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

With the advancement of the Port City Colombo Economic Commission Act, Standard Chartered Bank Chief Executive Officer (CEO) Bingumal Thewarathanthri spoke on the opportunities available for the banking and financial services industry for both local and international banks in Sri Lanka. 

The Colombo Port City Economic Commission Act envisages the establishment of offshore banks within the area of authority of the Colombo Port City. Would these entities be able to offer a wider array of services than foreign banks currently offer in Sri Lanka?

The premise of offshore banking is the deposit of funds by either a company or an individual in a bank which is situated outside their national residence. According to the draft law for Port City, offshore banking units may accept savings, fixed demand deposits, or lend to any authorised person or a non-resident in any designated foreign currency.

The success of this service depends on the framework that Port City comes up with for offshore banking. If the framework is similar to some of the other international financial centres (IFCs), the offshore units in the Port City 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 edge against onshore banking since it will not be governed under the current exchange control regulations. 

How do you see these services supporting the wider ecosystem envisioned at Port City encompassing trade, logistics, corporate headquarters, etc.?

In Port City, the medium of exchange would be US dollars or any major foreign currency and that will protect the businesses from currency depreciation and monetary instability.  We believe that the Port City will hub many regional treasury centres (RTCs) and procurement centres in future. In that context, having full offshore banking services will support areas such as regional liquidity management, inter-company funding, receivable services, and seamless cross-border payments. There will also be opportunities to do commodity trading, derivatives, and setting up of various funds. Depending on how Sri Lanka connects with the rest of the world with Double Tax Avoidance Agreements (DTAAs),  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 the potential offshore companies.

It is understood that these offshore banks would predominantly serve the regional markets. Why would they do so from Sri Lanka as opposed to setting up elsewhere in the region?

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

  1. Corporates that are already in South Asia but are managing the region from a different time zone. 
  2. Corporates that are significantly large in India and are looking at de-risking some part of it.
  3. New entities that are established in South Asia; Sri Lanka to act as a gateway to the sub-continent.

Sri Lanka holds competitive advantage in the services sector with its pool of skilled labour in ICT, finance, and knowledge services industries. Also, Sri Lanka has the added advantage of location with regards to time zone as well as maritime 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 ports and logistics hub. However, Sri Lanka will have to work on uplifting the country’s rating and would need a robust plan to manage the debt suitability concerns. The country also requires a clear path to reduce the current account deficit by increasing exports and it requires some stringent reforms to manage the fiscal deficit.    

Do you envision any opportunities for local banks at the Colombo Port City?

This is a good opportunity for local banks to set up an offshore banking unit with fully fledged offshore banking capabilities. IFCs have taken time to take off. Hence, it’s important to be patient during the process. As per the Port City law, the capital for such businesses should come from overseas. Hence, domestic banks might have to work on partnerships to establish such entities. 

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

As offshore banks would be operating in “any designated foreign currency”, what are the implications on the stability of the domestic banking system?

Port City will be completely separated from the domestic banking system in the country and we do not foresee any challenge for the domestic banking industry due to the emergence of the Port City. There should be a clear separation between the two. Offshore units should be servicing only the entities that are set up in the Port City and run as two different jurisdictions. Any transaction that a domestic company plans to do in offshore banking should be subject to regulatory clearance. Some Sri Lankan entities access offshore banking for cheaper funding and for some cross-border transactions subject to regulatory approval. We should continue that process even with the Port City. 

There have been various concerns over Port City becoming a potential tax haven and money laundering risks. What are your thoughts on this? How have other IFCs established safeguards?

Legislation related to Port City needs to be considered carefully for its impact to the economy. Certain policies intended to attract foreign investors could lead to creating an accessible environment for money launderers and other illegal activities. It is therefore important to ensure supervisory responsibility by a financial regulatory system is present to manage these risks similar to other IFCs across the world. Some countries have got this wrong and have ended up in the Financial Action Task Force (FATF) grey list. Since Sri Lanka has now come out of the FATF grey list, we are in a good position to create the platform for a robust due diligence process which is similar to any reputed IFC. Since Sri Lanka is joining the long list of IFCs as a late entrant, it is important to maintain very high standards in this space. Not having a robust infrastructure to curb money laundering can bring this initiative to a standstill.  

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