Cash Management in Sri Lanka
Overview
Sri Lanka is an emerging economy, with a population of 19.7 million, gross domestic product (GDP) of US$23bn and a per capita GDP of US$1,170. The economy is based on imports of food and consumer items, raw materials and machinery, and exports of apparel, tea and rubber, and services including tourism, agriculture and remittances of low skilled overseas workers.1 As an economy reliant on imports, Sri Lanka has been affected by the spiraling cost of oil in the global markets. This has a twofold effect, as there is an outflow of dollars to pay for the fuel and a fiscal hole due to the government’s fuel subsidies.
If the status quo on the Cease Fire Agreement between the government of Sri Lanka and the Liberation Tigers of Tamil Eelam remains, and the planned infrastructure projects such as the Norachcholai Coal Plant and the Southern and Airport Expressways commence, it should act as a stimulant to the economy, making the projected GDP growth levels of between 6% and 8% achievable. Inflation is projected to remain high at 8% to 9% as the government considers loosening its policy on subsidising fuel.2
Sri Lanka obtained its first sovereign ratings in December 2005. Fitch Ratings assigned Sri Lanka a BB- rating (sub-investment grade), noting that all long-term outlooks were stable. Standard & Poor’s rating was B+. The rating agencies commended Sri Lanka’s resilience to adverse shocks, strong institutions and an unblemished debt service record.3
Uncertainty over the peace process and the ceasefire is the single biggest challenge facing businesses. Reducing the high fiscal deficit, thereby bringing inflation and the growing public debt under control is also a factor, as is improving the inadequate infrastructure, especially roads/rail and power.
The private sector is the engine of the economy, fuelled by services such as telecommunications, transport, international trade, banking and tourism as well as export industries including apparel, ceramics, tea and gems.
Foreign direct investment (FDI) flows in 2005 averaged only about US$150m. On the back of the sovereign credit rating, 2006-2007 will see the government trying to raise funds internationally through the issuance of sovereign bonds. The government is attempting to raise funds through the sale of these bonds not only to residents but also to the sizable Sri Lankan communities in Australia, Europe and North America. In addition to this, the government is also planning to enhance the present Board of Investment benefits to foreign investors by providing attractive additional tax benefits to companies investing outside Colombo.
Sri Lanka has one of the more advanced financial systems in South Asia, and has been implementing various reforms to further liberalise and privatise the financial system. The Sri Lankan banking sector is the largest part of the financial system, accounting for 69% of the financial sector assets. There are 23 commercial banks, 12 of which are foreign-owned, and 11 local banks, including two state banks. ICICI Bank is the newest foreign bank in Sri Lanka.
The central bank has already made arrangements to implement the Basel II Capital Adequacy Accord beginning 2007 that will improve the overall risk management of the banking system. The Tier 1 capital requirement has been raised from US$5m to US$25m from 2008. Existing banks have time until the end of December 2007 to meet the new requirements while ensuring that they meet at least 50% of the increase at the end of 2006 and the remaining 50% of the increase at the end of 2007.
The Cheque Imaging and Truncation Project will facilitate efficient and speedy processing and clearing of cheques around the island. Lanka (Pvt) Ltd. (LCPL), which operates the national clearing house for cheques and other means of payments between banks, has successfully implemented a nationwide information technology-based payment infrastructure for transacting and clearing cheques in coordination with over 1,300 commercial bank branches across the country. This is not only proof of a successful information technology-based nationwide project but a first in the region to implement an imaging project on a national scale. Automating the cheque clearing process will reinforce the strengthening of a safe and efficient national payment system with the reduction of clearing/payment cycle of cheques from remote customers. Furthermore, automation of the clearing process is expected to reap long-term benefits including reduced operational costs and improved processing efficiency that will benefit banks, banking customers and the clearing house.4
With effect from 8 September 2003, the Central Bank of Sri Lanka (CBSL) implemented an automated inter-bank payment and settlement system, real-time gross settlement (RTGS) for the settlement of high-value and time-critical transactions of banks, primary dealers and some business enterprises/individuals. Payments settled through the RTGS system account for 78% of the total value of transactions (calculated as an average per day).5
The culture of cash management is slowly emerging as a strong part of the Sri Lankan banking sector. The commercial sector, in particular multinational corporations (MNCs) and large local companies, are increasingly more demanding of efficient cash management solutions. More companies are actively reviewing their existing cash management techniques and issuing requests for proposals to find the bank that best meets their requirements. The increase in the use of enterprise resource planning (ERP) systems has also prompted the commercial sector to work more closely with banks that can create efficiencies for them by streamlining their processing operations. They also seek effective tools to help them manage the information flow and help them with reconciliation and cash applications.
Sri Lanka is still very much a cash-oriented society with notes still widely used for payments to third parties. For companies, cheques are the most common method of payment. The Sri Lanka Inter Bank Payments System (SLIPS) is an electronic funds transfer system that caters mainly to low-value bulk payments on a daily basis. Companies are now using SLIPS for electronic salary and third-party payments, and RTGS for large-value central bank transfers.
Local commercial banks enjoy the advantage of being able to provide collections services due to their widespread branch networks. However, international banks are now entering the collections arena with alliance agreements with local banks. They are also in a better position to offer superior electronic banking systems that provide an integrated receivables offering delivered through integrated channels that enable auto reconciliation. The cheque collections process has been further enhanced with the Cheque Imaging and Truncation Project that has reduced the cheque clearing time for cheques issued from outstation branches. Private local banks are upgrading their systems and linking branches island-wide to provide more efficient account services to their customers.
With the expansion of payments services, banks have automated the payments transaction process to make life easier for their customers. Phones, mobile phones, tele-banking and the Internet allow bank customers to manage their finances at any time, wherever they are. With the introduction of short message service (SMS) customers can perform a wide range of query-based transactions over their mobile phones. Telephone and Internet banking has shown a rapid increase during the past few years. The larger commercial and foreign banks make use of such systems, which are increasing in popularity. The increasing use of ERP systems by the majority of the larger companies in Sri Lanka and the need for integration with the banking system is also one of the main reasons for the demand for web based systems.
Figure 1: Payment Instructions Handled Through Electronic Systems Including LankaClear
| ITEM | 2004 | 2005 | Source |
|---|---|---|---|
| Number of transactions tele-banking/Internet and mobile banking |
502,444 | 686,025 | Commercial banks – average figures for 2005 |
| Number of credit cards | 508,917 | 690,730 | Commercial banks – average figures for 2005 |
| ATMs – volumes of transactions |
37,803,000 | 43,000,000 | Commercial banks/National Savings Bank – average figures for 2005 |
| EFTPOS – volume of transactions |
9,581,600 | 9,897,800 | Commercial banks/National Savings Bank – average figures for 2005 |
| No. of cheques cleared | 37,689,000 | 40,067,934 | Lanka Clear (Pvt) Ltd |
| Number of SLIPS | 2,411,455 | 3,090,000 | Lanka Clear (Pvt) Ltd – average figures for 2005 |
| Number of RTGS | 138,119 | 149,627 | Central Bank of Sri Lanka – average figures for 2005 |
The cash management market in Sri Lanka has evolved considerably over the past two years and will continue to do so over 2006-07. Global banks are aggressively targeting the deposit balance market by offering competitive interest rates and more sophisticated receivables management solutions.
The trend towards centralisation of treasury operations among MNCs and large local companies has led to a demand for increased ability to provide comprehensive cash management services that streamline services from a single point of control. The role of leading cash management banks in Sri Lanka is now evolving from that of transaction processors to that of transaction consultants.
1Doing business in Sri Lanka, Country commercial guide 2006.
2ADB Sri Lanka Financial Sector Assessment.
3Doing business in Sri Lanka, Country commercial guide 2006 -“Sri Lanka obtains sovereign ratings.”
4Lanka Business online.
5Central Banks payment bulletin 2005.