The history of the special economic zones (SEZ) isn’t replete with runaway successes as often made out to be. SEZs, like the Colombo Port City under development in Sri Lanka, are enclaves where investors are provided with an environment with better infrastructure, lower taxes and tariff and regulatory incentives, unavailable in the rest of the country.

States also have an opportunity to experiment with a new regime and tweak it before rolling out some of its best parts across the country. China’s creation in 1980 of its Shenzhen SEZ is the poster boy for potential after its success in transforming a landscape of small fishing villages into one of the world’s most dynamic areas for producing goods and providing services.

However, not all SEZs are Shenzhen-type successes. In the shadows of the runaway successes including those of the United Arab Emirates, Malaysia, South Korea and now the Philippines; two other categories of SEZs exist. They are a large number of marginally positive zones and the vast number of outright failures.

Colombo Port City’s ability to join the group of runaway successes isn’t a foregone conclusion. However, its Colombo Port City Economic Commission Act provides the enclave with a far-reaching ability to craft its regulations. For instance, investors in the Port City, including any global banks, will not be governed by the existing Banking Act of 1988 which applies to the rest of the country.

Colombo Port City’s designers aim to position it also as an international financial centre, adding a feature that is already available at the most successful SEZs. Recently Chairperson of HNB, Aruni Goonetillake, CFO of Commercial Bank of Ceylon, Nandika Buddhipala, and Deputy Managing Director of Port City Colombo, Thulci Aluwihare discussed the proposition of the Colombo Port City provides for modernising the financial sector in Sri Lanka. The panel. moderated by Imran Furkan, discussed laws, regulations and the impact of technology in relation to Port City and the whole county. This panel discussion was part of the Reshape series of discussions hosted by EconomyNext and FNF Sri Lanka. Excerpts of the discussion…

Port City will inevitably play a large role in mapping Sri Lanka’s financial future. What principles and concerns will be considered in the creation process of banking regulations for the Port City?

Aluwihare: Through the Colombo Port City we are creating a regional platform for the world’s leading financial institutions and multinational corporations to establish themselves here.

For that to happen, they must have the confidence to establish themselves in Port City, which requires robust, progressive, and independent regulations as well as a regulator that will help create an environment conducive to business.

Through the Colombo Port City Economic Commission Act, we will not be limited or restricted by the existing Banking Act of 1988, which means we will have a blank canvas to draft suitable, more progressive regulations that meet these requirements, which is a huge advantage.

However, the Port City Economic Commission Act will by default support existing Anti Money Laundering (AML) laws, and Counter-Terrorism Financing (CTF) laws. The Central Bank’s Financial Intelligence Unit (FIU) will have jurisdic – tion and compliance with BASEL and FATF recommendations will be maintained.

How will Port City integrate with the economy of Sri Lanka?

Aluwihare: Being a Special Economic Zone (SEZ), Port City will have different trade business and trade laws compared to the rest of the country. Because of that, it will be ring-fenced, in a sense, econom – ically separating itself from the greater Sri Lankan economy and as a result, the benefits of Port City will reach Sri Lankans mainly through the supply chain.

Any goods or services supplied to Port City from Sri Lanka will be deemed an export, and as such, payments will be in foreign currency. Not only that, international banks and multinational companies that establish themselves at Port City will create many employment opportunities for Sri Lankans, who will be remunerated in foreign currency as well.

Why is having a separate regulatory system in an IFC important?

Aluwihare: A good example to consider is the Gujarat International Finance TecCity. Initially, it didn’t have an independent financial regulator, which didn’t work out well for them. It was only after real – ising this and creating the International Financial Services Centre – a unified, apex regulator – that any progress has been made by them.

Having a separate regulatory system will give businesses that establish in Port City the assurance that they can operate without major interference from the Central Bank. But as Aruni shared, we will need to have political stability and a good reputation as a country as well.

How will Sri Lanka’s economic circumstances affect Port City and its ability to become an international hub?

Goonetilleke: Successful people want to be in a successful place. If you consider some of the successful financial hubs in the world such as London, New York, Hong Kong, Singapore, and Dubai, the countries themselves are doing well.

The big question is, who will establish themselves in Port City when they know the precarious situation the country has got itself into? Even with business-friendly banking and financial regulations in place at Port City, what will get us into trouble is the broader economy.

Any foreign investor that even considers establishing themselves in Port City, will naturally observe this country’s situation. Is there liquidity? Is there confidence? Is there political stability? Is there transparency in your financial mechanism? Not only that, we aren’t trade-friendly, our economic growth is now negative and as a result, investment, innovation and all other aspects which are expected from a financial hub no longer exist because of the country’s current situation.

We will need to have a good business environment as well as political and economic stability. It is challenging, but we have to overcome our circumstances and make sure the reforms we implement are effective. We will have to prove that we are reliable, transparent, trustworthy, and consistent.

Lack of implementation is another concern when introducing regulations. How can this be tackled?

Buddhipala: We need to have sound common law in place and give prominence to the rule of law, especially important for economic development. We need to create and implement policy through good law-making. Things like anti-money laundering and combating terrorism financing shouldn’t be left to the Central Bank alone to implement.

Having a population that is informed and aware will also be necessary. We often experience instances where some people are reluctant to disclose information such as their monthly income when answering KYC (know your customer) questions. The general public needs to be educated on why these are necessary.

Goonetilleke: We also have to move on from the usual tick-box approach. I believe that banks are more often than not, simply ticking a box to appease the regulator and filing it away. We have to be more dynamic with how information is shared, working together with the central bank while honouring customer confidentiality. Perhaps technology can help us achieve that purpose.

How do you think we can better harness the potential of digital technology?

Aluwihare: Digitisation sped during Covid, and I feel that FinTech (financial technology), is the future. In Sri Lankan banks cost structures are quite high, and perhaps technology can help us in addressing this issue. Digitisation can also help create more inclusive financing, and address some of the shortcomings in our current banking system.

Buddhipala: Privacy and confidentiality are a concern among people with digitisation, and banks certainly in both the private and government sector have addressed this. In my opinion, if we were to use technology to create a transparent, centralised system that handles a person’s financial information including KYC and income statements which are then gathered and reported to authorities, it will be very beneficial.

Goonetilleke: Digitisation certainly increased during Covid, and while many other industries and sectors were faster at adoption, the financial services industry, in comparison, has been slow. These sectors are now catering to each customer based on their behaviour, and we should be doing so as well.

Aluwihare: There is a lot of opportunity in that, but if international banks, which are more capable of making use of digital technology to enhance the customer experience arrive, and we aren’t prepared to face that competition, we will lose a large slice of that share.

Even though we are in an unprecedented situation, the regulatory systems we’ve followed, which include looking at an expected loss rather than incurred loss, liquidity caps and foreign currency borrowing caps; these principle-based implementations have helped”

Auditing is a critical component and technology is becoming a big player in this as well. Can technology used in auditing elevate our capability in this and perhaps allow us to even cater to clients beyond our borders?

Buddhipala: I believe technology can be a very useful tool in auditing. Using analytical tools to identify risk-elevated areas, early warning signals, and perhaps even detect malpractices such as fraud will be of great benefit to a company

Although data protection is a concern, many firms are using AI and other automation solutions to add value to discussions which take place in board audit committees and other groups. Considering that, I think this will be relevant not only for auditing but also for building business strategies as well, in my opinion.

We’ve gone through a lot in the past few years, and now we have an economic crisis. How robust is the risk management framework in our banking system and in what areas can we improve?

Goonetilleke: The framework of regulations we have in place is quite advanced and effective, which is now paying off. Even in the present circumstances our banks and the financial services sector have been quite resilient.

Even though we are in an unprecedented situation, the regulatory systems we’ve followed, which include looking at an expected loss rather than incurred loss, liquidity caps and foreign currency borrowing caps; these principle-based implementations have helped.

Aside from the dollar liquidity which is an issue countrywide, banks are well capitalised and we are quite liquid, even though that might change soon given the severe stress we are facing.

Considering the governance structure in banks, there is an integrated risk management framework. We operate within that, trying to identify various risks. We have risk limits and individual operating limits which are managed, with a clear organisational structure that is independent and transparent, operated under the oversight of a Board Risk Committee, and the Chief Risk Officer who reports to the committee.

There are robust regulations implemented by the Central Bank as well, including a supervisory review process, an ICAAP process, and more. Doing all these right has benefitted us well and managed to keep us profitable.

Even so, a lot of things were simply beyond our control this year, given that it was a macro problem and we couldn’t have safeguarded from some of these risks simply because we didn’t see this reserve issue reaching such a level. The exponential rise of these risks has made it a tough year, but so far, we’ve managed to maintain the situation at a manageable level because of the regulations we have implemented, how we’ve operated and how we’ve built up our capacity.

In such a time of crisis, how can financial inclusivity be protected?

Buddhipala: When considering the financial sector, we should not restrict ourselves solely to the banking system. We need to have other financial markets also in place.

From angel investors to venture capital and others. We need these parties who have different levels of risk appetite.

Those are essential elements for the financial sector to develop, rather than considering such ventures as eating into the banking sector share, we should be developing together.

And although reports have stated that we have a high level of financial inclusivity, we can still learn a lot from the examples of our neighbouring countries, including Bangladesh. We have to open our eyes to what’s beyond the banking sector and to other parts of the financial market.

While we have been good at managing our risks thanks to our existing governance structure, we were unable to anticipate that our exchange rate would depreciate, and our interest rates would increase at an unprecedented rate in such a short duration of time.

Aluwihare: My opinion on our financial inclusivity is a bit different, considering how we haven’t performed well in the past Doing Business ranking by the World Bank, or even in terms of access to credit compared to other states.

Additionally, in my personal opinion, I feel financial institutions could have done a lot more to support SMEs and entrepreneurship during the post-war drive to economic growth, which makes me beg to differ on the stance that we are financially inclusive. Banks I believe especially could have done a lot more.

But I agree that we need to look beyond typical conventional banking and finance for solutions, opening up to private equity, venture capital, and corporations will create more opportunities for borrowing and helping businesses grow.

Buddhipala: Adding to that, international experience has always shown that other contemporary avenues also should come into the market and play their role. As banks, we primarily take deposits from the people and provide loans, making our risk appetite fairly different.

We have to protect the interest of the depositors, and some of our depositors are not from wealthy means, which translates into them not having a big risk appetite either. As such, developing other markets is necessary.

Goonetilleke: I agree with both of you. There is an informal sector, a formal sector, and a semi-formal sector, and we can certainly do more, including, bringing all three sectors under better regulation and the CRIB to assist lenders in being aware of the financial backgrounds of those who are borrowing. We need to bring everyone together, but also ensure that customers are treated fairly.

We can also consider the approach by Singapore which maintains a credit insurance scheme, allowing the bank to share the risk with the government and take on more risk as the company grows. We need to incorporate systems that operate holistically.

When considering the financial sector, we should not restrict ourselves solely to the banking system. We need to have other financial markets also in place. From angel investors to venture capital and others. We need these parties who have different levels of risk appetite”