Pricing benchmark and its impact on Islamic financial institutions in Sri Lanka

Abstract

As far as the history of Islamic banking and finance concern, it is noted that a unique feature of banking and finance operation consist of risk sharing mechanism which is called profit and loss sharing (PLS) paradigm. The profit or loss of the operation is determined by pricing benchmark which is considered as an important element in the practices of financial institutions in Sri Lanka. The purpose of using pricing benchmark is primarily related to reducing information asymmetries concerning the value of traded and non-traded financial assets. The pricing benchmark became a debatable topic in Islamic financial institutions in Sri Lanka since there seems no differences between conventional and Islamic banking practices in setting the pricing mechanisms. This study examined the pricing benchmark and its impact on Islamic financial institutions in Sri Lanka. The primary objective of this study is to investigate the reasons behind the application of pricing benchmark to determine profit sharing rate as pricing for their financial products and its impact on the practices of Islamic Financial institutions in Sri Lanka. The data was collected from primary sources such as interview and the secondary sources such as literature survey. The sample of the study consisted of Islamic financial institutions in Sri Lanka. The findings of this study reveals that application of pricing benchmark to determine profit sharing rate is unavoidable as per the central bank regulations which is challenging to the shari’ah compliance. And also the impact of pricing benchmark has been found from both side of Islamic financial institutions and customers. The outcome of this study will provide information to the policy makers, especially to Shar’ah advisers, and regulators to mitigate the obstacle to set an alternative pricing benchmark for Islamic financial institutions in Sri Lanka to comply with Shari’ah perspective.