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Two decades of economic and financial reforms have helped Sri Lanka to enjoy the highest per capita income in south Asia.

And prominent among those reforms was the creation of a modern sophisticated payments infrastructure.

The old paper-based “deferred net settlement system” saw banks submitting cheques to the Central Bank of Sri Lanka, which settled funds at the end of the day across current accounts that the banks held with it.

This was swept away by the “real-time gross settlement” (RTGS) system in 2003, enabling banks to make high-value payments and complete settlements among themselves in real-time.

The RTGS project was conceived as part of a World Bank funded programme to modernise the central bank and included an upgrade of the bank’s technology, procedures and governance systems.

“Our aim was to create a lean, modernised and efficient central bank, and along with it a core financial infrastructure that would reduce risks and increase the overall efficiency of the financial system,” states Dr Ranee Jayamaha, deputy governor of CBSL.

The earlier deferred net settlement process, says Dr Jayamaha, exposed the financial system to a high level of credit, liquidity and systemic risks. For example, if at the end of a day a bank did not have sufficient funds to clear its payment obligations, the central bank had to bear the credit and settlement risk overnight.

“The payment and settlement system is the bloodline of any country’s financial infrastructure. Any problem in it can pose a systemic risk to the entire financial system.

“By replacing the system, we have effectively countered these risks,” she says.

CBSL used technology vendor LogicaCMG to provide both the payments solution and the technology to automate the central bank’s own systems. The vendor also provided a solution for creating a scripless securities settlement system (SSSS) for the hitherto paper-based government securities market, which was launched in 2004. All the payment and settlement instructions for the RTGS/SSSS system, LankaSettle, are sent through Swift, the global infrastructure that handles transaction communication.

The biggest challenge for the project, Dr Jayamaha says, was convincing the various market participants. “Everyone was so used to dealing with paper that they were worried about the security and accuracy of paperless transactions,” she says. CBSL, along with LogicaCMG and consulting firm IBM Business Consulting Services conducted several rounds of training to educate all the market players, including banks, regulators and primary dealers.

Despite the vast scope of the automation exercise, the project was completed within three years, making Sri Lanka the first country in south Asia to have a combined RTGS/SSSS system on Swift.

Over time, the plan is to link LankaSettle with the Colombo Stock Exchange to facilitate the payments of private share transactions to be made on a real-time basis, eliminating delays of four to five days in receiving share certificates.

Jayamaha says the money market and the country has benefited enormously from these investments.

Along with the immediate benefits, the RTGS system has tightened up financial discipline and improved liquidity management in the banking sector, while the securities settlement system has helped revitalise the government securities market.

Further, the new payments infrastructure has enhanced Sri Lanka’s standing in the world, says Dr Jayamaha.

“It has enhanced confidence in our financial system and Sri Lanka is now viewed as an advanced financial centre that can be relied upon to offer efficient services.”

Copyright The Financial Times Limited 2019. All rights reserved.

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