The Central Bank of Sri Lanka (CBSL) wishes to announce the issuance of the Banking Act Directions No. 05 of 2024 on Corporate Governance for Licensed Banks on 30.09.2024. 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 01.01.2025 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 corporate governance in banks in view of the recent governance failures and latest market developments.

Accordingly, the Banking Act Directions on Corporate Governance for Licensed Banks issued in 2007, were further strengthened considering the provisions of the Banking (Amendment) Act, the present market and regulatory developments, international best practices, Basel core principles for effective banking supervision and the evolving requirements in the corporate governance regime.

The key areas included in the revised Banking Act Directions on Corporate Governance inter alia are:

• BOD to inculcate a sound corporate culture which reinforces appropriate norms for professional, ethical, and prudent behaviour throughout the bank;
• strengthened responsibilities and the collective suitability and diversity among members of BOD;
• improved independence of BOD, where at least half of BOD shall comprise independent directors and the existing criteria for ascertaining independence criteria for directors was further strengthened;
• enhanced suitability of the Chairperson, requiring the Chairperson to be an independent non-executive director;
• improved composition and functions of Board sub-committees, including further strengthening the independence of sub-committees; where the chairperson of the bank shall not chair any of the sub-committees.
• improved oversight of related party transactions, requiring BOD to form a Board Related Party Transactions Review Committee to ensure that related party transactions are undertaken at arm’s length, with approved securities and within required limits.
• enhanced requirements on managing conflicts of interest;
• requirements in relation to the Board’s oversight of senior management and the key responsibilities of the risk management, compliance and internal audit functions of banks; and,
• strengthened requirements in relation to branches of foreign banks operating in Sri Lanka.

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 depositors and other stakeholders, promote a healthy mix and independence of the Board, reinforce sound corporate culture and values and inculcate a strong risk governance framework in licensed banks leading to a strong and resilient banking sector in Sri Lanka.

The Banking Act Directions No. 05 of 2024 on Corporate Governance for Licensed Banks can be downloaded from the website of the Central Bank of Sri Lanka via the following web link.

Banking_Act_Directions_No_5_of_2024.pdf (cbsl.gov.lk)