Bank of Ceylon’s Islamic banking charts new course for Sri Lanka’s growth

Bank of Ceylon Deputy General Manager – Branch Credit Operations – Range I K.A. Ajith Karunarathne

• In conversation with Deputy General Manager – Branch Credit Operations – Range  K.A. Ajith Karunarathne

The global financial system is undergoing a profound transformation. On one hand, technological disruption is redefining how banks interact with customers. On the other, sustainability imperatives are forcing financial institutions to rethink their role in addressing climate change and social inequalities. 

Against this backdrop, Islamic banking has emerged as a viable alternative and as an increasingly mainstream component of global finance. Rooted in ethical principles that forbid speculative activities and encourage investment in productive, socially responsible sectors, Islamic banking is now valued in the trillions of dollars and expanding into new geographies.

For Sri Lanka, a country searching for innovative ways to stimulate growth, attract investment, and ensure financial inclusion, Islamic banking holds particular promise. Bank of Ceylon (BOC), which pioneered the first Islamic banking window in 2009, continues to lead the way in shaping this sector locally. To understand the global and national dimensions of Islamic finance, its challenges, and its future role in Sri Lanka’s economic development, Deputy General Manager – Branch Credit Operations – Range I K.A. Ajith Karunarathne shares his views in this discussion.

Q: What are the key global trends in Islamic banking currently? How do they reflect in Sri Lanka?

A: Islamic banking is experiencing strong momentum worldwide. According to the 2024 Islamic Finance Development Index, the industry’s total assets stood at $ 4.9 trillion in 2023, an 11% increase from the previous year. Of this, Islamic banking accounted for $ 3.6 trillion, showing 12% year-on-year growth. Projections suggest the industry could reach $ 6.7 trillion by 2027, a figure that underscores its rapid expansion.

Several key trends are shaping this growth. First, the adoption of financial technology is transforming how Islamic banks operate. From mobile banking apps designed specifically for Shari’ah-compliant products to blockchain-based smart contracts that improve transparency, technology is making Islamic banking more accessible and efficient. 

Second, sustainability has become a defining feature of the sector. Green Sukuk — Islamic Bonds issued to fund environmentally friendly and socially responsible projects — are now being used to finance renewable energy, infrastructure, and social development projects across Asia and the Middle East. 

Third, Islamic banking is moving beyond its traditional markets. Countries like the UK, Luxembourg, and even South Africa are exploring regulatory frameworks that allow Islamic finance to thrive alongside conventional systems.

Sri Lanka, while at an earlier stage, is very much part of this story. BOC’s launch of Islamic banking services in 2009 marked the first step, and the regulatory environment has gradually matured since then. Today, awareness of Islamic finance is spreading, and demand for alternative investment vehicles is growing. 

While the sector still makes up a small portion of Sri Lanka’s overall banking market, the direction is clear. As people become more familiar with Shari’ah-compliant principles, and as businesses seek ethical financing solutions, Islamic banking is poised to play a bigger role in the local financial sector.

Q: What challenges does the Islamic banking sector face globally, and how can Sri Lanka overcome these challenges?

A: Despite its growth, Islamic banking continues to face significant challenges. The first is limited knowledge and awareness. In many parts of the world, even in regions with sizable Muslim populations, the average consumer may not fully understand how Islamic finance differs from conventional banking. Misconceptions about its complexity or accessibility often hinder adoption. Without proper education, both customers and even some financial professionals remain hesitant to engage with Islamic products.

The second challenge is regulatory. In several markets, frameworks are either underdeveloped, inconsistent, or fragmented across institutions. This lack of harmonisation creates difficulties for Islamic banks to compete on equal footing with conventional banks. For instance, differences in Shari’ah interpretations across jurisdictions can lead to uncertainty, and the absence of standardised products sometimes confuses consumers.

For Sri Lanka, these global challenges resonate strongly. Awareness of Islamic banking remains relatively low, even though the sector has existed locally for more than a decade. The way forward is clear: education and outreach. The Bank of Ceylon has been proactive in this regard, conducting awareness programs to explain the principles of Islamic finance to both customers and industry stakeholders. Such initiatives need to be scaled up and supported at a national level.

On the regulatory side, Sri Lanka has made progress, but more can be done to harmonise local products with international standards. Developing standardised Shari’ah-compliant offerings and creating a consistent framework will enhance transparency and instil confidence. For Islamic banking to flourish, regulators, banks, and Shari’ah boards need to work closely to create an enabling environment.

Q: How important is sustainability in Islamic banking, and how is it being incorporated in Sri Lanka?

A: Sustainability is not merely a trend for Islamic banking; it is a principle embedded in its very foundations. Because Shari’ah law prohibits investment in harmful industries such as alcohol, gambling, and tobacco, Islamic banking naturally aligns with ethical and responsible finance. But the sector has gone further, positioning itself at the forefront of the global sustainability movement.

Take Green Sukuk as an example. These Shari’ah-compliant Bonds are specifically designed to fund projects that are environmentally and socially beneficial. Malaysia and Indonesia have issued Green Sukuk to finance renewable energy and infrastructure, while countries in the Middle East are using them to support sustainable urban development. 

This integration of Islamic principles with global sustainability goals has made Islamic banking a leader in the ESG (Environmental, Social, and Governance) space.

In Sri Lanka, the importance of sustainability in Islamic finance is beginning to manifest more concretely. A milestone event occurred in July 2025 when the Colombo Stock Exchange listed the nation’s first-ever Sukuk. The listing introduced a Shari’ah-compliant investment avenue to local and international investors, underscoring the potential of Islamic finance to support sustainable development.

Islamic financial institutions in Sri Lanka are also starting to channel funds into renewable energy projects and eco-friendly businesses. These initiatives are not only consistent with Shari’ah principles but also align with the country’s sustainable development agenda. The direction is promising: as awareness grows and frameworks mature, sustainability could become one of the defining features of Islamic finance in Sri Lanka.

Q: Can Islamic banking contribute to economic growth in Sri Lanka, especially in light of the country’s current economic challenges?

A: Absolutely. The essence of Islamic banking is to promote real economic activity through ethical and productive investments. This makes it highly relevant for Sri Lanka, a country facing fiscal constraints, debt obligations, and the need to stimulate broad-based growth.

For one, Islamic finance can provide funding for infrastructure projects that the country urgently needs. By mobilising long-term, asset-backed capital, Islamic banks can help finance roads, ports, energy, and housing projects in a sustainable way. 

Secondly, Islamic finance has a strong focus on SMEs. By offering Shari’ah-compliant products at competitive rates, institutions like Bank of Ceylon are already supporting small enterprises, including those in remote areas. Strengthening SMEs is critical for job creation and balanced regional development.

Islamic banking also complements Sri Lanka’s goal of attracting foreign investment. Given the country’s geographic position at the crossroads of South and Southeast Asia, Sri Lanka is well-placed to tap into Islamic finance capital flows from the Middle East and beyond. By offering a sound Shari’ah-compliant financial framework, the country could attract new investors, build stronger trade links, and boost foreign exchange inflows.

Q: How do Islamic banks manage risk differently from conventional banks, and what lessons can Sri Lanka learn from global practices?

A: The difference in risk management lies at the core of Islamic finance. Conventional banks primarily rely on interest-based lending, where the risk largely falls on the borrower. Islamic banks, however, operate on partnership principles. 

They use profit-and-loss sharing mechanisms, which means that both the bank and the customer share the risks and rewards of an investment. This structure discourages speculative behaviour and aligns the interests of both parties toward the success of the venture.

Globally, Islamic banks also emphasise asset-backed financing. Every transaction must be tied to a tangible asset, which reduces exposure to purely speculative risks. This approach proved particularly resilient during the 2008 global financial crisis, when Islamic banks were relatively less exposed to toxic assets compared to conventional counterparts.

For Sri Lanka, there are clear lessons here. By encouraging risk-sharing products and focusing more on asset-backed ventures, the financial sector can build greater resilience. This is particularly important for long-term development sectors such as agriculture, renewable energy, and infrastructure, where the benefits of shared risk and tangible assets are most evident.