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Financial System Stability
Regulation and Supervision

Regulation and Supervision of Banks
The regulatory and supervisory framework for Banks is specified mainly in the Banking Act, Monetary Law Act and the Exchange Control Act. The Central Bank issues banking licenses for two categories of banks, namely Licensed Commercial Banks and Licensed Specialised Banks (which are savings and development banks). The main difference between a Licensed Commercial Bank and a Licensed Specialised Bank, is that the former is permitted to accept demand deposits from the public (operate current accounts for customers) and is an Authorised Dealer in foreign exchange which entitles it to engage in a wide-range of foreign exchange transactions, whereas the latter is permitted to limited engagements in foreign exchange with Central Bank’s approvals.

The laws empower the Central Bank to undertake the following:
Licensing of new commercial and specialised banks.
Issue prudential directions, determinations and orders to banks, under the statutes.
Conduct Continuous Supervision and Examination of banks.
Enforce regulatory actions and the resolution of weak banks.

The regulatory and supervisory function relating to banks licensed by the Monetary Board is carried out by the Bank Supervision Department of the Central Bank. The supervision of banks is based on the internationally accepted standards for bank supervision set out by the Basel Committee for Banking Supervision.

Under the continuous supervision/surveillance system, the financial condition of Licensed Commercial Banks and Licensed Specialised Banks is monitored on the basis of periodic information provided by banks on their operations. The periodic information includes weekly interest rates of deposits and advances, monthly returns on assets and liabilities, income and expenditure, classified advances and provisioning for bad and doubtful debts, statutory liquid assets, quarterly returns on capital adequacy, investments in shares, accommodation granted to related parties, interest spreads, foreign currency exposures, maturity gap analysis and annual returns on audited financial statements and abandoned properties.

An Internal Supervisory Rating system of banks is in place, taking into consideration of quantitative measures such as Capital Adequacy, Asset Quality, Management, Earnings and Liquidity (i.e. CAMEL model components) and other qualitative measures such as assessment of bank's compliance with statutory requirements, applicable laws and regulations, internal controls and the standards of corporate governance, in order to categorise them under different risk ratings and take necessary regulatory and supervisory actions to improve the positions of weaker banks.

In terms of the provisions of the Banking Act and the Monetary Law Act, all Licensed Commercial and Specialised Banks are subject to statutory examinations, at least once in two years. A new approach to examination of banks has now been adopted - the risk based examination process, which focuses on identification of banking risks, the management of these risks and the assessment of adequacy of resources to mitigate these risks. Matters relating to non-compliance with prudential requirements and any weaknesses and deficiencies in the financial condition, controls and systems of a bank are brought to the notice of its Board of Directors, by the Central Bank to ensure that corrective action is taken by the bank.

Licensed Commercial Banks and Licensed Specialised Banks are also required to publish their quarterly and annual audited financial statements, including key performance indicators, in the newspapers, in all three languages, within two months of the end of each period.

Common Banking Forum - The Governor holds monthly meetings with the Chief Executive Officers of licensed banks, which serves as a forum for the exchange of views on issues and policies relating to banking operations and the financial sector.

Bank Directors’ Symposium – The Central Bank conducts annually the Bank Directors’ Symposium with the view of updating and sharing the new developments in the regulatory and the banking business reforms with bank directors in order to ensure banks’ resilience to the challenging environment.

Public Awareness - The Central Bank conducts public awareness programmes on the banking and financial system with regular notices in the newspapers, Radio and TV commercials/programmes to advise the public to assess and to be cautious of the risks and returns on their transactions with financial institutions as well as investing in prohibited schemes.


Main Prudential Regulations, Directives and Guidelines applicable to Licensed
Commercial Banks & Licensed Specialized Banks >>
 
Banking Act & Banking (Amendment) Act >>
A Guide to Bank Customers – Fees on RTGS and SLIPS customer transactions >>
Institutions Authorised to Accept Deposits From the Public >>


Regulation and Supervision of Finance Companies
The regulation and supervision of Licensed Finance Companies is governed by the Finance Business Act. The Finance Business Act No 42 of 2011 was enacted on 09.11.2011 repealing and replacing the Finance Companies Act No 78 of 1988 to strengthen the regulation and supervision of Licensed Finance Comapanies and to curb unauthorized finance businesses.The Department of Supervision of Non-Bank Financial Institutions of the Central Bank carries out the regulatory and supervisory functions in respect of Licensed Finance Companies, with the objective of ensuring that these institutions comply with the minimum prudential requirements stipulated by the Central Bank. These functions are carried out mainly through off-site surveillance and on-site examinations. The directions and rules issued under the provision of the Finance Business Act cover minimum capital adequacy and liquidity requirements, deposits, provisioning for bad and doubtful debts, single borrower limits and limits on equity investments. Matters relating to non-compliance with prudential requirements and any weaknesses and deficiencies in the financial condition, controls and systems of a finance company are brought to the notice of its Board of Directors, by the Central Bank to ensure that corrective action is taken by the finance company.

The Central Bank also conducts investigations into the affairs of institutions, which are allegedly engaged in finance business, without legal authority. These unauthorised institutions are taking money from the public either as deposits or in a manner akin to deposits by calling them other names, such as investments, credit, borrowings or placements. Appropriate action is taken against such unauthorised institutions that contravene the provisions of the Finance Business Act. Legal action is also instituted against entities that fail to provide information for investigations to ascertain whether such companies are conducting finance business.

The Central Bank conducts a public awareness programme through notices, posters and publications to inform the public of authorised financial institutions and to warn them of unauthorised persons / entities that engage in finance business.


Facts that a person should be aware of in applying for a Licence to carry on Finance Business>>
Licensed Finance Companies >>
Main Prudential Regulations, Directions & Guidelines applicable to Licensed Finance Companies >>
Finance Business Act, No 42 of 2011 >>


Regulation and Monitoring of Finance Leasing Establishments


Regulation and supervision of Registered Finance Leasing Establishments (RFLEs) >>
Registered Finance Leasing Establishments>>
Main Prudential Regulations, Directions and Guidelines applicable to Registered Finance Leasing Establishments >>
Finance Leasing Act >>
Facts that a person should be aware of in applying for a licence to carry on finance leasing business >>


Regulation and Supervision of Primary Dealers
The regulatory and supervisory framework for Primary Dealers in government securities is specified by regulations issued under the Local Treasury Bills Ordinance and the Registered Stocks and Securities Ordinance. The Central Bank is empowered to regulate and supervise Primary Dealers, which entails the appointment of Authorised Primary Dealers, the issuing of prudential directions and determinations under the laws, the off-site and on site examination of Primary Dealers and the enforcement of regulatory actions, including the suspension and cancellation of the appointment of Primary Dealers for non-compliance with the laws. The Public Debt Department of the Central Bank is responsible for supervising Primary Dealers.

There are two categories of institutions that are eligible to be Authorised Primary Dealers - Licensed Commercial Banks and Dedicated Primary Dealers Companies. The supervision of Primary Dealers is carried out to ensure an efficient, sound and safe primary dealer system, to promote the stability of the government securities market and to safeguard the interests of investors. The main Directions issued to Primary Dealers cover Minimum Capital Requirement, Capital Adequacy, Special Risk Reserve, Segregation of Securities Accounts, Custodial Holdings of Securities, Market Valuation, Repurchase Agreements, Forward Rate Agreements and Interest Rate Swaps, Financial statements, Dividend Declaration and Diversification. The Public Debt Department supervises Authorised Primary Dealers through off-site surveillance and on -site examinations. Regular meetings, as well as, one to one discussions, are held with Primary Dealers to exchange views and to institute remedial measures, where necessary. In addition, the Central Bank has issued a Code of Conduct for Primary Dealers to promote best practices in the conduct of trading and compliance is monitored.


Main Prudential Regulations, Directives and Guidelines applicable to Primary Dealers in Government Securities >>
 
Local Treasury Bills Ordinance >>
Registered Stocks and Securities Ordinance >>

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Financial System Stability
About the Financial System
 
Financial System Stability
  Structure of the Financial System
  Components of the Financial System
Regulation and Supervision
 
Regulation and Supervision of Banks
  Regulation and Supervision of Finance Companies
  Regulation and Monitoring of Finance Leasing Establishments
  Regulation and Supervision of Primary Dealers
Monitoring and Surveillance
 
Maintaining Stability in Money and Foreign Exchange Markets
  Overseeing the Payment and Settlement System
  Surveillance of Financial Conglomerates
  Lender of Last Resort
Financial System Stability Committee
   
 
 
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