Banking Credibility

Dec 29, 2007 (LBO) – The International Monetary Fund (IMF) has raised doubts about the independence of Sri Lanka's central bank and its ability to regulate banks fairly due to the presence of a Treasury representative which creates a conflict of interest. "¦the Monetary Board’s independence could be potentially constrained by the presence of the Secretary of the Treasury who acts as shareholder of the two largest banks," the IMF said in a recent assessment of the island's financial system stability.

State Banks

It pointed out that Treasury Secretary was responsible both for appointing members of the boards of state banks and approving them as ˜fit and proper’.

This was "not consistent" with standards of corporate governance expected by the Central Bank of supervised entities, IMF said.

"The operational independence of the Central Bank as the supervisory agency could be further strengthened to enhance its credibility and assist it in imposing true remedial action," the IMF said.

"The participation of the controller of the state banks in supervisory decisions on the banking system through membership of the Monetary Board could limit the ability of the supervisors to enforce compliance, particularly with respect to t