A new international financial center in Colombo – dream or reality?


With the advancement of the Colombo Port City Economic Commission Law, Bingumal Thewarathanthri, CEO of Standard Chartered Bank, spoke about the opportunities available for the banking and financial services sector for local and international banks in Sri Lanka.

The Colombo Port City Economic Commission Law contemplates the establishment of offshore banks in the Colombo Port City Authority Zone. Would these entities be able to offer a wider range of services than that currently offered by foreign banks in Sri Lanka?

The principle of offshore banking is the deposit of funds by a company or an individual in a bank located outside its national residence. According to the Port City Bill, offshore banking units can accept savings, fixed demand deposits, or lend to any authorized person or non-resident in any designated foreign currency.

The success of this service depends on the framework that Port City offers for offshore banking. While the framework is similar to some of the other International Financial Centers (IFCs), the port city’s offshore units will be able to facilitate many transactions that are currently not permitted in Sri Lanka under normal banking services. Therefore, offshore banking in the port city will have an advantage over onshore banking as it will not be governed by current exchange control regulations.

How do you see these services supporting the larger ecosystem envisioned in Port City encompassing commerce, logistics, head office, etc. ?

In Port City, the medium of exchange would be the US dollar or any other major foreign currency and this would protect businesses from currency depreciation and monetary instability. We believe that the port city will in the future be the crossroads of many regional treasury centers (RTCs) and supply centers. In this context, having full offshore banking services will support areas such as regional liquidity management, business-to-business financing, debt services and transparent cross-border payments. There will also be opportunities to trade commodities, derivatives and set up various funds. Depending on how Sri Lanka connects to the rest of the world with Double Tax Avoidance Agreements (DTAA), Investor Protection and Promotion (IPP) and Trade Treaties, offshore banking in the port city should be able to offer a range of products to support potential offshore companies.

It is understood that these offshore banks would primarily serve the regional markets. Why would they do it from Sri Lanka instead of settling elsewhere in the region?

While there are several hubs around us, we believe Sri Lanka has a business case for:

Companies that are already in South Asia but operate the region from a different time zone. Companies that are very important in India and looking to reduce their risk in part.New entities established in South Asia; Sri Lanka to serve as a gateway to the subcontinent.

Sri Lanka has a competitive advantage in the service sector with its pool of skilled labor in the ICT, finance and knowledge services sectors. Additionally, Sri Lanka has the added advantage of location with regard to time zone as well as shipping routes. Having the best port in the region with an already well established transit hub, Sri Lanka has a vast opportunity to position the country as a port and logistics hub. However, Sri Lanka will need to work on improving the country’s credit rating and would need a solid plan to deal with debt adequacy issues. The country also needs a clear path to reduce the current account deficit by increasing exports and it needs tough reforms to manage the budget deficit.

Are you considering opportunities for local banks in the port city of Colombo?

This is a good opportunity for local banks to set up an offshore banking unit with full offshore banking capabilities. The IFCs have been slow to take off. Therefore, it is important to be patient during the process. According to the law on the port city, the capital of these companies must come from abroad. Therefore, national banks might have to work on partnerships to establish such entities.

The Central Bank also has a role to play as a regulator in maintaining the stability of the financial system through appropriate macroeconomic policies, maintaining global standards, strengthening supervision, improving the structure of payments and regulations, improving the governance structure and improving customer protection rules. It also requires moving from traditional domestic banking supervision to an offshore banking environment. The strengthening of offshore banking supervision capacities will be the key to the success of this initiative.

Given that offshore banks would operate in “any designated foreign currency”, what are the implications for the stability of the domestic banking system?

The port city will be completely separated from the country’s national banking system and we do not foresee any challenges for the national banking sector due to the emergence of the port city. There should be a clear separation between the two. Offshore units should only serve entities located in the port city and managed under two different jurisdictions. Any transaction that a domestic company intends to carry out in the offshore banking sector should be subject to regulatory authorization. Some Sri Lankan entities access offshore banking services for cheaper financing and for some cross-border transactions subject to regulatory approval. We should continue this process even with the port city.

There have been various concerns about Port City becoming a potential tax haven and money laundering risks. What do you think about this? How have other IFCs established safeguards?

The legislation relating to the port city should be carefully considered for its impact on the economy. Certain policies aimed at attracting foreign investors could lead to creating an accessible environment for money launderers and other illegal activities. It is therefore important to ensure that the oversight responsibility by a financial regulatory system is present to manage these risks in a manner similar to other IFCs around the world. Some countries made a mistake and ended up on the gray list of the Financial Action Task Force (FATF). Since Sri Lanka is now off the FATF gray list, we are in a good position to create the platform for a strong due diligence process, similar to any reputable IFC. Since Sri Lanka joins the long list of IFCs as a late entrant, it is important to maintain very high standards in this space. Not having a solid infrastructure to fight money laundering can cripple this initiative.

(This interview is an excerpt from a journal of the Institute of Chartered Professional Managers of Sri Lanka [CPM])


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