Central Bank of Sri Lanka (CBSL)

Overview

The Central Bank of Sri Lanka (CBSL) is the monetary authority and apex regulator of Sri Lanka's banking and financial system. Established in 1950, CBSL operates under the Central Bank of Sri Lanka Act No. 16 of 2023 (replacing the 1949 Monetary Law Act), which grants it significantly expanded independence and authority. CBSL was fundamentally reformed following the 2022 economic crisis (Aragalaya), emerging with strengthened governance structures, enhanced monetary policy autonomy, and reformed regulatory frameworks.

Current Leadership

• Governor: Nandalal Weerasinghe (appointed April 8, 2022) — leading CBSL through post-crisis reconstruction and institutional reform

• Monetary Policy Board: Multi-member board replacing unilateral governor decision-making under new 2023 Act

• Constitutional Council Approval: Governor appointment now requires Constitutional Council approval (introduced 2022-2023)

Key Statistics

• Established: 1950

• Headquarters: Janadhipathi Mawatha, Colombo 1, Sri Lanka

• Workforce: 1,000+ employees

• Banking System Oversight: 20+ commercial banks, 40+ finance/lending companies, 600+ microfinance institutions

• Currency: Sri Lankan Rupee (LKR)

Basic Identity

Classification

Inclusion Justification

What This Entity Oversees

Supervisory Authority and Structure

CBSL exercises comprehensive supervision through:

• Banking Supervision Department: Licensing, ongoing compliance, examination, enforcement

• Macroprudential Policy Division: System-wide risk assessment and countercyclical measures

• On-Site Examination Teams: Periodic bank inspections and compliance reviews

• Off-Site Supervision Unit: Continuous monitoring of regulatory returns and risk indicators

Licensing Framework

CBSL grants licenses for:

• Commercial Banks: Full banking services

• Specialized Banks: Development/merchant banking

• Finance Companies: Consumer and corporate lending

• Leasing Companies: Asset-based financing

• Microfinance Institutions: Small borrower lending

• Payment Service Providers: Digital and alternative payment methods

Prudential Regulatory Standards

Basel III Compliance:

• Capital Adequacy: Minimum Common Equity Tier 1 (CET1) 5.5%, Tier 1 7%, Total CAR 10.5%

• Liquidity Requirements: Liquidity Coverage Ratio (LCR) 100%, Net Stable Funding Ratio (NSFR) 100%

• Leverage Ratio: Non-risk-weighted requirement at 4.5%

• Countercyclical Buffer: Variable 0-2.5% of RWA for macroprudential purposes

Credit Risk Management:

• Expected Credit Loss (ECL) provisioning framework

• Large exposure limits (single exposure capped at 25% of capital)

• Sectoral concentration limits

• Related-party transaction restrictions

Liquidity and Operational Risk:

• Intraday liquidity monitoring

• Operational risk framework and capital requirements

• Interest rate risk in banking book (IRRBB) standards

• Cybersecurity and operational resilience requirements

Supervisory Examination Program

• Periodic Inspections: Annual/biennial on-site examinations (risk-based frequency)

• Compliance Testing: KYC/AML/CFT, interest rate ceilings, transaction reporting

• Prudential Assessment: Capital adequacy, asset quality, profitability, liquidity

• Enforcement Actions: Warnings, remediation orders, monetary penalties, license restrictions/revocation

Regulatory Enforcement

Penalties:

• Monetary fines ranging from LKR millions to LKR billions depending on violation severity

• License suspension, conditions, or revocation

• Managerial sanctions (removal of directors/senior officers)

• Mandatory remediation programs and enhanced supervision

Payment Systems and Infrastructure

Payment System Oversight Framework

Section 7(e) of the Central Bank of Sri Lanka Act 2023 empowers CBSL to:

• Administer, supervise, and regulate all payment systems

• Ensure safety, effectiveness, and efficiency of payment infrastructure

• Set standards for payment service providers and operators

• Manage systemic risk in payment and settlement systems

LankaPay National Payment Network

Role and Structure:

• National payment network operator under CBSL authority

• Provides central payment infrastructure for Sri Lanka's financial sector

• Operates multiple payment systems under unified governance

• Ownership: Joint ownership between CBSL and commercial banks

Clearing and Settlement Infrastructure

Common Electronic Fund Transfer Switch (CEFTS)

Launched: Phase-based implementation beginning mid-2020s

Characteristics:

• Fully automated, paperless fund transfer system

• Real-time interbank fund transfers between member banks

• Instantaneous settlement enabling 24/7/365 operations

• Supports payments within seconds

• Transfer limits: Up to LKR 5 million per transaction

• Accessibility: Available to all bank customers through retail banking channels

Functionality:

• Real-time credit transfers (supplier payments, salary deposits)

• Bill payments and utility settlements

• P2P fund transfers

• Government and corporate payment processing

• Cross-border payment settlement

Participating Institutions: All commercial banks and authorized financial institutions

Cheque Clearing System

• Automated cheque processing for retail check instruments

• Daily clearing cycles with end-of-day settlement

• Image-based cheque truncation for paperless processing

• Backup to electronic fund transfers for legacy payment methods

LankaClear (Pvt) Ltd

Clearing House Operator:

• Subsidiary responsible for clearing house functions for retail payments

• Joint ownership: Central Bank of Sri Lanka (49%) and Commercial Banks (51%)

• Operates CEFTS and ancillary clearing systems

• Settlement and reconciliation of inter-bank transactions

Emerging Payment Innovations

Digital Payment Expansion:

• Payment service provider licensing framework development

• Mobile banking and digital wallet regulation

• Real-time payment (RTP) infrastructure modernization

• Cross-border payment system development (Project Nexus with regional partners)

GovPay Initiative:

• Sri Lanka's first integrated digital government payment platform

• Centralizes government payment services for citizens

• Reduces cash dependency in public sector

• Integration with CEFTS for instant settlements

Recent Transfer to CBSL (2023)

Effective 2023, CBSL assumed regulation of insurance and insurance intermediaries, previously under Ministry of Finance:

Supervisory Authority Over:

• Life insurance companies

• General insurance companies

• Insurance brokers and agents

• Insurance industry development

Regulatory Framework:

• Prudential standards for solvency, capital adequacy, reserving

• Policy holder protection mechanisms

• Insurance conduct regulation

• Coordination with banking sector stress-testing

Financial Intelligence Unit (FIU)

Establishment: FIU operating under Financial Transactions Reporting Act No. 6 of 2006

Authority:

• Receives and analyzes Suspicious Transaction Reports (STRs) and Cash Transaction Reports (CTRs)

• Disseminates intelligence to law enforcement and regulatory authorities

• Maintains Financial Intelligence Database

AML/CFT Legal Framework

Primary Legislation:

• Financial Transactions Reporting Act No. 6 of 2006: Reporting requirements and AML/CFT framework

• Central Bank of Sri Lanka Act No. 16 of 2023: Section 19 provisions for administrative penalty imposition

• Finance Leasing Act No. 56 of 2000: Non-bank financial institution AML/CFT requirements

• Terrorism Prevention Act No. 1 of 2011: Terrorist financing prevention

Regulatory Requirements

CBSL has issued comprehensive AML/CFT guidelines and directions covering:

• Customer Due Diligence (CDD): Enhanced CDD for high-risk customers and Politically Exposed Persons (PEPs)

• Know Your Customer (KYC): Customer identification, verification, beneficial ownership

• Suspicious Activity Monitoring: Transaction monitoring systems and alert protocols

• Transaction Reporting: STR and CTR filing timelines and procedures

• Sanctions Compliance: UNSC sanctions list screening and blocking procedures

• Record-Keeping: 5-year retention for transaction and customer records

• Staff Training: Annual AML/CFT awareness training mandates

FIU Enforcement Powers

Section 19 Administrative Penalties (Financial Transactions Reporting Act):

• Authority to impose administrative penalties on non-compliant institutions

• Penalties ranging from millions to tens of millions of LKR

• Enforcement for failure to comply with CDD, AML/CFT filing, sanctions screening requirements

Recent Enforcement Actions (2023-2024):

• Bank of Ceylon: Penalized for PEP approval failures and delays

• People's Bank: Penalized for non-compliance with suspension orders and prohibited debit transactions

• MMBL Money Transfer: Penalized for AML/CFT compliance gaps

National Risk Assessment and Policy

• National AML/CFT Policy 2023-2028: Approved by Cabinet of Ministers

• Risk-Based Supervision: Targeting high-risk sectors and institutions

• International Coordination: Full compliance with Financial Action Task Force (FATF) recommendations

FATF Mutual Evaluation and Grey-Listing Concerns

Current Status:

• Previous mutual evaluation (2017) identified compliance gaps

• FATF Follow-Up Mutual Evaluation completed 2021

• Recent FATF Status Review (2024-2025) assessing continued compliance

• Risk of potential grey-listing if compliance standards not maintained

• Critical priority: Maintaining FATF compliance to avoid international financial isolation

Current Regulatory Priorities and Challenges (2024-2026)

IMF Program Compliance

• Meeting Extended Fund Facility quantitative performance criteria

• Monetary policy coordination with fiscal authorities

• Banking sector stability and debt restructuring

• External sector target achievement (BOP, FX reserves)

Post-Crisis Financial System Rehabilitation

• Restoring depositor confidence and domestic credit

• Asset quality improvement in banking sector

• Bad debt resolution and debt restructuring

• Credit normalization after crisis-induced contraction

Capital Account Liberalization

• Gradual relaxation of exchange controls per IMF schedule

• Encouraging foreign investment inflows

• Managing exchange rate stability amid capital flow volatility

Payment System Modernization

• CEFTS implementation and adoption acceleration

• Digital payment infrastructure expansion

• Real-time payment capability enhancement

• Cross-border payment system integration

Macroprudential and Financial Stability

• Implementation of countercyclical capital buffers

• Stress-testing for extreme economic scenarios

• Systemic risk early warning indicators

• Financial stability coordination with government

Technology and Cybersecurity

• Banking sector cybersecurity standards and resilience

• Fintech and digital banking regulation

• Operational resilience and business continuity

• Technology risk management in banking system

Regulatory Powers

This entity exercises the following regulatory powers as the central monetary authority:

Regulatory Role and Function

Legal Foundation

Primary Legislation

Central Bank of Sri Lanka Act No. 16 of 2023

• Effective September 15, 2023

• Completely replaced the Monetary Law Act (MLA) of 1949 (as amended through 2014)

• Represents most significant institutional reform in CBSL history

• Grants CBSL independence in monetary policy formulation and implementation

• Establishes Monetary Policy Board replacing unilateral governor decisions

• Defines CBSL's regulatory scope over banking, insurance, and payment systems

Key Provisions of the 2023 Act

Monetary Policy Independence

• Section 6: Monetary Policy Board (MPB) makes policy decisions (Governor + 4 external members)

• Policy decisions cannot be overruled by government

• Board members appointed for fixed 5-year terms with staggered expiration

• Public announcement of policy decisions and voting records

Financial Stability Authority

• Established Financial Stability Council for macroprudential oversight

• Authority to coordinate with government on systemic risk

• Powers to implement countercyclical buffers and macroprudential measures

Payment Systems Authority

• Section 7(e): Powers to administer, supervise, regulate payment systems

• Ensures safety, effectiveness, efficiency of payment infrastructure

• Authority over payment service providers and operators

Institutional Governance

• Increased Board oversight of Central Bank management

• Enhanced transparency and accountability mechanisms

• Improved internal audit and risk management

Supporting Legislation

• Banking Act No. 30 of 1988 (as amended): Banking sector prudential regulation and supervision

• Banking Amendment Act No. 24 of 2024: Recent amendments strengthening supervisory powers

• Monetary Law Act (Chapter 422) (2014): Partially retained provisions on currency and foreign exchange

• Financial Transactions Reporting Act No. 6 of 2006: AML/CFT framework

• Finance Leasing Act No. 56 of 2000: Non-bank financial institution regulation

Recent Regulatory Amendments (2023-2024)

• Strict Creditor Rights Framework: Enhanced depositor protection and creditor hierarchy

• Banking Supervision Modernization: New prudential standards alignment with Basel III international best practices

• Expanded Regulatory Scope: Insurance regulation transfer to CBSL from Ministry of Finance

Licensing and Authorization Relevance

The Central Bank of Sri Lanka (CBSL) is a key licensing authority in Sri Lanka's financial system:

The licensing process typically involves assessment of capital adequacy, fitness and propriety of management, business plan viability, AML/CFT compliance frameworks, and IT systems readiness.

Payments and Money Movement Relevance

Policy Objectives

Under the Central Bank of Sri Lanka Act 2023, monetary policy objectives include:

1. Price Stability: Maintaining inflation within target range (4-6% medium-term)

2. Financial System Stability: Ensuring soundness and efficiency of banking sector

3. Economic Growth: Supporting sustainable economic development

4. External Stability: Maintaining adequate foreign exchange reserves and stable exchange rate

Monetary Policy Board (MPB)

Composition:

• Governor (Chair)

• Deputy Governor (Monetary Policy)

• Three independent members with economic/financial expertise

• Fixed 5-year terms with staggered rotation

Decision-Making Authority:

• Quarterly policy rate decisions

• Public announcement of decisions and dissenting votes

• Forward guidance on policy trajectory

Policy Instruments

• Policy Rate (Repo Rate): Primary instrument for influencing money market rates

• Open Market Operations: OMO purchases and sales of government securities

• Reserve Requirements: Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)

• Standing Corridor: Lending and deposit facilities at policy rate +/- corridor width

Current Monetary Policy Context (2024-2026)

Post-Crisis Recovery

• IMF Extended Fund Facility Program (USD 2.9 billion, 2023-2027) requiring specific monetary targets

• Inflation management in post-depreciation environment (LKR devalued 60%+ in 2022)

• Foreign exchange reserve rebuilding (target: USD 5+ billion)

• Banking sector stabilization and credit normalization

Policy Priorities:

• Gradual policy rate normalization as inflation pressures ease

• Exchange rate stability and reserve adequacy

• Credit growth monitoring in post-crisis context

• Integration of financial stability and monetary policy considerations

Authority and Functions

Under the Central Bank of Sri Lanka Act 2023, CBSL holds exclusive authority for:

• Management of official foreign exchange reserves (currently ~USD 3-4 billion post-crisis)

• Formulation and implementation of exchange rate policy

• Regulation of authorized dealers and money changers

• International payments and settlements

Exchange Rate Regime

Managed Float System:

• Market-determined exchange rate within managed bands

• Daily fixing by authorized dealers under CBSL guidance

• Intervention to prevent excessive volatility and maintain external competitiveness

• Reference currency basket (USD, EUR, GBP, INR, JPY, CNY)

Foreign Exchange Regulation

Authorized Dealer System:

• Licensed banks and money changers authorized for forex transactions

• Regulatory oversight of dealer activities and pricing

• Quarterly reporting of forex transactions and positions

Capital Controls (Currently Under Liberalization):

• Restrictions on capital outflows (under IMF program relaxation schedule)

• Repatriation requirements for export proceeds

• Limits on foreign loans and borrowing

Reserve Management

Foreign Exchange Reserve Strategy:

• Build reserves to USD 5+ billion (from crisis-depleted levels)

• Diversify reserves across major currencies and gold

• Enhance reserve liquidity and asset quality

• Manage debt service obligations and import cover

Payment Systems Governed or Overseen

The CBSL operates and/or oversees the national payment and settlement infrastructure of Sri Lanka. Specific systems include:

[Further detail on specific system names requires verification from official sources]

Relationship to Other Regulators

International Monetary Organizations

• International Monetary Fund (IMF): Extended Fund Facility Program (USD 2.9 billion, 2023-2027) for economic stabilization

• World Bank: Technical assistance and policy support

• Asian Development Bank (ADB): Regional economic and financial development programs

• Basel Committee on Banking Supervision: Implements international supervisory standards

Regional Cooperation

• South Asian Association for Regional Cooperation (SAARC): Regional payment and financial stability initiatives

• Asia-Pacific Financial Forum (APFF): Regional supervisory coordination

• South Asian Regional Technical Cooperation (SARTC): Bilateral capacity building agreements

• Project Nexus: Cross-border real-time payment system development with regional partners

Bilateral Relationships

• Reserve Bank of India (RBI): Currency swap arrangements (USD/INR), regional coordination

• Central Banks of Trading Partners: Correspondent banking, financial intelligence exchange

• FATF and Mutual Evaluation: Regular compliance assessments and follow-ups

Geography and Jurisdiction Notes

Important Departments and Divisions

Key Public Resources

Central Bank of Sri Lanka Headquarters

Address: Janadhipathi Mawatha, Colombo 1, Sri Lanka

Website: www.cbsl.gov.lk

Key Divisions:

• Department of Banking Supervision

• Monetary Policy Department

• Financial System Department

• Payment Systems Department

• Macroprudential Policy Division

Financial Intelligence Unit of Sri Lanka

Website: fiusrilanka.gov.lk

Contact: Available on FIU website for suspicious transaction reporting

8. SRI LANKA PAYMENT SYSTEMS & INFRASTRUCTURE

8.1 Core Settlement & Clearing Systems

8.2 LankaSettle Components

LankaSettle operates as three integrated systems under CBSL management:

1. RTGS System (Real Time Gross Settlement)

• Processes large-value, time-critical payments

• Operates: 8:00 AM - 5:00 PM (Standard hours)

• Enhanced hours: 5:00 PM - 9:00 PM (evening window)

• Participant Banks: 22+ commercial banks, 15+ finance companies

2. LankaSecure System (Scripless Securities Settlement)

• Securities settlement for stock exchange

• Bond market transactions

• Government securities trades

3. Central Depository of Securities

• Custodian for dematerialized securities

• Manages investor accounts

• Settlement finality

8.3 CEFTS (Common Electronic Fund Transfer Switch) — Interoperability Hub

Overview:

• Launched: 2015 by Central Bank of Sri Lanka

• Upgraded: 2024 (expanded functionality to web)

• Member Banks: All licensed commercial banks, licensed finance companies

• Transaction Share (2024): 67% of total interbank retail transactions

• Growth: Increased from 8% (2018) to 67% (2024)

Key Features:

• 24/7 × 365 operation (real-time transfers)

• Sub-second transaction processing

• Open network for all licensed financial institutions

• Standardized participation terms

• Consumer convenience: transfers within seconds

Transaction Types:

• Interbank fund transfers

• Bill payments

• Merchant settlements

• Standing orders/recurring payments

8.4 JustPay — Account-Linked Instant Payments

Overview:

• Launched: 2018

• Platform Base: Built on CEFTS network

• Regulation: CBSL-supported, bank-member initiative

• Transaction Limit: Up to Rs 10,000 per transaction (original tariff scheme)

Features:

• Certified mobile apps linked directly to bank accounts

• Web browser support (expanded 2024)

• Extremely low tariff structure

• Biometric authentication support

• E-commerce integration (expanded 2024)

Participating Apps: Multiple third-party apps; requires bank account linkage

8.5 Card Payment Systems

Domestic Cards:

• RuPay penetration: Not yet adopted; discussions ongoing with RBI

• Visa/Mastercard: Primary international schemes

• Domestic schemes: Limited bank-specific schemes

Regional Integration:

• SAARC cooperation: Discussions for regional payment system linkage

• Cross-border: Through international card networks

8.6 Financial Services Providers — PSP Regulation

Authorized PSPs:

• Licensed Payment Service Providers (PSPs): Growing segment

• Authorization basis: Central Bank of Sri Lanka (Finance Companies Act)

• Key areas: Merchant acquiring, payment gateways

8.7 Key Regulatory Directives & Guidelines

Payment System Direction (2020, updated 2023-2024):

• Participation requirements for banks

• Cybersecurity standards

• Fraud control & dispute resolution

• Data localization requirements

Financial Inclusion:

• Digital payment access target: 70%+ of population (2025)

• Mobile banking: Encouraged through regulatory incentives

• Merchant digitalization: Government support via CEFTS

Notes on Naming and Language