CBSL issues new directions for Licensed Banks

The Central Bank (CBSL) announced the issuance of the Banking Act Directions No. 05 of 2024 on Corporate Governance for Licensed Banks on September 30.

These Directions were issued with a view to strengthening the corporate governance processes and practices of the licensed commercial banks and licensed specialised banks (hereinafter referred to as licensed banks), thus facilitating the conduct of banking business in a responsible and accountable manner in order to promote safety and soundness of the banking sector and the financial system as a whole.

The new Directions will come into effect from January 1 with certain extended effective dates, upon which the prevailing directions on corporate governance issued in 2007 will be revoked. The banking sector of Sri Lanka is mainly funded by deposits accounting for nearly 81.5% of the funding structure of banks as at end 2023.

The board of directors (BOD) and senior management, i.e., chief executive officers and key management personnel of licensed banks play a pivotal role in safeguarding the interest of depositors. The banking sector is dynamic, fast evolving and becoming increasingly complex, while being exposed to emerging risks, frauds and failures. Accordingly, a robust corporate governance framework that encompasses sound corporate culture and values, healthy composition of BOD, strengthened process of assessment of fitness and propriety and strong risk management and control functions is of paramount importance for the banking sector.

Accordingly, with the enactment of the Banking (Amendment) Act, No. 24 of 2024, which came into effect on 15.06.2024, inter alia CBSL focused on strengthening the legal and regulatory framework relating to corporate governance in the banking sector.

The international standard setters such as the Basel Committee on Banking Supervision (BCBS) and regulators across the world have recently implemented several measures to strengthen Bank Supervision Department 03.10.2024 2 corporate governance in banks in view of the recent governance failures and latest market developments.

The new Directions on Corporate Governance are expected to strengthen the responsibility and accountability of BOD and senior management on banking business in the best interest of 3 depositors and other stakeholders. The Banking Act Directions No. 05 of 2024 on Corporate Governance for Licensed Banks can be downloaded from the website of the Central Bank via: Banking_Act_Directions_No_5_of_2024.pdf (cbsl.gov.lk)