The increasing focus on governance and regulation has made compliance an important factor. The failure to maintain compliance poses more than just financial risk which involves financial penalties or a possible increase in charges, but it also poses a serious business risk damaging the bank's reputation. It is crucial to be able to manage global compliance issues, risks and opportunities and have firm control.
In Sri Lanka, the introduction of Basel III and International Financial Reporting Standard 9 (IFRS 9) regulations have helped the banking sector to bring in huge changes in the way business is done. The capital requirements have become stronger and are pushing non-banking financial institutions (NBFIs) to consolidate, with a range of new rules collated for the country's emerging fintech industry. These new rules comprising of frameworks and procedures leaves lenders in a stronger position going ahead, in their capacity to meet and deal with new shocks, and in their capability to grow business and build functionality across the country.
International Financial Reporting Standards (IFRS) is the international accounting framework which is used to appropriately organise and report financial data. IFRS 9 or its Sri Lankan equivalent of SLFRS 9 needed banks to change their provisioning models from incurred credit loss accountancy method to the expected credit loss method, which is a more advanced approach that requires financial institutions to identify current business drivers and design the impact of possible future scenarios on their company. Banks and Non Banking Financial Institutions are required to analyse the credit losses which are expected, for the following 12 months and for the entire life cycle of all their non performing or performing assets.
In the global financial crisis of 2007-08, the International Accounting Standard 39 were deemed inadequate in preventing recession. The earlier regulations had a system of fair value which led to delays in recognizing financial losses. The old system was about traditional, retrospective accountancy where the results of past actions were evaluated while the new system looks ahead and prioritises real-time assessments and the estimation of future risks. For IFRS 9, with processing getting heavily loaded, automation needs to come to replace the manual systems.
The old system placed assets under four major categories, which got reduced to two under IFRS 9; assets measured at amortised cost and those at fair value. The new rules also measure banks' equity investments at fair value – which was earlier not required. Overall, IFRS 9 requirements call for an increase in loan loss provisions.
Sri Lanka is fighting money laundering as a member of several regional and international bodies and as a result has passed various legislations to conform with the global requirements and standards. With the new regulations, Sri Lanka's financial institutions will become more secure and will be in a better position to take advantage of the latest technology.
Anti-money laundering policies include all the regulations and laws that require financial institutions to proactively screen their clients to prevent money laundering and corruption. The Sri Lankan Parliament has passed three acts to fight money laundering: