Sri Lanka’s Amana Bank began operations this month as the island nation's first shariah-compliant commercial bank, underscoring the growing popularity of Islamic finance in the region.

The market for Islamic finance in the country is not large -- estimated at some $1.5bn -- and while Muslims make up less than 10 per cent of the country's population of 21m people, Islamic finance is gaining wider acceptance. Given the government's promise to facilitate the sector with appropriate taxes and laws, Sri Lanka also has the potential to become a hub for south Asia, given that India's still waffling about it.

Sri Lanka requires Islamic banks to have a capital base of at least $22m; Amana Bank has assets in excess of $30m, and its insurance arm, Amana Takaful, is already listed on the Colombo exchange.

Bank Islam Malaysia owns a fifth of Bank Amana, while Bangladesh's AB Bank, has a 15 per cent stake and Saudi Arabia'a Islamic Development Bank has 10 per cent.

Bank Islam has an agreement to transfer technical expertise and other know-how to Amana Bank; the deal with Amana Bank is the Malay bank's first overseas banking venture, and part of its regional expansion plan.

“Sri Lanka was chosen not only to capitalise on our existing presence and familiarity with the business environment, but more importantly due to its favourable economic prospects and tremendous untapped potential of its promising Islamic financial service industry," Bank Islam's managing director Zukri Samat said at the time.

Amana Bank, which offers a whole suite of services including treasury services, has more than a dozen branches in the country, and is counting on the growing demand for shariah-compliant trade and infrastructure finance as the country rebuilds after nearly three decades of civil war.

See also:
Full coverage of Islamic finance in Asia - FT Tilt
Full coverage of Sri Lanka - FT Tilt