Overview: Islamic finance in the Maldives

Until the 15th century, trade and business activities relied heavily on Islamic banking principles, which then spread throughout Spain, the Mediterranean and the Baltic states. Its recent history, however, it dates back to the 1970s, when modern Islamic banking resurfaced, with Saudi Arabia and the United Arab Emirates launching Islamic banks. The industry has since then expanded into one that holds over $1 trillion in assets worldwide, managed under the rules of Islamic financing.

The basic principles of Islamic finance, derived from Islamic law or Shari’ah, are that 1] wealth must be generated from a legitimate trade and asset-based investment, 2] investment must have social and ethical benefit to the wider society, 3] risks should be shared, and, 4] all prohibited (haram) activities should be avoided. In Islamic economic law, priority is given to the establishment of justice and the well-being of the society in a market that symbolizes human freedom and solidarity.

Development of Islamic finance in Maldives

The Maldives first introduced Islamic finance in 2003, with the opening of Amana Takaful, a full-fledged takaful subsidiary of a Sri Lankan institution, in the Maldives. The development of Islamic capital markets by the Capital Market Development Authority (CMDA), and the establishment of the Maldives' first Islamic Bank, Maldives Islamic Bank (MIB) seven years later, expanded prospects for the Islamic finance industry in the country. Since the launch of the first Islamic bank, the Maldives has witnessed an increasing demand for Islamic financial products and services, resulting in fast-paced growth of the industry. 

In 2012, the Housing Development Finance Corporation (HDFC) launched its Islamic window, AMNA, and issued the country’s first Sukuk, a USD3.9 million issuance with a 10-year tenure. A number of institutions launched Islamic finance windows in the following years, notably, Ayady Takaful by Allied Insurance, BML Islamic by the Bank of Maldives, Hazana Maldives and the Maldives Center for Islamic Finance (MCIF), geared towards developing and enriching the Islamic finance industry in Maldives.

As the key regulator of the financial sector, the Maldives Monetary Authority (MMA) has introduced the legal and regulatory frameworks needed for the industry and established the main element of the governance system, the Shariah Advisory Council of MMA. This Council is  responsible for ensuring shariah compliance of licensed institutions.

Today, the Maldives' Islamic finance industry consists of two banks offering  products through Islamic windows, two takaful companies and eight more institutions offering Islamic finance services. The industry witnessed a significant improvement in its Islamic finance assets with a 38 percent increase in 2016 and remains competitive within the South Asia region. With the rise in infrastructure development and construction projects between 2016 and 2018, Islamic home financing products such as 'Istisna' has become popular among the public. The high level of activity in the capital market has also made the Maldives a ripe market for investment banks from Sri Lanka.

The Islamic banking sector has developed significantly over the last few years, with new branches of the Islamic banking windows of banks established in Addu, Fuvahmulak, Thinadhoo, Kulhudhufushi and Hulhumale. New products have been introduced into the market, and efforts are ongoing to create awareness among schools and students. The Maldives Islamic Bank recently introduced deposit ATMs and launched its VISA card, further improving access to its banking services. Due to these innovations and improvements in service delivery, the sector has expanded its customer base and is in competition with conventional banks for further expansion. 

Obstacles for growth in the industry

Although the industry has registered robust growth over the last few years, there exist significant barriers to the industry in the Maldives as well. There is a lack of qualified and skilled employees in the field of Islamic banking and finance, with limited options at local institutions for studies or skills development in the field. This was highlighted by Dr. Aishath Muneeza, one of the few qualified Islamic finance professionals in the country, in an article published in CPI Financial in 2018. 

Other obstacles for growth include limited investment opportunities under Islamic financing for individuals, businesses and the government. There are few prospects for investments at present, which include the general investment account of the Maldives Islamic Bank, or the purchase of a Sukuk from an Islamic financial institution. Lack of development of the technology platforms used in the institutions has also been an area of concern, with customers complaining on the unavailability of real-time information, which is available through most conventional banks. The legal framework surrounding the provision of Islamic finance also requires further development, by enacting an Islamic Finance Act. 

The way forward

Moving forward, it is crucial to increase awareness on Islamic finance in order to enhance its validity and acceptance in the market. Research into and development of new products and services fully compliant with Islamic financing principles will contribute to sustained growth of the industry. Such efforts will make Islamic banking and finance products more desirable, while creating a customer pool that understands and appreciates the underlying aspects of the products offered. The government and regulatory authorities also need to further strengthen the legal framework around the market in order to capitalise on expansion prospects.