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Has digitalisation been in a mix-up with proposed national payments system?


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Budget 2016 proposed to allocate Rs. 10,000 million for the purpose of implementing an advanced digitalisation program of the country’s economy.

In the scope envisaged, it was proposed to set up a special purpose company under the Information and Communications Technology Agency (ICTA) with plans to implement a single window concept, unifying the sharing of communication links owned by Governmental authorities while also integrating the services of the National Digital Identity system proposed to be introduced.

Virtually the culmination of this program by the end of 2018 would bring about electronic connectivity among local bodies, post office and Police stations, Ceylon Electricity Board, Road Development Authority, Sri Lanka Railways, etc., extending the linkage even to DFT-17-INthe unification of mobile towers run by various companies.

According to the broad outline, the proposal was to develop a comprehensive digital development strategy with facilities for sharing information and improving communication within the Government network.

The fund transfer network and other settlement programs in operation in the financial circles were not included in this exercise as the related functions were governed by legislative requirements going beyond the mere sharing of information and improving communication.

 

"The proposal to set up a National Payment Platform should be compulsorily referred for clearance under the Monetary Law compliances by the Central Bank. The distinct functional division between the communication task and the financial operations should be addressed by the Central Bank and the commercial banks as both institutions are governed by laws to ensure protection to clients as well as adherence to financial regulations"

 



Nevertheless, a recent cabinet paper granting approval for ICTA to lead the role with the inclusion of the financial transactions and bank settlement programs now in operation has caused some degree of unfavourable concerns in the financial sector. The expressed concerns emanate from certain important legal issues which appear to be not considered in the serious manner that they deserve to be addressed. Therefore, the authorities responsible for the implementation of the cabinet decision have to act cautiously to avoid possible adverse repercussions.

By virtue of the powers under the Monetary Law Act No. 58 of 1949, the entire control of the financial system, irrespective of whether operated privately or by public institutions, comes within the purview, Administration and Regulatory Authority of the Monetary Board. Naturally, the Banking System and the Exchange Control function and the related regulatory functions are coming under the responsibility of the Monetary Board and the Central Bank. What is important is the fact that these are legal requirements necessary to be followed mandatorily. Any system permitting financial transfers and settlements especially in association with the banking industry will lead to many corrupt operations unless properly monitored by a regulatory authority.

As a step forward moving towards the IT-backed operation systems, the Central Bank initiated the automated clearing system empowered under an Act of Parliament in 2005 viz. the Payments & Settlement Systems Act No. 28 of 2005 (PSSA). In order to implement the program efficiently and to enforce and administer the provisions of the PSSA, an advisory body called the National Payments Council was established.



LankaClear

As related progressive steps coming under this program, a body corporate styled LankaClear Ltd., which is known as LankaClear, was established as an institution jointly owned by the Central Bank and the licensed commercial banks in Sri Lanka, bringing all the national level payment and clearing systems operated by this body under the regulatory framework of the Central Bank.

The system of interbank settlement and fund transfer operations are carried out by LankaClear under a set of system rules approved by the Central Bank and all transactions are properly linked to the Real Time Gross Settlement (RTGS) system operated by the Central Bank.

This operation system has ensured the vital related legal requirements coming under the Monetary Law Act as well as the Banking Act providing the security, secrecy, privacy and compliance of industry standards and best practices, as required not only in the domestic sphere but covering even the international requirements in accordance with Basel standards.

LankaClear has now reportedly evolved back operations involving payments to all the revenue collecting authorities of the Government, namely, the Customs, Inland Revenue and Excise, falling in line with the automations effected in those areas. In addition, LankaClear is also serving as the provider of Central Switch facilities for card operations and the ATM network of the banking institutions.

As a body set up for a specific purpose and owned by the Central Bank and other commercial banks, all activities of LankaClear are mandatorily within the applicable laws and the regulatory authority of the Monetary Board.



Clearance required

In such a context the proposal to set up a National Payment Platform should be compulsorily referred for clearance under the Monetary Law compliances by the Central Bank. 

The distinct functional division between the communication task and the financial operations should be addressed by the Central Bank and the commercial banks as both institutions are governed by laws to ensure protection to clients as well as adherence to financial regulations.

The desire of the Ministry of Finance to introduce a system of e-collection of revenue at the lowest cost is well appreciated. But to meet this requirement, the Ministry should work with the existing legal and institutional framework rather than commissioning the work to an agency which has no regulatory powers. It is not clear whether the Ministry has got the observations of the Central Bank, LankaClear or commercial banks before it decided to commission this work to ICTA. These are the important stakeholders of the country’s national payment system.

 

 

"The financial industry of the country would appreciate a pre-consultative process to express and address the issues important to them before implementing a new scheme with a mere directive to the banks to just fall in line. This type of a comprehensive consultation with all the stakeholders is in line with the economic democracy which this Government has promised to deliver to the nation in its election manifesto presented in August 2015"

 



There is another impediment that might crop up when the Ministry of Finance is trying to implement a national payment system through ICTA. That is the awkward administrative structure which Sri Lanka has in place today. 

ICTA functions under the Ministry of Telecommunications and Digital Infrastructure. The Central Bank functions under the Ministry of National Policy and Economic Affairs. The State-owned commercial banks have been gazetted under the Public Enterprise Development Ministry. Accordingly, the Ministry of Finance has the least control over the country’s payments system or the Central Bank. The coordination of the work among these different agencies will become a gigantic task for the Ministry. It has a purpose but it does not have powers. 

Hence, it is logical that the Central Bank initiate the introduction of a modern national payments system to Sri Lanka with LankaClear as the focal institution. ICTA’s built-in knowledge in this area can be cooped by the Central Bank to the project. 



Pre-consultative process

The financial industry of the country would appreciate a pre-consultative process to express and address the issues important to them before implementing a new scheme with a mere directive to the banks to just fall in line. 

This type of a comprehensive consultation with all the stakeholders is in line with the economic democracy which this Government has promised to deliver to the nation in its election manifesto presented in August 2015. If this consultation process is not done, there could be irreversible damage to the country’s financial system and it would derail the Government’s attempt at developing Colombo Port City as the Colombo Financial City with international participation. 

Hence, it is important that the Central Bank should be the implementation authority of the national payments system with LankaClear as the focal institution.

(The writer is a career banker and a former Chairman of the Bank of Ceylon.)


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