Central Bank Sri Lanka

A central bank is a financial institution given privileged control over the creation and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks. The Central Bank of Sri Lanka (CBSL) is the monetary authority of Sri Lanka. CBSL is administered by a five-member Monetary Board, comprising the Governor as chairman, the Secretary to the Ministry of Finance and Planning, and three members appointed by the President of Sri Lanka on the recommendation of the Minister of Finance with the concurrence of the Constitutional Council.

 

Development of Central Bank of Sri Lanka

• Before the establishment of the Central Bank, the Currency Board System established under the Paper Currency Ordinance No.32 of 1884 and functioned as the country’s Monetary Authority.
• But it had a very narrow in its capacity. As this system was insufficient for a developing country upon gaining political independence.
   
• With the assistance of American economist Mr. John Exter, the Central Bank of Ceylon was established by the Monetary Law Act (MLA) No.58 of 1949 and commenced operations on August 28, 1950.
• Renamed as the Central Bank of Sri Lanka (CBSL) later in 1985.
• By a modernization program, CBSL reshaped its objectives in 2000.

Mr.Indrajith Coomaraswamy (current governor)

 

John Exter (1st governor)

 

 

 

 

 

 

 

 

 

The Regulatory Responsibilities of Central Bank of Sri Lanka

 

The scope of the Central Bank of Sri Lanka mainly spread through the monetary system and the financial system of the country. Central Bank of Sri Lanka is responsible for conducting monetary policy in Sri Lanka, which mainly involves setting the policy interest rates and managing the liquidity in the economy. The monetary operations of the Central Bank influences interest rates in the economy, affecting the behavior of borrowers and lenders, economic activity and ultimately the rate of inflation. Therefore, the Central Bank uses monetary policy to control inflation and keep it within a desired path.

Financial System Stability is one of the main objectives of the Central Bank. A stable financial system is capable of gathering savings and allocating them to productive investments, managing risks and settling payments, without materially affecting economic growth and welfare of the people even during economic shocks and stressful situations. This helps to create a positive environment for efficient financial intermediation to promote investment and economic growth

Overall Key roles of Central bank of Sri Lanka.

 

Main Roles

• The conductor of Monetary Policy
• The conductor of the Exchange Rate Policy
• Manager of the Official International Reserves
• Monitor of the Financial System
• Licensing, Regulating and Supervising of Banks and Selected Non-Bank Financial Institutions
• Provision of Settlement Facilities and the Regulation of the Payment System
• Issuer and Distributor of the National Currency
• Banker to the Government and its agencies, and provision of current account facilities to LCBs and non-commercial bank Primary Dealers for Government Securities

Agency Roles

• Manager of the Public Debt
• Manager of Foreign Exchange
• Fund Manager and Custodian of the Employees’ Provident Fund
• Facilitating Financial Inclusion
• Financial Intelligence services to prevent, detect, investigate and prosecute Money Laundering and Terrorist Financing

In order to perform those regulatory functions the legislative of the country has given the empowerments through following Acts, to the Central Bank

 

• Monetary Law Act, No. 58 of 1949 (Incorporating Amendments up to 30th June 2014)

An Act to establish the monetary system of Sri Lanka and the Central Bank to administer and regulate the system and to give and impose upon the Monetary Board of the Central Bank powers, functions, and responsibilities necessary for the purpose of such administration and regulation, and to provide for connected matters. This reprint which incorporates all amendments made to that Act up to 30th June 2014 is, however, not a statutory reprint. It is only issued for purposes of convenience. 

 

• Banking Act, No. 30 of 1988

An Act to provide for the introduction and operation of a procedure for the licensing of persons carrying on banking business.

• Finance Business Act, No. 42 of 2011 & Finance Leasing Act, No.56 of 2000

An Act to provide for control and supervision of finance companies and to financial leasing businesses.

 

• Micro finance Act, No. 6 of 2016
• Foreign Exchange Act No. 12 of 2017
• Employees Provident Fund (Amendment) Act, No 2 of 2012
• Local Treasury Bills Ordinance No. 8 of 1923

 

Central Bank and the Non-banking Financial businesses.

The Supervision of Non-Bank Finance and Leasing Sector is managed through Examinations, Continuous monitoring, Giving regulatory approvals, Issuance of directions and prudential requirements, Reviewing into companies carrying on finance business and accepting deposits without authority and investigating into public complaints. The directions, regulations, and rules issued under the provisions of the Finance Business Act  No. 42 of 2011 mainly cover minimum capital adequacy, liquidity requirements, provisioning for bad and doubtful debts, single borrower limits, limits on equity investments, etc. In the event of any non-compliance with the prudential requirements, the Financial Business Act empowers the Monetary Board and Director of Supervision of Non-Bank Financial Institutions (SNBFI) to take necessary corrective actions such as penalty, business restrictions, license cancellation and further investigation of books etc.

Non-Banking financial businesses regulating by the Central Bank of Sri Lanka.

 

• Licensed Finance Companies (LFCs)    

A finance company is an organization that makes loans to individuals and businesses. Unlike a bank, a finance company does not receive cash deposits from clients, nor does it provide overdraft and current account services common to banks, such as checking accounts. Finance companies make a profit from the interest rates they charge on their loans, which are normally higher than the interest rates that banks charge their clients. The regulation and supervision of LFCs are governed by the Financial Business Act No. 42 of 2011 which was enacted on 09.11.2011.

• Specialized Leasing Companies (SLCs)

Specialized Leasing Companies are not permitted to accept money from the public as deposits. However, they may borrow money by issuing debt instruments such as promissory notes, commercial paper and debentures, etc. with the prior approval of the Director of Supervision of Non-Bank Financial Institutions. In terms of Finance Leasing Act, No 56 of 2000 (FLA), a certificate of registration issued by the Director of Supervision of Non-Bank Financial Institutions is necessary to conduct finance leasing business having prescribed amount of capital.

• Primary Dealers

A primary dealer is a pre-approved bank, broker-dealer, or other financial institution that is able to make business deals with the Central bank of Sri Lanka, such as underwriting new government debt. These dealers must meet certain liquidity and quality requirements. The regulatory and supervisory framework for Primary Dealers (PDs) in government securities is specified by the regulations issued under the Local Treasury Bills Ordinance and the Registered Stocks and Securities Ordinance. The Central Bank is authorized to regulate and supervise Primary Dealers, which involves the appointment of Authorized Primary Dealers, issuing of prudential directions and determinations under the laws, examinations and continuous surveillance of Primary Dealers, enforcement of regulatory actions and suspension and cancellation of the appointment of Primary Dealers for non-compliance with the laws.

• Authorized Money Brokers

A money broker is an intermediary who arranges short-term loans usually in large amounts for borrowers. Authorized Money Brokers (AMBs) are regulated under the Money Broking Regulations No. 1 of 2013 issued under Section 10 (c) of the MLA, No. 58 of 1949. There are two supervisory methods for this purpose. One is the off-site surveillance where Authorized Money Brokers are supervised through information obtained through online and offline methods. The second method is on-site surveillance where CBSL staff visit the premises of Authorized Money Brokers to check whether they comply with the regulations in force.