134 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
 3 .2  The LCBs/LSBs should also ensure that the company profiles and financial data are made
available to investors upon request.
 3.3 An adequate appraisal of the financial condition of the issuer is carried out and due caution is
exercised before lending the support of the LCB/LSB. For this purpose, the LCB/LSB should,
among other things, obtain a report from the Credit Information Bureau (CRIB).
 3.4 The CP/PN are printed on good quality security paper incorporating adequate security features,
that necessary precautions have been taken to keep documents in safe custody, preventing
access by unauthorised persons.
 3.5 The issue of CP/PN is completed within a period of 14 calendar days from the date of issue.
Thus, any unsold portion of the issue after the 14 day cannot be issued.
 3.6 Each single issue of CP/PN should have the same maturity date.
 3.7 The issuing company should discharge the obligations on the CP/PN on the date of maturity.
No grace period shall be given to the issuer in this regard.
 3.8 The CP/PN shall contain the following minimum information/features:
 (a) The description of debt instrument should be clearly printed on it;
 (b) Name of the issuing company;
 (c) Serial number;
 (d) Place of payment (of interest and principal);
 (e) Date of issue;
 (f) Amount (in words and figures);
 (g) Date of maturity;
 (h) Names of the issuing and paying agents;
 (i) If the repayment of principal and payment of interest are guaranteed, name of the
guarantor;
 (j) Signatures of authorised signatories of the issuing company
 (k) W here the LCB/LSB does not accept any obligation for the payment on the
CP/PN, as when it only authenticates the signature, such fact should be conspicuously
stated on the CP/PN;
 (l) The counterfoil of CP/PN should also contain the information at ( a) to (k). In the case
of (j), the signature/initials of the respective signatories.


of (j), the signature/initials of the respective signatories.
 (m) Adequate space should be provided for endorsements on the reverse of the CP/PN.
3.9 (a) The LCB’s/LSB’s accounts in respect of CP/PN should be in conformity with
applicable/accepted accounting practices and non fund based support for CP/PN
should be recorded and reported as off-balance sheet items.
 (b) The LCB’s/LSB’s obligations/commitments on CP/PN shall be reported in the statutory
returns submitted to the Central Bank of Sri Lanka.
 (c) Details of the LCB/LSB support for the issue of CP/PN outstanding monthly, shall be
reported to the Director of Bank Supervision in a monthly statement as in the annexed
format. This statement shall be submitted by the 15th of the following month, duly
certifying that the obligations of the LCB/LSB under the different categories of issue,
as recorded in the General Ledger, are correctly reflected in the statement. A ‘nil’
statement should be sent if there are no outstanding balances.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  135
 3.10 The LCBs/LSBs supporting the issue of CP/PN should conform to all legal requirements.
 3.1 1  Roll-over of CP/PN should be considered as a new issue.
4. Prudential Requir ements of the Central Bank
 4.1 All credit facilities extended, and commitments made, by LCBs/LSBs relating to the issue of
CP/PN will be treated as accommodation granted to the issuing company and shall be subject
to directions issued from time to time under the Banking Act and to all prudential guidelines
issued by the Central Bank.
5. These Guidelines shall be ef fective from 05 January 2001.
6. Guidelines to Licensed Commercial Banks in Sri Lanka on the grant of facilities for the issue of
Commercial Paper dated 05.06.1995 are hereby rescinded.
7. Any clarifications/queries with regard to these Guidelines should be addressed to the Director of
Bank Supervision.
Sgd. P. T. Sirisena
Director of Bank Supervision
05 January 2001


136 Directions, Determinations, and Circulars issued to Licensed Specialised Banks(Amounts in Rupees Thousands)
 Name of  Legal Status  Type of  Amount  Amount  Date of  Date of  Rate of  Nature of
 Issuing Company  of Issuing  Promissory   of the Issue  Subscribed  Issue  Maturity  Interest (%)  Support
  Company  Notes Issued  (Face Value)   (YY/MM/DD)  (YY/MM/DD)
 (1) (2) (3) (4) (5) (6) (7) (8) (9)
We hereby certify that this statement reflects the value of support extended to the Bank’s customers and that the statement figures tally with the General
Ledger Balances as at the end of the month.
Date :  Name of Bank :  Authorised Officer :* Column (9)
Please indicate using the following
Codes :
Nature of Support  Code
Accepting  AC
Endorsing  EN
Guaranteeing  GT
Underwriting  UN
Purchasing  PR
Issuing Agent  IA
Paying Agent  PA
Dealer  DE
Authenticating  AUInstructions :
* Column (2)
Please indicate using the following Codes :
Private Company  –  PR
Public Unquoted Company  –  PU
Public Quoted Company  –  PQ
Peoples Company  –  PC
* Column (3) : Please indicate whether Commercial Paper (CP), Promissory Notes (PN), or any other form
(Please specify)
* This statement should reach the Director, Bank Supervision Department on or before the 15th of the following
month.
* A ‘nil’ statement should be submitted if there are no outstanding amounts.Monthly Statement of Commercial Paper / Promissory Notes
As at ……………………… in terms of Guidelines dated 5 January 2001


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  137
 Bank Supervision Department
 31 December 2007
Mr. S A Weerasinghe
General Manager
State Mortgage and Investment Bank
269, Galle Road
Colombo 3.
Dear Sir,
DIRECTION ON LIQUID ASSETS
With a view to strengthening the safety and soundness of the State Mortgage and Investment
Bank (SMIB), the Monetary Board of the Central Bank of Sri Lanka has decided to revoke the separate
Direction issued to SMIB on the maintenance of the Statutory Liquid Assets on 21 November 1997 under
Sections 76 j(3) of the Banking Act and replace the same with the Direction issued to other Licensed
Specialised Banks (LSBs), with effect from 1st January 2008. The applicable Direction issued under
Section 76 j(1) of the Banking Act is attached herewith.
The Monetary Board has also decided to grant time till 31 December 2008 to comply with the
requirements contained in the new Directions. If SMIB is unable to comply with the newly applicable
Direction, it shall comply with requirements contained in the relevant previous Direction until the
expiration of the time granted to comply with the new Direction.
Yours faithfully,
Sgd, B D W A Silva
Actg. Director of Bank Supervision


138 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Ref. No. : BS/31/90 V ol. IV
Bank Supervision Department
8th Floor, Renuka Building
41, Janadhipathi Mawatha
Colombo 1.
18th May, 1998
To :  Licensed Specialised Banks
LIQUID ASSETS
DIRECTION UNDER SECTION 76 j(3) OF THE
BANKING ACT, NO. 30 OF 1988 AS AMENDED BY ACT, NO. 33 OF 1995
 The Monetary Board, in terms of Paragraph 3.10 of the above mentioned Directions dated
21st November 1997, has determined that Treasury Bonds issued under Section 21 a of the Registered
Stock and Securities Ordinance shall be liquid assets.
 The Licensed Specialised Banks may, therefore, take into account the Treasury Bonds they hold
on their account for the purpose of complying with the provisions of the Directions issued under Section
76j(3) of the Banking Act, No.30 of 1988 as amended by Act, No.33 of 1995, relating to their obligation
to maintain the required amount in liquid assets.
Yours faithfully,
Sgd. Y. A. Piyatissa
Director of Bank Supervision
NSB
    Section 76 j(3)
SMIB




Directions, Determinations, and Circulars issued to Licensed Specialised Banks  139
BANKING ACT NO. 30 OF 1988
AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995
The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76 j(1)
of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995.
Sgd. A. S. Jayawardena
Governor
Colombo
21-11-1997.
DIRECTIONS UNDER 76 j(1)
LIQUID ASSETS
1. Every licensed specialised bank shall maintain minimum average monthly, liquid assets of not less
than 20 per cent of its total monthly deposit liabilities.
2. Every licen sed specialised bank shall furnish to the Director of Bank Supervision a monthly return
in a format to be released by him, certifying the total monthly deposit liabilities and the average total
monthly liquid assets as at close of business on the last working day of that month. Such return should
be forwarded before the 15th day of the month following the month to which the statement relates.
3. Liquid Assets for purpose of this direction shall mean –
 3.1 Cash in hand.
 3.2 Balance in a current account in a licensed commercial bank.
 3.3 Balance in a deposit account in a licensed specialised bank or a licensed commercial bank
provided such deposit account have a maturity not exceeding one year.
 3.4 Money at call in Sri Lanka.
 3.5 T reasury bills and securities issued or guaranteed by the Government of Sri Lanka which have
a maturity not exceeding one year.
 3.6 Goods receipts.
 3.7 Import and export bills.
 3.8 Inland bills.
 3.9 Cash items in process of collection.
 3.10 T reasury Bonds issued under Section 21 a of the Registered Stock and Securities Ordinance.
 3.1 1  Such other assets as may be determined by the Monetary Board.


140 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Ref. No. : 02  / 17 / 500 / 0540  / 001
Bank Supervision Department
15 October, 2012
To :  The CEOs of all Licensed Specialised Banks
Definition 	of	Liquid	Assets	under	Section	76J(1)	of	the
Banking Act, No. 30 of 1988, as Amended
The Monetary Board has determined that Reverse Repurchase Agreements in Treasury bills and
Treasury bonds shall be treated as liquid assets in terms of item 3.11 of the Liquid Assets Direction of
licensed specialised banks issued under Section 76J(1) of the Banking Act, No. 30 of 1988.
Licensed specialised banks may, therefore, take into account the daily outstanding amount of the
Reverse Repurchase Agreements or the market value of the underlying securities held under Reverse
Repurchase Agreements, whichever is less, in computing their liquid assets ratio.
Licensed specialised banks are further informed that, the eligible value of the Reverse Repurchase
Agreements in Treasury bills and Treasury bonds should be reported under code number 4.1.2.4.0.0
and 4.1.2.13.0.0, respectively, of the monthly web based return on Statutory Liquid Assets Ratio
(BSD-MF-04-LD).
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  141
Ref. No. : 02  / 17 / 500 / 0540  / 001
Bank Supervision Department
05 April, 2013
To :  The CEOs of all Licensed Specialised Banks
Definition 	of	Liquid	Assets	under	Section	76J(1)	of	the
Banking Act, No. 30 of 1988, as Amended
The Monetary Board has determined that investments in Gilt Unit Trusts (GUTs) by LSBs
shall be treated as liquid assets in terms of item 3.11 of the Liquid Assets Direction of licensed specialised
banks issued under Section 76J(1) of the Banking Act, No. 30 of 1988, subject to the following conditions.
(a) GUTs should be open ended mutual funds.
(b) Underlying investment portfolio of GUTs should always be Sri Lanka Government
Securities (Treasury bills and Treasury bonds).
(c) Only 90% of investments in GUTs should be treated as liquid assets.
Licensed Specialised Banks are further informed that, the eligible value of the investments in
GUTs be reported under code number 4.1.2.4.0.0 of the monthly web based return on Statutory Liquid
Assets Ratio for Domestic Banking Unit (BSD-MF-04-LD).
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision


142 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
BANKING ACT
Directions made by the Monetary Board of the Central Bank of Sri Lanka under Section 76 j(1) of
the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995 and Act,
No.2 of 2005.
Sgd. Sunil Mendis
Governor
Colombo
01-03-2006.
DIRECTION ON THE PRUDENTIAL NORMS FOR CLASSIFICATION, V ALUATION
AND OPERATION OF THE BANK’S INVESTMENT PORTFOLIO
1. W ith effect from 31 March 2006, all Licensed Specialised Banks are required to classify their
investment portfolio under two categories: i.e., the Investment Account and the Trading Account. All
banks are required to maintain two separate books of accounts for this purpose.
2. Banks should decide on the category of investment at the time of acquisition and the decision should
be documented. Classification is not a free choice but is based on facts and the management’s intent at
the date of purchase. Transfers between categories after initial recognition are restricted.
3. The criteria for classifying and valuation of the bank’ s investment portfolio are as provided below:
A. Investment Account
 (a) All securities acquired with the positive  intent  and ability  to hold till maturity  shall be
classified under the Investment Account.
 (i) Positive intent cannot be demonstrated if:
 • the bank has the intent to hold the securities for only an undefined period; or
 • the bank stands ready to sell the securities in response to changes in market interest
rates or risks, liquidity needs, changes in the availability of the yield on alternative
investments, changes in financing sources or terms, or changes in foreign currency
risk; or
 • the issuer has a right to settle the securities at an amount significantly below its
amortised cost.
 (ii) The ability to hold the securities to maturity cannot be demonstrated if:


amortised cost.
 (ii) The ability to hold the securities to maturity cannot be demonstrated if:
 • the bank does not have the financial resources available to continue to finance the
investment until maturity; or
 • the bank is subject to legal or other constraints that could frustrate its intention to
hold the securities to maturity.
 (iii) When a bank’s actions cast doubt on its intent or ability to hold investments to maturity,
the Central Bank of Sri Lanka shall retain the right to reclassify all or part of the
Investment Account as Trading and require appropriate provisioning.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  143
 (b) All unlisted securities ( eg.: shares, debentures) should generally be classified under the
Investment Account. However, government securities will have to be classified based on the
rules specified under point A(a) above.
 (c) Securities in the Investment Account may be used for repurchase transactions.
 (d) Securities in the Investment Account shall be carried and reported at acquisition cost over
the period of redemption.
 (i) Carrying values of interest bearing securities in the Investment Account may be adjusted
to account for the accretion of discount (or depletion of premium). The adjustments
should be amortised annually on a straight-line basis over the period to maturity.
 (ii) All other securities should be maintained at cost. Any impairment in value which is
considered to be permanent should be fully provided for in the Profit & Loss Account
immediately. The following conditions should be taken into consideration in deciding on
whether there is an impairment of value.
 • T rack record of dividends/returns – Non receipt of dividends/returns for a
consecutive period of three years, should be considered as an impairment and the
investment should be classified as non performing.
 • Market prices – A continuously declining trend in market prices, with the investment
value being below cost for over three years should be considered as an impairment
in value.
 (iii) The Central Bank of Sri Lanka will retain the flexibility to consider specific requests/
exceptions in this regard.
 (iv) Any impairment in value or losses on the sale of investments held in the Investment
Account should be taken to the Profit & Loss Account.
 (e) Sale of securities classified under the Investment Account should only be an insignificant
amount of the investment portfolio and should be limited to circumstances that do not taint


amount of the investment portfolio and should be limited to circumstances that do not taint
the rest of the portfolio. These circumstances are:
 • if the investment was close enough to maturity or call date so that changes in the market
rate of interest could not have a significant effect on the investment's market value;
 • the sale is made after the entity has collected substantially all of the investment’s original
principal through scheduled payments or prepayments;
 • the sale was due to an isolated event that was beyond the entity's control, non-recurring
and could not have been reasonably anticipated.
B. T rading Account
 (a) All securities acquired for the specific purpose of trading on a regular basis (at least every
quarter), to take advantage of the short-term changes in market prices and yields, shall
be classified under the Trading Account. The classification of Trading assets is based on
original intention and these are not transferred to the Investment category because intention
subsequently changes.
 (b) Securities held in the Trading Account must be revalued or marked to market on a daily
basis. In the case of securities for which daily prices are not available, banks are advised to


144 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
mark to market at least on a weekly basis. Where two-way quotes are published (eg.: Rates
for government securities), the middle rate should be adopted.
 (c) Any gains or losses on the sale of investments held in the Trading Account should be taken
to the Profit & Loss Account.
C. T ransfer of Securities
The transfer of securities between portfolios will generally not be permitted, except under
specified circumstances. This is to limit the opportunities to manipulate the recognition of gains
or losses or to mask changes in market value.
 (a) T ransfer of securities between the Trading Account and the Investment Account must be
justifiable, documented and authorised.
 (b) Port folio transfers to or from the Investment Account shall only be undertaken rarely
(preferably at the beginning of the accounting year), with the approval of the Board
of Directors, the Assets and Liability Committee or the Investment Committee. The
circumstances justifying such transfers are given below:
 (i) A  change in the statutory and regulatory requirements.
 (ii) A  significant increase in the capital requirements that may oblige the Bank to reduce
its investment holdings.
 (iii) A  major business occurrence that necessitates the transfer of securities to maintain the
Bank’s risk profile.
 (iv)  Exceptional circumstances such as tight liquidity conditions and extreme volatility .
 (c) The carrying value of securities transferred from the Trading Account into the Investment
Account shall be marked to market prior to the transfer. Therefore, any gains or losses due
to revaluation would have been recognised in earnings prior to the transfer. The market
value of the securities at the point of transfer into the Investment Account then becomes
the ‘acquisition cost’ for accounting purposes.
 (d) A  statement on portfolio transfers, if any, shall be signed by the Chief Executive Officer


(d) A  statement on portfolio transfers, if any, shall be signed by the Chief Executive Officer
of the Bank and submitted to the Bank Supervision Department of the Central Bank of Sri
Lanka, on a quarterly basis.
 (e) The Central Bank of Sri Lanka will retain the right to review the statement of portfolio
transfers and require the bank to make provisions if considered necessary.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  145
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 46(1) and
76(J)(1) of the Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
21 December 2012
BANKING ACT DIRECTION NO. 2 OF 2012
OUTSOURCING OF BUSINESS OPERATIONS OF
A LICENSED COMMERCIAL BANK AND
A LICENSED SPECIALISED BANK
In the exercise of the powers conferred by Sections 46(1) and 76(J)(1) of the Banking Act, No. 30
of 1988, last amended by the Banking (Amendment) Act, No. 46 of 2006, the Monetary Board hereby
issues the following Directions on Outsourcing of Business Operations of a Licensed Commercial Bank
and a Licensed Specialised Bank, respectively (hereinafter referred to as a Licensed Bank).
1(1) These Directions may be cited as the Banking Act, Directions No. 2 of 2012.
2(1) An ‘outsourcing arrangement’ is an agreement between a licensed bank and
a third party ‘service provider’, whereby the service provider performs an
activity, function or process connected with the operations of a licensed bank.
2(2) ‘Service provider’ includes the  Head Office, parent institution, another
branch or related company of a Licensed Bank, or an unrelated institution,
whether located in Sri Lanka or elsewhere.
2(3) These Directions shall not apply to outsourced arrangements that are not
directly related to the provision of financial services such as Mail, Courier
services, Catering of staff, Housekeeping and janitorial services, Security
of premises, Printing services ( e.g., Application forms, brochures etc.),
Recruitments on contract and temporary basis and Communication services.
2(4) Outsourcing arrangem ents shall be entered into only with service providers
who have specialised resources and skills to perform the related activities.


who have specialised resources and skills to perform the related activities.
2(5) Outsourcing arrangements shall not be entered into with a service provider
of which the majority of the ownership is held by employees and/or close
relatives of an employee of the respective licensed bank.
2(6) Every Licensed Bank that decides to outsource its functions/operations shall
comply with Directions 3 to 9 below.
3(1) A  Licensed Bank may outsource its functions/operations other than the
following functions/operations or activities:Citation.
Outsourcing –
definition and
applicability.
Functions or
activities that can
be outsourced.


146 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
 (i) Services associated with acceptance of deposits and withdrawals
excluding the agency arrangements approved under the provisions of
section 12(1)(b) of the Banking Act.
 (ii) Assets and Liabilities management
 (iii) Compliance function
 (iv) Customer due diligence and Know Your Customer (KYC) procedures
 (v) T reasury functions, foreign exchange trading and management
 (vi) Risk Management
 (vii) Strategic planning and decision-making
 (viii) Sanctioning of loans except where the basis of approval has been
previously approved by the Board
 (ix) Internal Audit Function subject to Directions 3(2) and 3(3) below
 (x) Information Technology (IT) related services subject to Directions
3(4) and 3(5) below.
3(2) A  Licensed Bank shall not outsource its Internal Audit Function other than in
keeping with the following:
 (i) A Licensed Bank may outsource its Internal Audit Function, where
the size of the bank and the extent of the risks do not justify the
internal audit function to operate with a full time internal audit staff.
 (ii) A Licensed Bank may outsource certain activities or specialised areas
of its internal audit function such as branch and/or department audits,
Information System (IS) audits, where the bank is in a position to
justify the cost savings, improved efficiency and better management
of resource constraints.
3(3)  The outsourcing of the internal audit function or activities as per 3(2)( i) and
3(2)(ii) above shall be subject to the following conditions:
 (i) The responsibility and control of the outsourced audit assignments
in the case of 3(2)(ii) above shall continue to be with the Head of
Internal Audit.
 (ii) The selection of audit firms or staff shall be made from the panel of
external auditors approved by the Central Bank of Sri Lanka (CBSL)
other than the bank’s own external auditor.


other than the bank’s own external auditor.
 (iii) Any such appointment as per 3(3)( ii) above shall be made after a
“cooling off” period of 2 years if such audit firm or staff had been
previously engaged in the external audit assignment of the bank.
 (iv) The internal audit service provider shall not perform any management
function or act, directly or indirectly, in a capacity equivalent to that
of a member of management or an employee of the bank.Outsourcing of
Internal Audit.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  147
 (v) The internal audit service provider shall not provide consultancy
services to a function or activity of the bank it is expected to audit or
vice versa  within a period of 2 years.
 (vi) The Head of Internal Audit shall ensure that, whenever practicable,
one or more members of the bank’s internal audit staff are also
involved in the bank’s internal audit related work of the internal audit
service provider with the view to gather the relevant knowledge to
perform such work by themselves in the future.
 (vii) The Licensed Bank shall be able to provide the internal audit plan,
follow-ups, reports and related working papers, etc., to CBSL as and
when required.
3(4)  A  Licensed Bank may outsource the following IT and business processing
functions:
 (i) Application/Systems development, testing, maintenance and support
 (ii) T echnology infrastructure management, maintenance and support,
Help Desks
 (iii) Maintenance and support to data centre operations
 (iv) Network administration
 (v) Disaster recovery support services
 (vi) Data entry operations
 (vii) Database maintenance and support
 (viii) Data warehousing
 (ix) Statements printing
 (x) Electronic banking systems ( e.g., Internet banking, Mobile banking
and Tele-banking) development, maintenance and support
 (xi) W eb hosting and maintenance
 (xii) Credit/Debit/A TM card printing.
3(5)  A  Licensed Bank shall ensure in its security policies, procedures and controls
that a service provider exercises a high standard of care and diligence to
protect the confidentiality and security of banks’ sensitive information
especially relating to customers, hardware, operating systems and application
software.
4(1) A  Licensed Bank shall have a comprehensive policy to guide the assessment
as to how its operations are to be outsourced. The policy shall contain at least
the following:


as to how its operations are to be outsourced. The policy shall contain at least
the following:
 (i) The placing of overall responsibility on the Board of Directors or
the Audit Committee and senior management for the outsourcing of
activities and for the formulation of policy therefor. Outsourcing
of Information
Technology.
Outsourcing
Policy.


148 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
 (ii) A  framework for identification and effective management of risks that
could arise from outsourcing of activities.
 (iii) Cost-benefit analysis on each activity or function or process to be
outsourced.
 (iv) T ender procedures to be followed for the procurement of outsourced
services.
 (v) Setting up of a monitoring and control unit in the event of having
several outsourcing arrangements.
 (vi) A  framework to conduct KYC and due diligence process on the
service provider.
 (vii) A  procedure to assess the service provider’s capacity, capability
and mode/basis of payment to perform the obligations under the
outsourcing arrangement.
 (viii) A  format of the legally binding contract/agreement for outsourcing
arrangement which should include at least the following:
 (a) Service standards,
 (b) Rights, responsibilities and expectations of all parties,
 (c) Dispute resolution mechanism,
 (d) Confidentiality and security of information,
 (e) T ermination of contract,
 (f) Subcontracting, if involved, and
 (g) Business continuity management.
 (ix) A  specific contingency plan to bring the outsourced activity back
in-house in an emergency situation which could arise due to service
provider’s inability to provide, and the costs, time and resources that
would be involved.
 (x) A  framework for cross-border outsourcing, taking into account the
differences in country environments.
 (xi) Limits on maximum exposure to a single service provider both in
terms of value and the number of contracts.
5(1) A  Licensed Bank shall ensure that the bank’s Business Continuity Plan (BCP)
contains all relevant operations including outsourcing arrangements.
5(2) A  Licensed Bank shall ensure that the service provider has a satisfactory BCP
and performs regular tests on its BCP.
6(1) A  Licensed Bank shall have a specifically designated unit/division at the Head


6(1) A  Licensed Bank shall have a specifically designated unit/division at the Head
Office to handle all outsourcing arrangements. A Licensed Bank incorporated
outside Sri Lanka shall have the designated unit/division at the local Head
Office.Business
Continuity
Management.
Monitoring &
Control.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  149
6(2) The monitoring unit s hall handle complaints, maintain records of such
complaints and carry out periodic supervision over outsourced activities.
6(3) A  Licensed Bank shall establish an effective management information
system that would on a regular basis provide information such as the type of
outsourced service activity, costs, volume, deliverables and expiry or renewal
dates of the contracts, the complaints, and the financial and operational
conditions of the service providers.
7(1) A  Licensed Bank shall be responsible for submitting transactions reports and
suspicious transactions reports to the Financial Intelligence Unit (FIU) in
respect of its customer transaction activities, even if such activities are under
outsourced arrangements.
8(1)  A  Licensed Bank shall ensure that marketing and recovery personnel
employed by the service providers are properly trained to handle their
responsibilities with care and prudence.
9(1) A  Licensed Bank shall inform the proposed outsourcing arrangements during
a particular calendar year to CBSL by 31 January of that year for concurrence.
9(2) A  Licensed Bank shall use the format annexed to this Direction for its
reporting requirements at 9(1) above to CBSL.
10(1)  The Banking Act Directions No. 7 of 2010 on Outsourcing of Business
Operations of Licensed Commercial Banks and the Banking Act Directions
No. 8 of 2010 on Outsourcing of Business Operations of Licensed Specialised
Banks, issued on 02 November 2010 are hereby revoked.Reporting to
FIU.
Outsourcing
arrangements
relating to
Marketing &
Recovery.
Reporting
Requirements.
Revocation of
previous Directions


150 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex
Business Operations that are to be Outsourced during the year …………..
Name of the Bank : ……………………………………………………………………………………………………………...
Activity/Function/
Process
to be OutsourcedName of the
Service ProviderAddressDate of
Commence-
mentPeriodNo. of persons
involved/
authorisedDeliverables/
ServicesCost
(per annum)
1.
2.
3.
4.
……………………………………………  ……………………………………………
 CEO / CCO / GM  Compliance Officer
Date : …………………………………  Date : …………………………………


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  151
Ref. No. : 02  / 04 / 004 / 0012  / 001
Bank Supervision Department
23rd July 2003
To : All Licensed Commercial Banks and
        Licensed Specialised Banks
Dear Sir  / Madam,
ACCEPTANCE OF CERTIFICATES OF DEPOSIT (CD s)
Further to our even numbered letters dated 12 June and 16 June 2003 on the above subject, and
the discussions at the monthly meeting of the Chief Executive Officers of Licensed Commercial Banks
(LCBs) and Licensed Specialised Banks (LSBs).
All LCBs and LSBs are hereby informed that the requirement to maintain details pertaining
to customer identification of persons encashing CDs shall not apply in respect of CDs issued before
30 June 2003.
Yours faithfully,
Director of Bank Supervision


152 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Ref. No. : 02  / 04 / 004 / 0012  / 001
Bank Supervision Department
16th June 2003
To : All Licensed Commercial Banks and
        Licensed Specialised Banks
Dear Sir  / Madam,
ACCEPTANCE OF CERTIFICATES OF DEPOSIT
Further to our letter No. 02/04/004/0012/001 dated June 12, 2003 on the above subject, all
licensed commercial banks and licensed specialised banks are hereby informed that they should satisfy
themselves with KYC in respect of customers who invest in CDs with banks, and maintain records of
adequate details pertaining to customer identification of the persons making investment in CDs with
the banks, and of persons encashing the CDs from the banks at the date of maturity. The banks are
requested to refrain from advertising the issue of CDs with anonymity.
The operating instructions BD/13/93 dated 5/10/1993 issued by the Central Bank on the Scheme
of Certificates of Deposit will remain effective.
Yours faithfully,
Actg. Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  153
Ref. No. : 02  / 04 / 004 / 0012  / 001
Bank Supervision Department
12th June 2003
To : All Licensed Commercial Banks and
        Licensed Specialised Banks
Dear Sir  / Madam,
ACCEPTANCE OF CERTIFICATES OF DEPOSIT
 W e refer to the discussions held at the Bank Managers’ meetings on the above subject and the
need to adhere to Know-Your-Customer rules (KYC) in respect of acceptance of certificates of deposits
(CDs).
All licensed commercial banks and licensed specialised banks are hereby informed that they may
satisfy themselves with KYC in respect of customers who invest in CDs with banks, and maintain
records of adequate details pertaining to customer identification of the persons making investment
in CDs with the banks, and of persons encashing the CDs from the banks at the date of maturity.
The banks are requested to refrain from advertising the issue of CDs with anonymity.
The operating instructions BD/13/93 dated 5/10/1993 issued by the Central Bank on the Scheme
of Certificates of Deposit will remain effective.
Yours faithfully,
Actg. Director of Bank Supervision


154 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Bank Supervision Department
16 June 2006
To :  CEOs of All Licensed Banks
Dear Sirs,
CONDUCT OF NON-GOVERNMENT ORGANIZATIONS (NGOs) ACCOUNTS
BY LICENSED BANKS
Further to our circular dated 31 May, 2006 on the above subject, the attention of all licensed banks
is drawn to the following:
• In order to scrutinize the legitimacy of financial transactions undertaken by NGOs who receive
funding assistance from external sources, the Ministry of Finance & Planning has requested
the relevant line Ministries to establish a proper monitoring procedure and ascertain the work
undertaken by them.
• Accordingly all licensed banks are requested to obtain a clearance letter from the relevant line
Ministry and External Resources Department before releasing such funds to the respective
NGOs, where it is evident that such NGO is operating outside its scope of activity. Copy of
clearance letter may be forwarded to Central Bank of Sri Lanka.
Yours faithfully,
Sgd, Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  155
Bank Supervision Department
31 May 2006
To :  All Licensed Banks
Dear Sirs,
CONDUCT OF NON-GOVERNMENT ORGANIZATIONS (NGO) ACCOUNTS BY
LICENSED BANKS
The immediate attention of all licensed banks is drawn to the need to observe strict due diligence
and the “Know Your Customer” (KYC) Rules with regard to inward remittances and outward transfers
or withdrawal of funds from accounts operated by NGOs.
In this regard the attention of all licensed banks is drawn to the provisions of Section 15 subsection
(2) of the Financial Transactions Reporting Act, No.6 of 2006 and Section 3 of the Convention on the
Suppression of Terrorist Financing Act, No.25 of 2005 which are annexed for ease of reference.
Sgd, Director of Bank Supervision


156 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Section 15 subsection (2) of the Financial Transactions Reporting Act, No. 6 of 2006 reads as
follows:–
15 (2)  Where the Financial Intelligence Unit has reasonable grounds to suspect that a transaction or
attempted transaction may—
(a) involve the proceeds, which are attributable to any unlawful activity ; or
(b) be connected to the commission of the money laundering offence under the Money
Laundering Act, No.5 of 2006; or
(c) be prepara tory to the commission of an offence under the Convention on the Suppression of
Terrorist Financing Act, No.25 of 2005,
it may direct the Institution in writing or by telephone to be confirmed in writing within twenty-
four hours, not to proceed with the carrying out of that transaction or attempted transaction or any
other transaction in respect of the funds affected by that transaction or attempted transaction for
a period to be determined by the Financial Intelligence Unit, which may not be more than seven
days, in order to allow the Financial Intelligence Unit —
 (i) to make any necessary inquiries concerning the transaction or attempted transaction; and
 (ii) if  the Financial Intelligence Unit deems it appropriate, to consult or advise the relevant law
enforcement agency in the inquiries.
  (3)  T he Financial Intelligence Unit may make an ex-parte  application to the High Court of the
Western Province, holden in Colombo, for an extension of the period of time stipulated in
subsection (2) setting out the grounds for such application.
 For the purposes of subsection 15 (2) (a) quote above “ unlawful activity ” interalia includes: –
 (a) .
 (b) any law or regulation  for the time being in force relating to the prevention and suppression
of terrorism
Hence, in view of the above provisions of law, if there is adequate proof that funds transferred


Hence, in view of the above provisions of law, if there is adequate proof that funds transferred
from a company to an individual would finance terrorism, it is possible for the FIU to inform the
Bank concerned which holds the funds for the company which proposes to release such funds
to an individual to carry out any act of terrorism, to suspend the account for a period of 7 days.
Before the expiry of 7 days, the FIU should apply to the High Court of Colombo for an extension
of the time if the time is insufficient to take in appropriate action to seize the funds in the account.
Further, Section 3 of the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005
reads as follows:–
3. (1)  A ny person who, by any means, directly or indirectly, unlawfully and willfully provides or
collects funds, with the intention that such funds should be used, or in the knowledge that they
are to be used or having reason to believe that they are likely to be used, in full or in part, in order
to commit, –
 (a) an act which constitutes an offence within the scope of, or within the definition of any one
of the Treaties specified in Schedule I hereto;
 (b) any other act, intended to cause death or serious bodily injury, to civilians or to any other
person not taking an active part in the hostilities, in a situation of armed conflict, and the
purpose of such act, by its nature or context is to intimidate a population or to compel a
government or an international organization, to do or to abstain from doing any act,
shall be guilty of the offence of financing of terrorists or terrorist organizations:


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  157
Provided that, for an act to constitute the offence set out above, it shall not be necessary to show
that the funds collected were actually used in the commission of an offence.
(2) Any person who–
 (a) Attempts to commit;
 (b) Aids or abets the commission of; or
 (c) Acting with a comm on purpose with another person or a group of persons, contributes to the
commission of,
the offence of financing of terrorists or terrorist organizations, shall be guilty of an offence under
this Act.
In this subsection “ abet” has the same meaning as in sections 100 and 101 of the Penal Code.
(3) Where an offence specified in subsection (1) or subsection (2) of this section is committed
by a body of persons, then, every member, Director, Manager, Secretary, officer or servant of
such body of persons shall be guilty of such offence, unless it can be proved that the offence
was committed without their knowledge or that they exercised all due diligence to prevent the
commission of such offence.
(4) A  person guilty of an offence under subsection (1) or subsection (2) of this section, shall on
conviction after trial on indictment by the High Court, be punished with imprisonment for a term
not less than fifteen years and not exceeding twenty years, and also be liable to a fine.
4. (1)  On indictment of any person in the High Court, for an offence under this Act, all funds collected
in contravention of the provisions of section 3, shall, with effect from the date of filing of such
indictment –
 (a) if such funds are lying in an account with any Bank, be subject to an order of freezing; or
 (b) if such funds are in the possession or control of any person be liable to seizure;
(2) The freezing or seizure of funds in terms of subsection (1) shall be in force until the conclusion
of the trial.
(3) On the filing of indictment, the Attorney-General shall notify the Central Bank of the freezing or


seizure as the case may be.
(4) The Central Bank shall thereupon take steps to give adequate publicity to the order of freezing or
seizure as the case may be, as it shall think fit.


158 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
My No. : 02  / 04 /004 / 0012  / 001
Bank Supervision Department
19 January 2007
To : All Licensed Commercial Banks and
  Licensed Specialised Banks
Dear Sirs,
CUSTOMER DUE DILIGENCE – ‘KNOW YOUR CUSTOMER’ PROCEDURES
In view of the potential risks on the banking and financial system stability that may arise from
cross-border financial transactions, all licensed banks shall conduct due diligence on all customers involved
in cross-border financial transactions and ensure that all requirements under the relevant statutes including
Prevention of Money Laundering Act, No.5 of 2006, financial Transactions Reporting Act, No.6 of 2006
and Convention on the Suppression of Terrorist Finance Act, No.25 of 2005 and the Exchange Control Act,
No.24 of 1953 are complied with.
Accordingly, the licensed banks shall report any transaction of suspicious nature to the relevant
authorities in terms of the above statutes immediately.
Yours faithfully,
Sgd, P. Samarasiri
Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  159
Bank Supervision Department
Central Bank of Sri Lanka
3rd December, 2001
To :  All Licensed Commer cial Banks and
 Licensed Specialised Banks
CUSTOMER DUE DILIGENCE –
‘KNOW YOUR CUSTOMER’ PROCEDURES
Your attention is drawn to the discussion on the above subject at the Bank Managers’ Meetings
held in the months of October and November 2001. Please find enclosed a Guideline on Customer Due
Diligence - ‘Know Your Customer’ procedures, which set out the minimum criteria to be adopted by
banks.
These guidelines will be effective immediately.
Yours faithfully
Director of Bank Supervision


160 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Ref. No. : 02  / 04 / 004 / 0012  / 001
Bank Supervision Department
Central Bank of Sri Lanka
3rd December, 2001
To :  All Licensed Commer cial Banks and
 Licensed Specialised Banks
GUIDELINES ON CUSTOMER DUE DILIGENCE –
‘KNOW YOUR CUSTOMER’ PROCEDURES
In order to prevent the unchecked use of the financial system for money laundering and
transactions related to terrorism and subversive activities, it is recommended that all banks follow these
guidelines on customer identification at the time of opening an account for a prospective customer,
or before establishing a business relationship with a prospective customer, or thereafter when there is
a material change in the way an account is operated. In addition to minimising the risk of use of the
banking system for illicit activities, the adoption of these guidelines will provide protection against
possible frauds, and enable the timely recognition of suspicious transactions and protect the bank from
reputational, legal and financial risks.
1. All banks are encouraged to document their policies on customer acceptance, customer
identification/risk management and monitoring of high risk accounts.
2. In order to ‘know their customers’ the banks are expected to:
 (i) Have sufficient information on the identity of the customer .
 (ii) Be satisfied that a prospective customer is who he/she claims to be. If the customer is acting
on behalf of another, sufficient evidence on the identity of both parties should be obtained.
 (iii) Ensure that information obtained in respect of a customer in the normal course of business is
used effectively for the prevention of money laundering/terrorism funding.
3.	 Customer 	Identification
3.1 Personal Accounts
 The following information should be obtained from all prospective personal customers:
• Customer ’s name from an original of a document issued by an official authority, preferably


• Customer ’s name from an original of a document issued by an official authority, preferably
bearing a photograph of the customer, such as the national identity card, passport or the
driving license. The reference number of such document should be recorded by the bank.
• Cust omer’s permanent mailing address and supporting evidence which should be
confirmed through correspondence.
• The authenticity and integrity of an introducer and his own identity should be established
to the satisfaction of the bank.
• I ndependent verification of introducer’s address should be made and filed with the
mandate.
3.2 Corporate Customers
 The following documents should be obtained:
• Certificate of Incorporation, Memorandum and Articles of Association or Partnership
Agreement, as appropriate, to establish the legal status of the customer


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  161
• Resolution by the Board of Directors
• Duly completed application form containing authorised specimen signatures
• The identity of each director and those authorised to operate the account, should be
established.
• For companies, businesses or partnerships registered outside Sri Lanka, similar documents
should be obtained, taking into consideration any soft regulatory system in the country of
origin.
3.3 In the case of accounts operated by:
• A  Power of Attorney
• Joint account holders
• Partnerships
• T rust accounts/Fiduciary accounts
The identity should be established in respect of each signatory to the account.
3.4 More  stringent customer identification policies should be established in the following
circumstances:
• Accounts opened by post or in any other circumstances where there is no face to face
contact with the customer.
• In the case of one-off transactions for non-account holders of the bank, in particular where
such transactions involve large amounts of cash, or the receipt of unusually large foreign
remittances, the customer should be asked to produce documentary evidence of identity,
and copies of such documents should be retained by the bank.
• Where safe custody facilities are made available to non-account holders, identification
procedure for non-account holders, as above, should be followed.
• In accommodating requests for remittances of funds between accounts using electronic
payment systems, where such transactions are of a large size, the bank should establish the
identity of the sender and ascertain the identity of the recipient.
4. In instances where the bank cannot establish the true identity of the customer to its satisfaction, it
should not commence any business relationship with such customer.
5. Other  Recommendations
5.1 In respect of all types of accounts, returned letters and statements should be followed-up.


5.1 In respect of all types of accounts, returned letters and statements should be followed-up.
5.2 Where after opening an account, the features of the transactions, as known at the time of
opening of the account changes significantly, causing grounds for suspicion of criminal
activity, inquiries should be made with regard to the changes in the financial position and
nature of activities, which should be recorded.
5.3 Retention of records: All evidence of identification as set out above should be maintained for
a minimum period of five (05) years even after an account is closed.
5.4 Where the officer handling the account opening has reasons to believe that a new relationship
may expose the bank to significant reputational risk, he may refer such request to an officer of
higher authority before opening the account.
5.5 The internal controller/auditor may be required to ensure compliance with the bank’s policies
on customer acceptance and identification.
P.T. Sirisena
Director of Bank Supervision


162 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Bank Supervision Department
13 June 2006
To :  CEOs of All Licensed Banks
Dear Sirs,
PREVENTION OF FRAUDS USING ELECTRONIC CARDS
Recent reports have highlighted the use of credit cards and ATM cards for fraudulently withdrawing
large sums of money from banks in many countries, especially in the South East Asian region.
The Presidential Secretariat, by its letter dated 06 June 2006 has drawn the attention of the Central
Bank to the need to take precautionary measures to avert the possibility of such attempts being made
even in Sri Lanka, considering the particular danger of terrorist groups using them as a means of creating
a sense of insecurity in a vital sector of the economy.
Accordingly, Licensed Banks that issue electronic cards to customers should, as soon as is
practicable take steps to:
1. Introduce security features such as tamper-proof micro chips for electronic cards, and in the
interim.
2. T ake appropriate steps to educate their customers with regard to the safety of their electronic
cards and remind them at regular intervals the steps that should be taken by them, in order to
avoid being victims of fraudulent use of such cards.
3. Ensure that adequate provision is made annually for the necessary investment in technology .
The banks are also encouraged to introduce other relevant security measures in respect of ATM
cards/machines. It is suggested that CCTV cameras be installed at all ATM outlets in order to enhance
the surveillance at ATM outlets.
Your views on this matter are welcome for discussion at the forthcoming monthly meeting of CEOs
on the 22 June 2006.
Yours faithfully,
Sgd, Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  163
SP
June 6, 2006
Deshamanya Sunil Mendis
Governor
Central Bank of Sri Lanka
The recently reported ATM scams in Singapore (Divaina – 25.05.2006) as well as other countries such as
New Zealand, indicate the likelihood of such practices spreading across the world.
It seems prudent to take precautionary measures to avert the possibility of such attempts being made
even in Sri Lanka, considering the particular danger of terrorist groups using them as means of creating
a sense of insecurity in a vital sector of the economy.
Accordingly, it may be worth taking early action to request the banks in the country to take the following
measures and any other, if they have so far not taken any initiatives in this regard.
1. Expedite the process of introducing tamper-proof micro chip Bank cards (being done in many
countries now).
2. Keep the customers remi nded at regular intervals the steps they should take in order to avoid
being victims of ATM robberies.
We hope you would understand that our observations and suggestions are guided by the fact that it is vital
to reduce the risk of any form of instability that would affect the Banks, their customers or the country.
Sincerely,
Sgd. Lalith Weeratunga
Secretary to the President


164 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Ref. No. : 02  / 04 / 004 / 0012  / 001
08 October 2008
To CEOs of all Licensed Banks
USE OF BANKING SYSTEM BY INSTITUTIONS AND PERSONS
NOT AUTHORISED TO ACCEPT DEPOSITS
 A number of institutions and persons, that are not authorised to accept deposits from the public,
are mobilising funds from the public in the guise of offering investment products/schemes.  We find that
such institutions and persons have used the banking system for their operations and that some banks have
accommodated these transactions without identifying the legality of these transactions or the potential
risks.
 As you are aware, permitting these institutions and persons to use the banking system to resort to
such practices can tarnish the image of your institution and thereby weaken public confidence in the
banking system.
 In this regard, we wish to draw your attention to the Circulars on Customer Due Diligence dated
3 December 2001 and Know Your Customer Procedures dated 19 January 2007 issued by the Director
Bank Supervision and Know your Customer and Customer Due Diligence Rules issued by the Director,
Financial Intelligence Unit dated 18 May 2007. We wish to emphasise that special attention should be
paid to strengthen Customer Due Diligence and Know Your Customer Procedures and to comply with
such Circulars/Rules to ensure that sources of income and movement of funds are monitored, as required
in these instructions.
 H A Karunaratne  B D W A Silva
 Dir ector of Financial Intelligence Unit  Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  165
Ref. No. : 02  / 17 / 800 / 0007  / 01
Bank Supervision Department
06 November 2008
To: The CEOs of All Licensed Commercial Banks and
       Licensed Specialised Banks
Dear Sirs,
REGULATIONS MADE UNDER THE PUBLIC SECURITY ORDINANCE
PROSCRIPTION OF TAMIL REHABILITATION ORGANISATION
 We write to inform you that His Excellency the President has promulgated Emergency (Proscription
of Tamil Rehabilitation Organisation) Regulations, No. 9 of 2007 on December 26, 2007 proscribing the
Tamil Rehabilitation Organisation in Sri Lanka. A copy of the relevant Extraordinary Gazette  No.1529/13
dated December 26, 2007 is attached herewith for your information.
 In this regard, w e wish to draw your special attention to Regulation 3 of these Regulations and advise
you to refrain from carrying out any transactions with the above proscribed organisation.
Yours faithfully,
Actg. Director of Bank Supervision
Encl:
cc: Secretary-General / SLBA


166 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
PART I : SECTION (I) – GENERAL
Government Notifications
CF 1/64
THE PUBLIC SECURITY ORDINANCE (CHAPTER 40)
REGULATIONS made by the President under Section 5 of the Public Security Ordinance
(Chapter 40).
Mahinda  Rajapaksa ,
President.
Colombo,
26th December, 2007.
REGULATIONS
1. These regulations may be cited as the Emer gency (Proscription of Tamil Rehabilitation Organization)
Regulations, No.9 of 2007.
2. For the purposes of ensuring public security, for the preservation of public order and for upholding
the Rule of Law, the Organization styled as the “Tamil Rehabilitation Organization” is hereby
proscribed.
3. From and after the date of the coming into operation of these regulations, any person who,–
 (a) wears any uniform, dress, symbol or other emblem, which signifies or indicates any association
with, or membership of, or adherence to the “Tamil Rehabilitation Organization” (hereinafter
referred to as the “proscribed organization”) ; or
 (b) summons or attends any meeting of the proscribed organization or participates or engages in
any activity of, or any activity connected with or related to the said proscribed organization ;
or


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  167
 (c) s upports the proscribed organization, by inviting or exhorting persons to be enrolled as members,
or by contributing or collecting funds, or by furnishing information or securing any other
assistance to the said proscribed organization ; or
 (d) harbours, conceals or in any other manner assists any member of the proscribed organization,
with intention thereby to prevent, hinder or interfere with the apprehension, trial or punishment
of such member ; or
 (e) makes, prints, distributes or is in any way connected with or concerned in the making, printing,
distribution or publication of any written or printed matter, which is or which purports to be
printed, by or on behalf of the proscribed organization or by any member thereof ; or
 (f) communicates or attempts to communicate to any other person in any manner whatsoever, any
order, decision, declaration or exhortation made or purported to have been made by the proscribed
organization or by any member thereof, or any information relating thereto, for the purpose of
advancing the objectives of the said proscribed organization,
shall be guilty of an offence and shall on conviction be liable to imprisonment for a period not
exceeding fifteen years.
4. (1) Where the Minister is satisfied, after such inquiry as he thinks fit, that any person has custody
of any money, securities or credits which are being used or which are intended to be used, for
the purposes of the proscribed organization, the Minister may by order in writing declare that
such moneys, securities, and credits as are in the custody of such person, or any such moneys,
securities and credits which may come into his custody after the making of such order and any
other movable or immovable property belonging to the said proscribed organization, shall be
forfeited to the State.


forfeited to the State.
 (2) The decision of the Minister under paragraph (1) shall be conclusive and shall not be called in
question in any court by way of writ or otherwise.


168 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of
the Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
12 April 2013
BANKING ACT DIRECTION NO. 4 OF 2013
AMENDMENTS TO DIRECTIONS ON
CORPORATE GOVERNANCE ISSUED TO
LICENSED SPECIALISED BANKS IN SRI LANKA
In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No. 30 of 1988,
last amended by the Banking (Amendment) Act, No. 46 of 2006, the Monetary Board hereby issues
the following Directions amending Direction 3(3)( ii) of the Banking Act, Direction No. 12 of 2007,
dated 26 December 2007 on Corporate Governance for Licensed Specialised Banks in Sri Lanka.
1. These Directions may be cited as the Banking Act, Direction No. 4 of 2013.
2. The following new Direction shall replace Direction 3(3)( ii) of the Banking Act, Direction
No. 12 of 2007, dated 26 December 2007.
3(3)(ii)  A  person shall not hold office as a director of more than 20 companies/entities/institutions
inclusive of subsidiaries or associate companies of the bank.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  169
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of
the Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
24 October  2008
DIRECTIONS
BANKING ACT DIRECTION NO. 8 OF 2008
AMENDMENTS TO DIRECTIONS ON CORPORATE GOVERNANCE FOR
LICENSED SPECIALISED BANKS IN SRI LANKA
In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No. 30 of 1988, last
amended by the Banking Act, No. 46 of 2006 and in terms of the Supreme Court order delivered on
September 1, 2008, the Monetary Board hereby issues the following Direction amending Direction
No. 6 of 2008 dated August 15, 2008, issued by the Monetary Board of the Central Bank of Sri
Lanka. This Direction may be cited as the Banking Act, Direction No. 8 of 2008.
1. The following new Direction shall replace Direction No. 5 of the Banking Act, Direction No.
6 of 2008, dated August 15, 2008.
3(9)(v)  If for any reason such as ill health or any incapacity as provided in the Banking Act,
the Monetary Board considers that exemptions referred to in Directions 3(2)(ii)B, 3(3)
(i)A and 3(3)(ii)A should not be availed of, such ground may be notified to the person
by the Monetary Board, and after a hearing, the Monetary Board may limit the period
of exemption.


170 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section
76J(1) of the Banking Act, No.30 of 1988 as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
15 August 2008.
DIRECTIONS
BANKING ACT DIRECTION NO. 6 OF 2008
AMENDMENTS TO DIRECTIONS ON CORPORATE GOVERNANCE FOR
LICENSED SPECIALISED BANKS IN SRI LANKA
In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No.30 of 1988, last amended
by the Banking Act, No.46 of 2006 and in terms of the Supreme Court order delivered on July 8, 2008,
the Monetary Board hereby issues the following Directions in lieu of Direction No.2 of 2008 dated
April 23, 2008, issued by the Monetary Board of the Central Bank of Sri Lanka. These Directions
may be cited as the Banking Act, Direction No.6 of 2008.
1. The Banking Act Direction No. 2 of 2008 dated April 23, 2008 described as “Provisions
regarding executive directors and transitional provisions for founding directors, incumbent
chairmen and executive directors”, is hereby revoked.
2. The following new Direction shall replace the present Direction 3(2)(ii) (B) of the Banking Act,
Direction No.12 of 2007.
3(2)(ii)  (B)   In this context, the following general exemption shall apply:
A director who has completed nine years as at January 1, 2008, or who completes
such term at any time prior to December 31, 2008, may continue for a further
maximum period of 3 years commencing January 1, 2009.
3. The following new Direction shall replace Directions 3(3)(i)(A) and 3(3)(i)(B) of the Banking
Act, Direction No.12 of 2007.
3(3)(i) (A)  In this context, the following general exemption shall apply:
A director who has reached the age of 70 years as at January 1, 2008 or who would
reach the age of 70 years prior to December 31, 2008 may continue in office for a


reach the age of 70 years prior to December 31, 2008 may continue in office for a
further maximum period of 3 years commencing January 1, 2009.
4. The fol lowing new Direction shall be included immediately after Direction 3(3)(ii) of the
Banking Act, Direction No.12 of 2007.
3(3)(ii) (A)  In this context, the following general exemption shall apply:
If any person holds posts in excess of the limitation as above, such person shall
within a maximum period of three years from 1 January 2009 comply with the
above-mentioned limitation and notify the Monetary Board accordingly.
5. The following new Direction shall be included immediately after Direction 3(9)(iv) of the
Banking Act, Direction No.12 of 2007.
3(9)(v)  If for any reason such as ill health or other incapacity, the Monetary Board considers
that exemptions referred to in Directions 3(2)(ii)B, 3(3)(i)A and 3(3)(ii)A should
not be availed of, such ground may be notified to the person by the Monetary Board,
and after a hearing, the Monetary Board may limit the period of exemption.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  171
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section
76j(1) of the Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Governor
Colombo
26 December 2007
DIRECTIONS
BANKING ACT DIRECTION NO. 12 OF 2007
CORPORATE GOVERNANCE FOR LICENSED SPECIALISED BANKS IN SRI LANKA
In the exercise of the powers conferred by Section 76 j(1) of the Banking Act, No.30 of 1988, last
amended by the Banking Act, No.46 of 2006, the Monetary Board hereby issues the following
Directions on Corporate Governance for Licensed Specialised Banks in Sri Lanka. These
Directions may be cited as the Banking Act, Direction No.12 of 2007. The Sections referred to in
these Directions will be those of the Banking Act, No.30 of 1988, last amended by the Banking
Act, No.46 of 2006.
1. Responsibilities and Empowerment under  the Banking Act and the Monetary Law Act
1(1) In terms of Section 76 j(1) of the Banking Act, No.30 of 1988 last amended by No.46 of 2006,
the Monetary Board has been empowered to issue Directions to licensed specialised banks
or to any category of licensed specialised banks, regarding the manner in which any aspect
of the business of such banks is to be conducted.
1(2)  In terms of Section 5 of the Monetary Law Act, No.58 of 1949, the Central Bank of Sri Lanka
is charged with the duty of securing, as far as possible by action authorised by such Act, the
two objectives, namely, ( a) economic and price stability and ( b) financial system stability.
1(3) In terms of Section 10(c) of the Monetary Law Act, the Monetary Board, in the exercise
of its powers, duties, functions and responsibilities, is empowered to make such rules
and regulations as the Monetary Board may consider necessary, in relation to any matter
affecting or connected with or incidental to the exercise, discharge, or performance of the


affecting or connected with or incidental to the exercise, discharge, or performance of the
powers, functions, and duties of the Central Bank of Sri Lanka.
1(4) Under the provisions of the Monetary Law Act, No.58 of 1949, the supervision of banks
has been made a duty of the Central Bank on account of specific reasons as stated in John
Exter’s Report on the Monetary Law Act which states, inter-alia, as follows: “Banking is an
economic activity which affects the public welfare to an unusual degree; it touches in one
way or another, almost every phase of a country’ s economic life. Sound banking is essential
to healthy and vigorous economic development. Supervision of banks helps to protect the
public against mismanagement, bank failures, and loss of confidence in the banking system.
It helps to protect depositors and stock-holders against loss and frequently enables bank
directors and officers to manage the affairs of their banks more wisely and intelligently.”
1(5) Accordingly , in order to enhance the overall banking sector stability which is the fundamental
to financial system stability, the Monetary Board, hereby issues Directions under Section
76j(1) of the Banking Act, No. 30 of 1988 to improve and sustain the corporate governance
processes and practices of the licensed specialised banks in Sri Lanka.


172 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
1(6) For purposes of this Direction, Corporate Governance processes and practices shall be
deemed to be the management framework that facilitates the conduct of the banking business
in a responsible and accountable manner so as to promote the safety and soundness of the
individual banks, thereby leading to the stability of the overall banking sector.
1(7) The rules of corporate governance as contained in Direction 3 of these Directions have,
therefore, been developed on the basis of certain fundamental principles as set out in
Direction 2 of these Directions with a view to facilitating the underlying supervisory
responsibilities of the Central Bank and to promote safety and soundness of the banking
system.
2. The Principles upon which the rules of Corporate Governance have been based upon
and developed are the following:
 The principles set out in this Dir ection 2 should be referred to for explanatory purposes and/or
for clarification purposes only, so as to understand the rationale for the rules as
contained in Direction 3 hereof. Hence, strict compliance under these Directions shall
only be in respect of the rules that are set out under Direction 3.
2(1) Principle: The Responsibilities of the Board
2(1)(i)  T he board of directors should assume the overall responsibility and accountability
in respect of: ( a) the management of the affairs of the bank, i.e., conduct of business
and maintenance of prudent risk management mechanisms; and ( b) the safety and
soundness of the bank.
2(1)(ii)  T owards this end, the board should: ( a) determine the structure of the management
of affairs of the bank; (b ) delegate business operations to key management personnel
led by the chief executive officer designated by the board; ( c) assume policy making
and risk management for the business; and ( d) ensure the effective role of the key


and risk management for the business; and ( d) ensure the effective role of the key
management personnel. Key management personnel shall mean such key executives of
the bank as defined in the International Accounting Standards.
2(1)(iii)  T he overall responsibility of the board should not be construed as an obligation to
undertake the inspection of day-to-day activities, but should rather be understood as an
obligation to oversee and ensure that the key management personnel are carrying out
the day-to-day activities of the bank in a safe and sound manner in accordance with the
policies set by the board.
2(1)(iv)  Directors should understand the business and risk management mechanism of the
bank and take objective decisions in the interest of the bank’s depositors, creditors,
shareholders and other stakeholders. Further, they should ensure that the bank does not
act in a manner that is detrimental or prejudicial to the interests of, and obligations to,
depositors and creditors.
2(1)(v)  The board should take the responsibility for compliance with accepted rules of
corporate governance. They should also ensure compliance with all regulatory and
supervisory requirements. Further, they should ensure that an effective combination of
professionals with practical experience in relevant subjects such as banking, finance,
economics, business management, human resource management, law, marketing,
information technology or any other discipline relevant or complementary to banking
operations, is available in the bank to undertake its operations and discharge its
responsibilities.
2(1)(vi)  The directors should be aware of potential civil and criminal liabilities that may arise
from their failure to discharge their duties diligently. They should also understand that
they should act with due care and prudence. In addition, the directors of state owned
banks should be aware of the additional liabilities that arise from the status of such


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  173
banks being state enterprises and consequently being accountable to the public. It is,
therefore, necessary that directors commit sufficient time and energy to fulfilling the
board’s responsibilities in managing the affairs of the bank in a prudent manner.
2(2) Principle: The Board’s composition
2(2)(i)  The board should be composed of a healthy mix of executive directors and
non-executive directors. Some of the non-executive directors should also be independent
so that there is strong independent element brought into the decision-making process.
2(2)(ii)  The board’s composition should ensure a balance of skills and experience as may be
deemed appropriate and desirable for the requirements of the bank.
2(2)(iii)  The banking indus try worldwide is making tremendous progress and undergoing
rapid change with new innovations, instruments, technologies, products, systems and
processes being introduced regularly. It is vital therefore, that the directors should be
persons who would: (a ) be able to keep abreast with these changes, and ( b) provide
continuous contribution and guidance to the board decision-making process.
2(2)(iv)  There should be a gradual infusion of new ideas into the board. There should also be
assurance that the relationships between the directors amongst themselves as well as
between the directors and the key management personnel is at a level that does not
suggest the existence of excessive familiarity, undue influence or coercion. In this
context, it should be noted that very long-standing relationships could sometimes
impair the high sense of values, independence and objectivity that is needed in the
discharge of the duties of a director of a bank.
2(3)  Principle: Criteria to assess the Fitness and Propriety of Directors
2(3)(i)  In addition to the principles under the board’s composition in Direction 2(2) above,


2(3)(i)  In addition to the principles under the board’s composition in Direction 2(2) above,
directors should be fit and proper persons in order to be eligible to hold office as
directors of a bank and no person should serve as a director unless such person is a fit
and proper person.
2(3)(ii)  There is strong need for commitment and ef fective contribution to the prudent
management of the affairs of the bank. It is very likely that the effectiveness of such
commitment and contribution would tend to decrease with advanced age of directors
and more particularly, if the age of such director is well beyond the normal age of
retirement, as generally accepted in the country.
2(4) Principle: Management functions delegated by the Board
2(4)(i)  T he board should have a formal schedule of matters specifically reserved to it for
decision. The board should also give clear directions to key management personnel, as
to the matters that should be approved by the board before decisions are made by key
management personnel, on behalf of the bank.
2(5)  Principle: The Chairman and the Chief Executive Officer
2(5)(i)  T here are two key aspects of the management of every bank, viz., ( a) the overall
governance by the board, and ( b) the day-to-day management of the bank’s business
by the CEO, in line with board approved strategic objectives, corporate values, overall
risk policy and risk management procedures.
2(5)(ii)  There should be a clear division of these responsibilities at the board level and the
executive management level to ensure a greater balance of power and authority, so that
powers are not concentrated in any one individual.


174 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
2(5)(iii)  The board should appoint a chairman as well as a chief executive of ficer. The division
of responsibilities between the chairman and chief executive officer should be clearly
established and set out in writing.
2(6)  Principle: Board appointed Committees
2(6)(i)  The board should appoint separate board committees for audit, selection, remuneration,
integrated risk management and such other subjects as determined by the Board to
ensure its oversight and control over the affairs of the bank.
2(6)(ii)  Where the board appoints a committee, it should set out the authority of the committee,
and in particular, whether the committee has the authority to act on behalf of the board
or simply has the authority to examine a particular issue and report back to the board
with recommendations.
2(6)(iii)  Each committee should be chaired by a non-executive director who has some expertise
in the relevant subject, and who preferably should be independent too. The majority
of the members of the board committee should consist of non-executive directors with
at least one independent director in the committee. If a need arises, professionals from
outside may be invited or hired to serve in a committee. Bank staff may be present at
the board committees for advice or special assignments, on invitation.
2(7)  Principle: Related party transactions
2(7)(i)  The board should ensure that the bank does not engage in transactions with “related
parties” in a manner that would grant such parties “more favourable treatment” than
that accorded to other constituents of the bank carrying on the same business.
2(8) Principle: Disclosures
2(8)(i)  The objective of disclosure is the transparency of information relating to af fairs and
risk management of banks which would help to promote market discipline of the
respective banks.


risk management of banks which would help to promote market discipline of the
respective banks.
2(8)(ii)  Since market disclosure is the focus of the Pillar III of the risk management based
capital standard known as Basel II recommended by the Basel Committee on Banking
Supervision at the Bank for International Settlements, (which is the globally accepted
body on introducing international standards on Bank Supervision), the extent of
disclosures should be commensurate with the size, ownership structure, systemic
importance, risk profile and the business model of the bank. Accordingly, it should be
noted that the adequate and timely public disclosure of relevant information by banks
would facilitate enhanced market discipline and lead to better and more effective
corporate governance.
2(8)(iii)  Disclosures by banks should generally include disclosures relating to capital adequacy ,
key performance indicators, business concentrations, transactions with related
parties, corporate governance statements, financial statements, etc., and should be
consistent with accounting standards, regulatory requirements as well as with any other
information disclosed on voluntary basis.
3. The following rules of Corporate Governance shall be complied by all licensed
specialised banks in Sri Lanka and such compliance shall be as provided for in
Direction 3(9)(i) hereof.
3(1)  The Responsibilities of the Board
3(1)(i)  The board shall strengthen the safety and soundness of the bank by ensuring the
implementation of the following:


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  175
 a ) Approve and oversee the bank’s strategic objectives and corporate values and
ensure that these are communicated throughout the bank;
 b) Approve the overall business strategy of the bank, including the overall risk policy
and risk management procedures and mechanisms with measurable goals, for at
least the next three years;
 c) Identify the principal risks and ensure implementation of appropriate systems to
manage the risks prudently;
 d ) Approve implementation of a policy of communication with all stakeholders,
including depositors, creditors, share-holders and borrowers;
 e) Review the adequacy and the integrity of the bank’s internal control systems and
management information systems;
 f) Identify and designate key management personnel, as defined in the International
Accounting Standards, who are in a position to: ( i) significantly influence policy;
(ii) direct activities; and ( iii) exercise control over business activities, operations
and risk management;
 g ) Define the areas of authority and key responsibilities for the board directors
themselves and for the key management personnel;
 h ) Ensure that there is appropriate oversight of the af fairs of the bank by key
management personnel, that is consistent with board policy;
 i ) Periodically assess the effectiveness of the board directors’ own governance
practices, including: ( i) the selection, nomination and election of directors and key
management personnel; ( ii) the management of conflicts of interests; and ( iii) the
determination of weaknesses and implementation of changes where necessary;
 j ) Ensure that the bank has an appropriate succession plan for key management
personnel;
 k) Meet regularly, on a needs basis, with the key management personnel to review
policies, establish communication lines and monitor progress towards corporate
objectives;


policies, establish communication lines and monitor progress towards corporate
objectives;
 l ) Understand the regulatory environment and ensure that the bank maintains an
effective relationship with regulators;
 m) Exercise due diligence in the hiring and oversight of external auditors.
3(1)(ii)  The board shall appoint the chairman and the chief executive of ficer and define and
approve the functions and responsibilities of the chairman and the chief executive
officer in line with Direction 3(5) of these Directions.
3(1)(iii)  The board shall meet regularly and board meetings shall be held at least twelve times
a year at approximately monthly intervals. Such regular board meetings shall normally
involve active participation in person of a majority of directors entitled to be present.
Obtaining the board’s consent through the circulation of written resolutions/papers
shall be avoided as far as possible.
3(1)(iv)  The board shall ensure that arrangements are in place to enable all directors to include
matters and proposals in the agenda for regular board meetings where such matters and
proposals relate to the promotion of business and the management of risks of the bank.
3(1)(v)  The board procedures shall ensure that notice of at least 7 days is given of a regular
board meeting to provide all directors an opportunity to attend. For all other board
meetings, reasonable notice may be given.
3(1)(vi)  T he board procedures shall ensure that a director who has not attended at least
two-thirds of the meetings in the period of 12 months immediately preceding or has not


176 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
attended the immediately preceding three consecutive meetings held, shall cease to be
a director. Participation at the directors’ meetings through an alternate director shall,
however, be acceptable as attendance.
3(1)(vii)  The board shall appoint a company secretary who satisfies the provisions of Section
43 read with Section 76 h of the Banking Act, No. 30 of 1988, whose primary
responsibilities shall be to handle the secretariat services to the board and shareholder
meetings and to carry out other functions specified in the statutes and other regulations.
3(1)(viii)  All directors shall have access to advice and services of the company secretary with
a view to ensuring that board procedures and all applicable rules and regulations are
followed.
3(1)(ix)  The company secretary shall maintain the minutes of board meetings and such minutes
shall be open for inspection at any reasonable time, on reasonable notice by any
director.
3(1)(x)  Minutes of board meetings shall be recorded in sufficient detail so that it is possible
to gather from the minutes, as to whether the board acted with due care and prudence
in performing its duties. The minutes shall also serve as a reference for regulatory
and supervisory authorities to assess the depth of deliberations at the board meetings.
Therefore, the minutes of a board meeting shall clearly contain or refer to the following:
(a) a summary of data and information used by the board in its deliberations; ( b) the
matters considered by the board; ( c) the fact-finding discussions and the issues of
contention or dissent which may illustrate whether the board was carrying out its duties
with due care and prudence; ( d) the testimonies and confirmations of relevant executives
which indicate compliance with the board’s strategies and policies and adherence to


which indicate compliance with the board’s strategies and policies and adherence to
relevant laws and regulations; ( e) the board’s knowledge and understanding of the
risks to which the bank is exposed and an overview of the risk management measures
adopted; and ( f) the decisions and board resolutions.
3(1)(xi)  There shall be a procedure agreed by the board to enable directors, upon reasonable
request, to seek independent professional advice in appropriate circumstances, at the
bank’s expense. The board shall resolve to provide separate independent professional
advice to directors to assist the relevant director or directors to discharge his/her/their
duties to the bank.
3(1)(xii)  Directors shall avoid conflicts of interests, or the appearance of conflicts of interest,
in their activities with, and commitments to, other organisations or related parties. If
a director has a conflict of interest in a matter to be considered by the board, which
the board has determined to be material, the matter should be dealt with at a board
meeting, where independent non-executive directors [refer to Direction 3(2)(iv) of
these Directions] who have no material interest in the transaction, are present. Further,
a director shall abstain from voting on any board resolution in relation to which he/she
or any of his/her close relation or a concern in which a director has substantial interest,
is interested and he/she shall not be counted in the quorum for the relevant agenda item
at the board meeting.
3(1)(xiii)  The board shall have a formal schedule of matters specifically reserved to it for decision
to ensure that the direction and control of the bank is firmly under its authority.
3(1)(xiv)  The board shall, if it considers that the bank is, or is likely to be, unable to meet its
obligations or is about to become insolvent or is about to suspend payments due to
depositors and other creditors, forthwith inform the Director of Bank Supervision of


depositors and other creditors, forthwith inform the Director of Bank Supervision of
the situation of the bank prior to taking any decision or action.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  177
3(1)(xv)  The board shall ensure that the bank is capitalised at levels as required by the Monetary
Board in terms of the capital adequacy ratio and other prudential grounds.
3(1)(xvi)  The board shall publish in the bank’s Annual Report, an annual corporate governance
report setting out the compliance with Direction 3 of these Directions.
3(1)(xvii)  The board shall adopt a scheme of self-assessment to be undertaken by each director
annually, and maintain records of such assessments.
3(2) The Board’s Composition
3(2)(i)  The number of directors on the board shall not be less than 7 and not more than 13.
3(2)(ii)   (A) The total period of service of a director other than a director who holds the position
of chief executive officer shall not exceed nine years, and such period in office shall
be inclusive of the total period of service served by such director up to 01 January
2008.
  (B) In this context, the following transitional provisions shall apply:
 a) In the event that there is only one director on the board who has served more
than nine years as at 01 January 2008, he/she shall be deemed to have vacated
the office as a director as at 31 December 2008.
 b) In the event that there are two or more directors on the board who have served
more than nine years as at 01 January 2008, the following provisions shall
apply:
 I. Of those directors whose period of service has exceeded nine years, the
longest serving director, shall be deemed to have vacated office as a
Director on 31 December 2008.
 II. Thereafter , at the end of each succeeding year, the remaining directors
shall be deemed to have vacated office in sequence, at least one director
each year, (on the basis of the longest to the shortest length of service as
a director), until all directors who have served a period in excess of nine
years as at 01 January 2008, have been deemed to have vacated office.


years as at 01 January 2008, have been deemed to have vacated office.
Provided also, that all directors of the bank who have served more than
nine years as at 01 January 2008 shall be deemed to have vacated their
office by or before 31 December 2011.
 c) In the event there are any directors who are due to complete nine years of service
between 01 January 2008 and 31 December 2010, such directors shall also be
deemed to have vacated office, in sequence, at least one director each year,
(on the basis of the longest to the shortest length of service as a director),
after the directors as set out in Direction 3(2)(ii)(B)(b) have vacated their
office as directors. Provided, however, that all such directors covered by this
sub-direction ( c) shall also be deemed to have vacated their office by or before
31 December 2011.
3(2)(iii)  An employee of a bank may be appointed, elected or nominated as a director of the
bank (hereinafter referred to as an “executive director”) provided that the number of
executive directors shall not exceed one-third of the number of directors of the board.
In such an event, one of the executive directors shall be the chief executive officer of
the bank.
3(2)(iv)  The board shall have at least three independent non-executive directors or one third of the
total number of directors, whichever is higher. This sub-direction shall be applicable from
01 January 2010 onwards.


178 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
  A  non-executive director shall not be considered independent if he/she:
 a) has direct and indirect shareholdings of more than 1 per cent of the bank;
 b) currently has or had during the period of two years immediately preceding his/her
appointment as director, any business transactions with the bank as described in
Direction 3(7) hereof, exceeding 10 per cent of the regulatory capital of the bank.
 c) has been employed by the bank during the two year period immediately preceding
the appointment as director;
 d) has a close relation who is a director or chief executive officer or a member of key
management personnel or a material shareholder of the bank or another bank.
For this purpose, a “close relation” shall mean the spouse or a financially
dependant child;
 e)  represents a specific stakeholder of the bank;
 f) is an employee or a director or a material shareholder in a company or business
organization:
 I. which currently has a transaction with the bank as defined in Direction 3(7) of
these Directions, exceeding 10 per cent of the regulatory capital of the bank,
or
 II. in which any of the other directors of the bank are employed or are directors or
are material shareholders; or
 III. in which any of the other directors of the bank have a transaction as defined
in Direction 3(7) of these Directions, exceeding 10 per cent of regulatory
capital in the bank;
3(2)(v)  In the event an alternate director is appointed to represent an independent director, the
person so appointed shall also meet the criteria that applies to the independent director.
3(2)(vi)  Non-executive directors shall be persons with credible track records and/or have
necessary skills and experience to bring an independent judgment to bear on issues of
strategy, performance and resources.
3(2)(vii)  A  meeting of the board shall not be duly constituted, although the number of directors


3(2)(vii)  A  meeting of the board shall not be duly constituted, although the number of directors
required to constitute the quorum at such meeting is present, unless more than one
half of the number of directors present at such meeting are non-executive directors.
This sub-direction shall be applicable from 01 January 2010 onwards.
3(2)(viii)  The independent non-executive directors shall be expressly identified as such in all
corporate communications that disclose the names of directors of the bank. The bank
shall disclose the composition of the board, by category of directors, including the
names of the chairman, executive directors, non-executive directors and independent
non-executive directors in the annual corporate governance report.
3(2)(ix)  T here shall be a formal, considered and transparent procedure for the appointment
of new directors to the board. There shall also be procedures in place for the orderly
succession of appointments to the board.
3(2)(x)  All directors appointed to fill a casual vacancy shall be subject to election by
shareholders at the first general meeting after their appointment.
3(2)(xi)  If a director resigns or is removed from of fice, the board shall: ( a) announce the
director’s resignation or removal and the reasons for such removal or resignation
including but not limited to information relating to the relevant director’s disagreement


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  179
with the bank, if any; and ( b) issue a statement confirming whether or not there are any
matters that need to be brought to the attention of shareholders.
3(2)(xii)  A  director or an employee of a bank shall not be appointed, elected or nominated
as a director of another bank except where such bank is a subsidiary company or an
associate company of the first mentioned bank.
3(3) Criteria to assess the fitness and propriety of directors
  In addition to provisions of Section 42 read with Section 76 h of the Banking Act, No.30
of 1988, the criteria set out below shall apply to determine the fitness and propriety of a
person who serves or wishes to serve as a director of a bank. Non-compliance with any
one of the criteria as set out herein shall disqualify a person to be appointed, elected or
nominated as a director or to continue as a director.
3(3)(i)  The age of a person who serves as director shall not exceed 70 years.
 (A) Where a director who is currently serving at a bank is over 70 years of age as at
01 January 2008, the following transitional provisions shall apply, subject,
however, to the provisions as set out in Direction 3(2)(ii) hereof.
 a) If a director is over 75 years of age as at 01 January 2008, such director may
continue to serve as a director for a further period that shall not extend
beyond 31 December 2008, and shall be deemed to have vacated office on
31 December 2008;
 b) If a director is between 70 and 75 years of age as at 01 January 2008, such
director may continue to serve as a director for a further period that shall
not extend beyond 31 December 2009, and shall be deemed to have vacated
office on 31 December 2009.
(B) Where a director who is currently serving at a bank reaches the age of 70 years,
between 01 January 2008 and 31 December 2009, such director may, subject to the


between 01 January 2008 and 31 December 2009, such director may, subject to the
provisions as set out in Direction 3(2)(ii) hereof, continue to serve as a director
for a further period that shall not extend beyond 31 December 2010 and shall be
deemed to have vacated office on 31 December 2010.
3(3)(ii)  A  person shall not hold office as a director of more than 20 companies/entities/
institutions inclusive of subsidiaries or associate companies of the bank. Of such
20 companies/entities/ institutions, not more than 10 companies shall be those
classified as Specified Business Entities in terms of the Sri Lanka Accounting and
Auditing Standards Act, No. 15 of 1995.
3(4) Management functions delegated by the Board
3(4)(i)  The directors shall carefully study and clearly understand the delegation arrangements
in place.
3(4)(ii)  The board shall not delegate any matters to a board committee, chief executive officer,
executive directors or key management personnel, to an extent that such delegation
would significantly hinder or reduce the ability of the board as a whole to discharge its
functions.
3(4)(iii)  The board shall review the delegation processes in place on a periodic basis to ensure
that they remain relevant to the needs of the bank.
3(5) The Chairman and Chief Executive Officer
3(5)(i)  The roles of chairman and chief executive of ficer shall be separate and shall not be
performed by the same individual.


180 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
3(5)(ii)  The chairman shall be a non-executive director and preferably an independent director
as well. In the case where the chairman is not an independent director, the board shall
designate an independent director as the Senior Director with suitably documented
terms of reference to ensure a greater independent element. The designation of the
Senior Director shall be disclosed in the bank’s Annual Report.
3(5)(iii)  The board shall disclose in its corporate governance report, which shall be an integral
part of its Annual Report, the identity of the chairman and the chief executive officer
and the nature of any relationship [including financial, business, family or other
material/relevant relationship(s)], if any, between the chairman and the chief executive
officer and the relationships among members of the board.
3(5)(iv)  The chai rman shall: ( a) provide leadership to the board; ( b) ensure that the board
works effectively and discharges its responsibilities; and ( c) ensure that all key and
appropriate issues are discussed by the board in a timely manner.
3(5)(v)  The chairman shall be primarily responsible for drawing up and approving the agenda
for each board meeting, taking into account where appropriate, any matters proposed by
the other directors for inclusion in the agenda. The chairman may delegate the drawing
up of the agenda to the company secretary.
3(5)(vi)  The chairman shall ensure that all directors are properly briefed on issues arising at
board meetings and also ensure that directors receive adequate information in a timely
manner.
3(5)(vii)  The chairman shall encourage all directors to make a full and active contribution to the
board’s affairs and take the lead to ensure that the board acts in the best interests of the
bank.
3(5)(viii)  T he chairman shall facilitate the effective contribution of non-executive directors