Financial sector and the regulator

The financial sector comprising commercial and specialized banks, leasing companies, unit trusts, provident funds, primary dealers, venture capital companies’ insurance sector and rural banks, etc wields significant influence in the economy of the country. As per the Central Bank, total assets of the Licensed Commercial Banks (LCB) and Licensed Specialized Banks (LSB) as at end 2006 was Rs 3.7 billion which is in excess of the GDP of Sri Lanka. Any vulnerability of the financial sector is a matter of concern and an indication of instability.

Currently 23 commercial banks operate within Sri Lanka with a network of 1530 branches. The credit expansion could be gauged by the fact that nearly one million credit cards are in circulation while 127 Automatic Teller Machines (ATM) are in operation, and the impact of technology is reflected by 16 banks providing Internet banking utilizing up to date ICT (Information Communication Technology) facilities. All this speaks of the rapid changes that have taken place in the financial sector and the demanding role of the regulator.

In keeping with the global trends Sri Lanka too is following a multi regulatory system in contrast to a single regulator. The Central Bank regulates banks, finance companies, leasing companies and primary dealers. The Securities & Exchange Commission (SEC) regulates the stock exchange, stock brokers, listed securities and listed companies. The Insurance Board regulates insurance companies; the Commissioner of Co-operative Development regulates co-operative and thrift societies. Other regulatory institutions are the Registrar of Companies, Consumer Affairs Authority and the Accounting Standards Monitoring Board. Functions of the multi regulatory institutions are coordinated by the Inter Regulatory Institutions council and the working groups.

The regulator’s task is onerous. Through his regulatory mechanism financial markets are expected to be maintained in a fair and orderly manner to help ensure that financial consumers enjoy a fair degree of independence. The financial regulator in UK the Financial Services Authority (FSA) defines its objective as market consideration, public awareness, consumer protection and reduction of financial crime. The regulator’s role is expected to promote efficient orderly and fair financial markets to help financial consumers.

Sri Lanka has come a long way from the catastrophe of finance company failures of the eighties that ruined the hard earned funds of many poor savers. However the Pramuka fiasco was another issue. The Central Bank has been increasing the importance of the regulatory feature in recent years and now the Financial Stability Review has become an annual feature. Depositors are regularly made aware of the registered finance companies and an effective public awareness campaign is being carried on Pyramid schemes. In 2006 several new measures were adopted such as the regular supervision of specialized leasing companies, setting up of the Financial Intelligence Unit (FIU) etc. These apart Basel 11 implementation process and Truncated Cheque imaging process to speed up the clearing mechanism were other long term measures.

The Micro Finance Institutions Act is another new instrument that will provide greater transparency and accountability and provide more opportunities for participation of development development partners.

These regulatory functions were underscored during a recent presentation on the “Changing Role of the Financial Regulator by Dr Ranee Jayamaha, Deputy Governor Central Bank of Sri Lanka. Dr Jayamaha underlined factors such as progressive liberalization of financial systems, increasing role of financial intermediaries in allocating resources, financial innovation and product development, the scale of international portfolio flows and their potential impact and increasing incidence of domestic and international financial crises forming the background for the changing role.

She emphasized that regulation does not come without a cost and such costs are ultimately passed onto customers adding to transaction costs. However regulation benefits the customers providing healthy competition among financial service providers leading to innovation and high service levels. Common regulatory challenges are limited stakeholder support, downside risks in financial sector, institutional failures leading to economic and social consequences and stakeholder intervention, lack of common understanding of competitive forces, flexible entry and no exit due to lobbying, no punishment for wrongdoers, temptation by investors and depositors for higher returns and difficulty in establishing uniform prudential criteria due to small and weaker institutions.

In conclusion the Deputy Governor pointed out that the present trend is to move away from compliance- based regulation to risk –based proactive regulation and supervision, she felt that the regulatory authorities should be transparent and accountable and should have regulatory, supervisory and budgetary independence. She also expected regulators to be mindful of public policy objectives and called for the principles-based risk-focused approach to be implemented in a transparent manner.