According to KPMG (2011) report, the Sri Lankan Banking Act No.30 of 1988 was amended in 2005 to permit licensed commercial banks and licensed specialized banks to offer selected Islamic finance instruments. In Sri Lanka there is a fully fledged Islamic bank and few licensed banks operate Islamic windows.

2.2 Islamic Banking

As per Venardos (2012, pp.44) the first Islamic bank was started in Myt.Ghamar savings bank in Egypt in 1963. The study of Ahmad (2010, pp.99) reveals that Islamic banking movement achieved steady progress and assumed significant dimension through the establishment of the Nasser social bank in 1972, Dubai Islamic bank in 1975, and Faisal Islamic bank in Egypt and Sudan in 1977. Since then there has been a steady expansion all over the world with Islamic banking establishing itself even in western countries with many conventional banks also creating Islamic financial instruments.

According to the UK Islamic Finance Secretariat, the global market for Islamic finance at the end of 2011 was worth around $1.3 trillion and, despite the Global Financial Crisis, Sharia-compliant assets have grown significantly over the past ten years. According to the same Economist article, globally banks hold over 90% of Islamic assets and, together with funds, are big investors in Sharia-compliant bonds known as Sukuk (The Economist online, 2012).

2.3 Conventional Banking

Conventional banking system refers to all banks that do not operate on Islamic principles. Conventional banks employ interest as their central tool for profit making. The owners of conventional banks therefore make profit purely on interest and which is the only source of profit. Conventional banks provide the full range of financial services, covering every need in every sector, with interest being central in all their activities.

2.4 Differences between Islamic Banking and Conventional Banking

As per Schaik (2001, p.46) Islamic banking differs from conventional banking in 3 ways, First of all, in its mission and objectives, because Islam is the backbone of Islamic banking, moral principles and objectives play a more important role in the operations of an Islamic bank than in a non-Islamic b