equal opportunities available to all citizens to access banking and financial services, it has been decided not to pursue the proposal further."

India's 2011 census counted 172.2 million Muslims. That is about 74 times the 2.33 million Muslims in Sri Lanka's 2024 census. Sri Lanka took the window route that the RBI once recommended and then dropped.

We in Islamic finance often measure a market by its number of Muslims. These two neighbours suggest that the legal route can matter more than the headcount.

Who is growing Islamic banking in Sri Lanka

An Islamic window is a unit inside a conventional bank that sells Islamic Banking products. The window uses the parent bank's branches, staff and systems. The parent bank does not have to set up a separate Islamic bank.

In Sri Lanka, the windows hold about 40% of Islamic banking assets, because Amana Bank holds the other 60%. Fitch says that the windows grew about 26% in the first half of 2026. Amana Bank's assets grew 7% year on year. The two periods differ, but Fitch's conclusion is that the windows are growing faster.

Reach explains part of this. BOC An-Noor products are available in more than 650 Bank of Ceylon branches. The bank says that it is the only provider of Islamic banking in every district of the country. In June 2025, The Banker named Bank of Ceylon "Islamic Retail Bank of the Year – Asia", the Daily Mirror reported.

The same facts raise a design question. A window shares one balance sheet with its conventional parent. Depositors therefore need to know how the bank keeps window funds apart, and who checks its products. In a September 2025 report by Al Jazeera, an executive at the Islamic unit of LB Finance made a proposal. One central Shariah supervisory authority would set one standard for all windows.

The 10.7% puzzle: a worked example

Fitch says that the small Muslim population limits the mainstream relevance of Islamic finance. A rough calculation shows how far the industry is from that limit. The figures below come from Fitch's numbers and are approximate.

1. Amana Bank's LKR 215 billion is about 60% of Islamic banking assets. Islamic banking assets are therefore about LKR 360 billion.
2. That amount is 1.3% of banking system assets. The whole banking system is therefore about LKR 27.6 trillion.
3. If Islamic banking held 10.7% of the system, the same share as Muslims in the population, it would hold about LKR 3 trillion.

That is about eight times its present size.

The calculation assumes that Muslims hold banking assets in proportion to their share of the population. That assumption is untested, so the result is only a crude benchmark.

Even so, the gap is large. Demography sets a ceiling over the long run, but the industry today sits far below it. The limits that bind now are the other items on Fitch's list: distribution, products and the ecosystem.

The ceiling also moves if non-Muslims take part. Bank of Ceylon states that BOC An-Noor products "are available to all Sri Lankans, regardless of faith" (BOC). A 2023 survey of 165 people in Ampara district, by Hilmy, Sajith and Ilma, looked at this question. It concluded that if non-Muslims knew Islamic institutions as well as conventional ones, "their engagement level in them could be much higher".

The gaps that a neutral law leaves

A neutral clause permits a contract. It does not build an industry around that contract. The sources point to three gaps.

Tax. Interviewees in the Al Jazeera report said that conventional finance receives tax exemptions on distributed interest. In their account, Islamic profit distributions do not receive the same treatment. They also said that the zakat (obligatory alms) that Islamic institutions pay earns no tax deduction.

Law and governance. The same interviewees called for a dedicated Islamic finance law and a unified Shariah board.

Capital markets. According to Fitch, the Securities and Exchange Commission approved Sukuk listing guidelines in 2023. In 2024, it issued guidelines on the certification of Shariah scholars (Sri Lanka Chronicle).

Sri Lanka's first Sukuk did not trade on an exchange. In August 2016, LOLC Finance issued a Rs. 500 million Sukuk-al-ijarah, and Bank of Ceylon bought the whole issue (Daily FT). In an ijarah sukuk, investors hold an interest in leased assets and receive rent instead of interest.

The first listed sukuk came nine years later. In July 2025, the renewable energy company Vidullanka PLC listed a five-year ijarah sukuk of LKR 500 million on the Colombo Stock Exchange. Its fixed-rate tranche pays 10.75% a year (Ada Derana). Fitch puts the issue at about USD 1.5 million. It is still the only Sukuk on the exchange. Fitch says that limited domestic demand and restricted international access hold the market back.

Takaful: small, but growing quickly

In Takaful, participants contribute to a fund that they own together. The fund pays the claims of participants who suffer a covered loss. An operator manages the fund, usually under an agency contract.

According to Fitch, the sector consists of two Amana companies: Amana Takaful PLC and Amana Takaful Life PLC. Their combined assets grew about 32% in 2025. Even so, Takaful holds just over 1% of insurance sector assets and about 2% of gross written premiums.

Common questions

Is Islamic banking legal in Sri Lanka?
Yes. The Banking (Amendment) Act, No. 2 of 2005 lets licensed banks accept money on a profit-and-loss sharing basis. The Central Bank licensed Amana Bank in 2011, and several conventional banks operate Islamic windows.

Which is the only Islamic bank in Sri Lanka?
Amana Bank PLC is the only full Islamic bank. In mid-2026, it held about 60% of Islamic banking assets.

How big is Islamic finance in Sri Lanka?
Fitch puts the industry above USD 1 billion in mid-2026. Islamic banking holds 1.3% of banking system assets and 1.4% of deposits.

Can non-Muslims use Islamic banking in Sri Lanka?
Yes. Bank of Ceylon states that its BOC An-Noor products are available to all Sri Lankans, regardless of faith.

What is an Islamic window?
An Islamic window is a unit inside a conventional bank that sells Sharīʻah-compliant products through the parent bank's branches and systems.

Back to the 63 words

The 2005 clause names no religion. In 2015, critics called that silence a "weak point". In 2025, people inside the industry told Al Jazeera that the country needs a dedicated Islamic finance law. Both sides saw a gap in the same 63 words. They wanted to close it in opposite directions.

Fitch now expects better regulation and more political support. That raises a question for the next law. If Sri Lanka writes the word "Islamic" into it, will the name give the industry more protection, or more exposure to attack?

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

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