The Application of Corporate Governance Principles in the Banking Sector in Sri Lanka – An Overview

Abstract

<p>All economies in the world are propelled by banks and the banking industry. Since the end of the war, Sri Lanka’s development has been accelerated and banks play a prominent role in the economy as they finance growth and development. Corporate Governance (CG) is seen as a particularly important regime for banks, due to their engagement with public funds, the public’s confidence and trust is of paramount importance to a bank’s stability. It is crucial that laws and regulations provide a versatile framework for good governance of the banking sector. This study critically examined the state of CG development and its underlying implications in the banking sector. Primarily, the relevant provisions of the Companies Act, Banking Act and the Monetary Law in Sri Lanka were evaluated, in addition to the other relevant laws, in order to ascertain whether they provide an adequate framework to ensure proper CG of banks. The Central Bank of Sri Lanka (CBSL) has improved its capacity over the years to supervise, enforce and maintain financial stability. It ensures the safety and stability of banks at all times and has taken steps to implement risk management, BASEL II, for tight CG of banking. A mandatory code of CG has been issued by the CBSL, requiring all banks to fully comply with the rules on or before the 31<sup>st</sup> of January 2009. This study also explores the scope, extent, impact and the effectiveness of the supervisory and regulatory role of the CBSL and identifies the challenges faced by it when addressing the CG issues in the banking industry.</p>