Curbing informal transactions with E-Money drive
View(s):Sri Lanka is undergoing a major shift in its financial system by accelerating the transition towards e-money and electronic transactions.
With nearly 45 per cent of financial activity outside the formal banking system, the government is accelerating the process of bringing these operations under formal monetary regulation.
The intention is not only to bring about greater financial inclusion but also to enhance economic efficiency and mitigate risks arising from unregulated financial behaviour, Finance Ministry sources said.
This informal segment includes cash transactions, illegal lending networks, and illegal digital transfers. These activities, while filling some of the gaps in access to finance, pose huge challenges to financial supervision and transparency.
In this context the Central Bank (CB) has identified the need of regulating these activities considering it’s urgency towards financial system stability.
A Central Bank Digital Currency (CBDC) is to be set up as one of the strategic steps in this direction. This state-backed digital currency will provide a traceable, secure, and regulated method of exchange to attract people for e- money transactions.
A CBDC proof-of-concept was released in 2024, and the findings will likely shape the next phase of integrating digital finance.
Although the CB has not officially announced the actual figure of money that is out of the banking system, Finance Ministry estimates indicate that about Rs. 1.3 trillion was in circulation out of the banking system in 2024.
This figure indicates the scale of unmonitored financial activity and its potential to destabilise monetary policy, financial stability, and anti-money laundering controls.
Colombo University Economist Prof. Priyanga Dunusinghe advocated ramping up digital payment infrastructure and expanding banking penetration, particularly into underserved bases, as the essential steps towards reducing financial informality.
The CB has also used active monetary measures to reduce excessive liquidity. In the first half of 2024 alone, it absorbed approximately Rs. 546 billion of foreign exchange into its account from the domestic economy. The operation was meant to improve monetary discipline and dampen inflationary pressures.
Digitisation of financial services has far-reaching benefits: it raises access to finance, especially in rural areas, raises transparency by having traceable transactions, and reduces transaction costs and processing time. For consumers and enterprises, these changes may mean better and safer financial practices.
When Sri Lanka goes through this financial transition, regulation that stays abreast of innovation will be crucial to developing a more inclusive, transparent, and more resilient economy.
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