Islamic Finance in Maldives
The Republic of Maldives, located approximately 500 kilometers southwest of
India, is a chain of nearly 1200 tiny coral islands grouped into 26 geographical atolls
spread across the Indian Ocean. Of these islands, approximately 200 are designated as
inhabited while a little more than 106islands are used for tourism under a 1 island 1 resort
model and a few islands are used for industrial and agricultural purposes. As of 2012 the
population was estimated at a little over 350,000 of which more than one-third live in the
capital city of Male’.
Although the economy of the country is narrow with high dependency on imports,
the past three decades has seen strong economic growth. In 1980 the country was one of
the 20 poorest countries with a Gross Domestic Product (GDP) of US$ 42 million.
Today, after three decades of strong growth, the Maldives is now a robust small island
economy worth US$2.2 billion annually. This impressive growth has transformed the
country from a low income country to an upper middle income country and places
Maldives as one of only three countries to have graduated from Least Development
Country (LDC) status by 2012. This graduation was based upon on three criteria: per
capita gross national income (GNI); human assets; and economic vulnerability to external
shocks. Though the Maldives did not meet the latter criterion, the Committee for Policy
Development of the United Nations graduated the Maldives in December 2004. With this
graduation and the resulting removal of LDC benefits comes a new playing field with a
whole new set of challenges. These challenges are made even more daunting by the fact
that the graduation came at a time where the economy is overwhelmed by new
legislations, particularly those related to employment and taxation, rising fuel prices, and
additional fiscal burden arising from the new democratic transitions.Though the Maldives
has consistently achieved growth in the past, we have to gear ourselves and be prepared
to face the new economic realities as an upper middle income country. We must reduce
vulnerabilities, build on our strengths, and embrace new opportunities to ensure our
progress continues in the new economic realm. To achieve this,a key strategy would be to
expand the narrow economic base of the country. At the moment the country is too reliant
on tourism as shown by the GDP where almost two-third is contributed by tourism and
tourism related activities.
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Figure 1: Percentage Share of GDP by Sectors in 2012
The importance of diversifying the economy has also been highlighted by the
Ministry of Economic Development (MED) which has come up with a long term strategy
to achieve this aspiration. Among the various strategies proposed by the Ministry in its
Maldives Economic Diversification Strategy is to transform the Maldivian financial
industry into an export-centric industry. A key part of this would be the development of a
comprehensive and robust Islamic finance industry which can attract significant funds
from the Middle East and the significant Muslim population of neighboring South Asia.
While the strategy proposed leans more towards the development of an Islamic Offshore
Financial Center, any such development has to be based on a robust legal and regulatory
framework and legislative environment designed to build confidence. Furthermore human
capital has to be developed so as to achieve enough critical mass to sustain the system
without overreliance on foreign talent.
While the development of an Islamic Offshore Financial Center remains a long
term objective of the Government of Maldives (GoM), in the short run attempts have
been made and the foundation of a local Islamic finance industry has been already laid
down in the country. However, before looking at the status of Islamic finance in
Maldives, it is vital to understand the larger financial system of the country. From a
regulatory and supervisory point of view the system in place can be divided into two
sectors – Financial intermediaries comprised of banks and non-banking financial
institutions and capital market intermediaries. The former is under the purview of
Maldives Monetary Authority (MMA) while the Capital Market Development Authority
(CMDA) is responsible for the latter. As it stands now, the financial system in the
Maldives is very narrow and is dominated by the banking industry. There are seven banks
currently operating in the Maldives which include one locally owned commercial bank,
branches of four foreign banks, one locally incorporated subsidiary of a foreign bank and
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an Islamic bank. The Non-bank financial institutions in the country consist of a finance
leasing company, a specialized housing finance institution, insurance companies, money
services businesses.
The financial intermediaries currently in operation include State Bank of India
(SBI), Habib Bank Limited (HBL), and Bank of Ceylon (BOC) established as foreign
bank branches in 1974, 1976 and 1981 respectively. Bank of Maldives Plc. (BML)
established in 1982, currently a public limited company with majority ownership by the
Government of Maldives (GoM). Hong Kong Shanghai Banking Corporation Ltd.
(HSBC), established as a foreign bank branch in 2002. Mauritius Commercial Bank
(Maldives) Pvt. Ltd. (MCB), originally established in 2008 as a foreign bank branch but
later in 2010 converted to a locally incorporated subsidiary of a foreign bank, and the
only Islamic bank in operation, the Maldives Islamic Bank (MIB) established in 2011,
co-owned by Islamic Corporation for Development of the Private Sector (ICD) and the
GoM.
Non-banking financial institutions in the country include players in the general
insurance market, a finance leasing company, a specialized housing finance institution
and money transfer businesses, including the Allied Insurance Company of Maldives
(Allied), incorporated in 1984 and owned by the State Trading Organization Plc. (STO) is
the only local insurance company in the country and the only composite insurance
company. The Sri Lanka Insurance Corporation Ltd, being the oldest insurance service
provider, established its branch office in the country in 1976. In addition to these two
companies, several other insurance companies and market intermediaries from
neighboring Sri Lanka operate in the country through their appointed local agents. One
such operator, Amana Takaful,who used to provide general insurance services based on
Shari’ah principles through a local agent, converted their operations to a locally
incorporated subsidiary.
The Maldives Finance Leasing Company Pvt. Ltd. (MFLC), established in 2002,
is the only player in the finance leasing market. The company was setup as a
collaborative venture between five domestic public and private sector entities and two
international parties, in order to address the demand for medium to long-term equipment
financing from all sectors of the economy.The Housing Development Finance
Corporation Ltd (HDFC), setup in March 2004, is an initiative of the government of
Maldives to provide much needed financing in the residential and commercial housing
sector to address the pressing demand for housing, particularly in the Malé region. The
company was restructured in 2009 with International Finance Corporation (IFC), Asian
Development Bank (ADB) and HDFC (India) coming on as co-shareholders with the
GoM.
Money services businesses in the country include three local companies operating
as agents of international money transfer companies. The services of these companies are
largely targeted towards the expatriates in the country who utilize their services for
outward remittances from Malé.
Apart from the banking and non-banking sectors, the financial system in Maldives
includes a few securities market institutions regulated by the CMDA. Although capital
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market activities started in the Maldives in the 1960s with a few companies raising
finance from the public, it was not regulated until 1999 when a Section was formed under
MMA for the purpose of developing a capital market. Through the work carried out by
this Section, a comprehensive Securities Act was passed into law in 2006 with the
requirement to establish an independent authority to regulate the capital market. With the
passing of this Act, the CMDA was establishedwith the statutory powers to license and
regulate securities market intermediaries including brokers, dealers, investment advisers,
asset managers, custodians, credit rating agencies as well as stock exchanges and central
depositories. In 2009, with the passing of Maldives Pension Act, Pension industry was
added to the regulatory purview of the Authority.The CMDA has been instrumental in
developing the regulatory environment as well as the infrastructure for the organization
of the securities market.
Emergence of Islamic Banking and Finance:
To some, the situation of Maldives might seem contradictory. Maldives, a
constitutionally guaranteed 100% Muslim nation where Islamic Shari’ah is considered a
primary tenet of law has not had any alternative to conventional financial institutions for
such a long time. While this may be true,it might surprise a few to know that Islamic
finance in some form has been in Maldives for almost a decade now.
The first form of Islamic finance in Maldives was Amana Takaful, a Takaful
operator from Sri Lanka, who in 2003 started offering Takaful products through a local
agent. Although, they had to base their operations on a conventional insurance license,
the operation and the products they offered were fully in line with Shari’ah. This was
followed by the establishment of a full-fledged Islamic bank in 2011. Since then, we have
witnessed the establishment of an Islamic Capital Market with one listed Shari’ah
compliant equity.
Year
2013




2012


2011



Developments
Approval given to Allied Insurance Company of the Maldives to
establish a Takaful window.
Approval given to BML to establish an Islamic banking window.
First Shari’ah Compliant Sovereign Sukuk papers issued by GoM.
First Corporate Shari’ah Compliant Sukuk – HDFC Mudarabah
Sukuk by HDFC approved.
HDFC forms an Islamic wing by the name of HDFC Amna and
starts offering Islamic financial products.
Housing Development Finance Corporation Plc. (HDFC) given
approval to offer mortgage financing on Islamic Shari’ah basis.
The Maldives Islamic Bank (MIB) starts operations.
The Capital Market Shari’ah Advisory Committee (CMSAC) was
established to advice the CMDA Board of Directors on matters
relating to the Islamic Capital Market.
The Islamic Capital Market Development Section (ICMDS) was
established within CMDA to spearhead the ICM development
activities.
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
The definition of Securities under the Maldives Securities Act
2/2006 was broadened to include Islamic Securities.
 Guidelines on Shari’ah Compliance Review for pre-IPO securities
were issued by CMDA to the Market setting out the criteria used
to categorize a company as Shari’ah Compliant.
 Approved Shari’ah Concepts and Principles for the purpose of
Structuring, Documenting and Trading of Shari’ah Compliant
Securities were endorsed to prescribe the principles that should be
applied by the issuers of Shari’ah compliant securities subject to
approval of the CMDA.
 Amana Takaful Maldives (ATM) made entry into the market by
listing on the Maldives Stock Exchange and the Initial Public
Offerings of the two companies were opened for public.
 Amana Takaful Maldives was endorsed as the first Shari’ah
Compliant Company to list on the Maldives Stock Exchange.
2010
 Amana Takaful (Maldives) Pvt. Ltd. established as a locally
incorporated subsidiary of Amana Takaful of Sri Lanka.
 Shari’ah Council of MMA established as the reference body and
advisor to MMA on all Shari’ah matters.
 MMA issues license to establish an Islamic bank.
2007
 GoM introduces project to establish an Islamic bank in the
country.
2003
 Amana Takaful of Sri Lanka starts offering Insurance products
based on Islamic Shari’ah principles through a local agent.
Table 1: Development of Islamic Finance in Maldives
The endeavor to introduce Islamic banking and finance in Maldives has been a
long journey. In 2007, the GoM initiated a project to establish an Islamic bank. It, in
consultation and in partnership with the ICD, and with an Islamic Bank from Dubai as the
technical partner, signed a tripartite agreement in 2008. A unit was also set up under
MMA to facilitate the project. However, the project did not materialize due to various
reasons including the global financial crisis. The project was once more revived in late
2009, under a Shareholders’ Agreement between the ICD and the Ministry of Finance
and Treasury (MoFT) to establish an Islamic bank. Following this, a company was
officially registered at the Ministry of Economic Development (MED) on 1 April 2010.
After evaluating the proposal, in August 2010, MMA issued a banking license to this
company to conduct banking services and operations under Shari’ah principles. The first
Islamic bank of Maldives, under the name Maldives Islamic Bank Pvt. Ltd. (MIB)
commenced operations in March 2011. The strong mobilization of deposits that followed
the commencement of MIB confirmed the latent demand for Islamic finance and the need
for an institution offering Islamic financial services. Since then multiple conventional
financial institutions have expressed their interest in offering Islamic financial services
through a window operation. Among these applicants HDFC has already started offering
housing finance based on Islamic Shari’ah principles through a window named, HDFC
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Amna, while Allied and BML have been given approval to provide Takaful and Islamic
banking products respectively.
Institution
Amana
Takaful
(Maldives) Plc
Maldives
Islamic
Bank
HDFC Amna
Type of Operation
Full-fledged Takaful operator
Full-fledged Islamic bank
Islamic window of Housing Development Finance
Corporation Plc
Islamic banking window of Bank of Maldives
BML
Islamic
Limited
Window
Islamic Takaful window of Allied Insurance
Allied
Islamic
Company of Maldives
Window
Table 2: Islamic Financial Institutions in Maldives
While the number of institutions offering Islamic financial services are on the
increase MMA in its capacity as the regulator of the financial sector sees a
comprehensive legal and regulatory framework as essential for the proper development of
a robust and resilient Islamic financial industry in the country. As it stands, Maldives has
close to no laws to guide Islamic financial ventures as exposed by the fact that the
Takaful operations within the country still have to base their practice on a conventional
insurance license. The situation of Islamic banks and windows is marginally better in that
the Maldives Banking Act (Law No: 24/2010) and the Islamic Banking Regulation 2011
provides for the licensing of Islamic banks and banking windows. With the importance of
Islamic finance as a development avenue for Maldivian economy, MMA has taken
various steps strengthen the legal, regulatory and operational framework of Islamic
financial operations. Among these steps is the establishment of a Shari’ah Advisory
Council, charged with validating all Islamic banking and finance operations to ensure
their compatibility with Shari’ah principles. It is also mandated to advise Maldives
Monetary Authority on all Shari’ah matters. To leverage experience of developed Islamic
financial centers, a prominent scholar from Malaysia and Bahrain were invited to sit on
the Council. The remaining members were made up of prominent local scholars and
senior MMA officials.
Furthermore, MMA in cooperation with Islamic Development Bank (IDB) is in
the process of developing a comprehensive legal, regulatory and supervisory framework
whereby proper laws and regulations will be enacted for both banking and Takaful
operations.
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