SL’s Central Bank introduces strict corporate governance rules for banks

The Central Bank of Sri Lanka (CB) has announced new directives to strengthen corporate governance practices within licensed commercial and specialised banks, effective from January 1, 2025.

These new regulations, known as the Banking Act Directions No. 05, aim to promote responsible and accountable banking operations while ensuring the safety and stability of the country’s banking sector.

As part of the updated framework, the current corporate governance guidelines, which were first introduced in 2007, will be replaced.

Corporate governance is crucial in Sri Lanka’s banking sector, where deposits account for approximately 81.5 per cent of the total funding structure as of 2023.

The board of directors (BOD) and senior management, including chief executive officers and key management personnel, play a central role in safeguarding depositors' interests.

The sector is fast-evolving, increasingly complex, and exposed to emerging risks such as fraud and operational failures. Therefore, a strong governance framework is vital to ensure the sector’s safety and soundness.

With the passage of the Banking (Amendment) Act, No. 24 of 2024, the CB has focused on reinforcing the legal and regulatory landscape surrounding corporate governance.

The updated rules are designed to align Sri Lanka’s banking sector with international best practices, including the Basel Committee on Banking Supervision’s core principles for effective banking oversight. These changes also address governance challenges that have emerged in the global financial sector in recent years.

Key provisions of the new directives include:

• The BOD is required to foster a corporate culture that promotes ethical, professional, and prudent behaviour across the bank.
• Board members must demonstrate collective suitability and diversity to effectively manage the bank.
• At least half of the board must consist of independent directors, with stricter criteria for determining director independence.
• The bank’s chairperson must be an independent non-executive director and will no longer chair any board sub-committees.
• Sub-committees, such as the Board Related Party Transactions Review Committee, will be tasked with ensuring that related party transactions are conducted transparently and within regulatory limits.

There are enhanced requirements for managing conflicts of interest and overseeing senior management. The risk management, compliance, and internal audit functions will receive greater oversight.

The new corporate governance guidelines are expected to improve accountability and decision-making among the BOD and senior management, fostering a robust risk management framework.

By promoting transparency, independence, and ethical practices, the CB aims to enhance the resilience of Sri Lanka’s banking sector, ensuring it remains secure for depositors and stakeholders alike.