Financial Times

New laws bring clarity to novel investment schemes
By Duruthu Edirimuni
The Central Bank has introduced a new definition for deposits in its proposed amendments to the Banking Act designed to prevent possible abuses that could mislead the public and put their money at risk and erode confidence in the financial system.

The new laws will allow the Central Bank to better regulate financial institutions that sell various types of innovative deposits and products such as investments in trees.

Sarojini Kadurugamuwa, Central Bank's Director Legal, said that currently the term deposit is not defined in the Banking Act or the Finance Companies Act and that this is a serious threat to the public interest in financial institutions in the current complex financial industry.

Kadurugamuwa said the banks and finance companies introduce various mechanisms in the guise of deposits such as promissory notes and that it is difficult to find a distinction between these and a deposit. The Central Bank gets complaints from the public almost on a daily basis about the investment schemes, she said.

But when the Central Bank tries to investigate them, the companies respond by taking legal action. She said that the gullible public is encouraged to invest in these nefarious schemes as they promise good returns.

"In other countries there is a very broader classification of deposits and the Central Bank will be adapting a distinct definition as well," she said. The new laws come in the wake of concern over finance companies such as Okanda Finance whose investment schemes have proved difficult to define and led to arguments with the Central Bank as to whether or not they are deposits.

Kadurugamuwa said that the regulator is working on a prudential framework to control institutions who are in the business of financial inter-mediation by inviting public funds as a business. "The various institutions that sell deposits can be brought under the purview of the Banking Act or the Finance Companies Act with this definition," she said, adding that currently it is difficult to regulate them.

The new definition reads that 'a deposit includes a sum of money accepted from any person as a business on terms under which it will be repaid with or without interest or a premium and either on demand or at a future time or in circumstances agreed to by or on behalf of the person making the payment and the person accepting it, provided that the person accepting the money is a person who in the usual course of business lends money or makes available the use or the benefit of the money so accepted to third parties.'

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