Finance Act to strengthen regulation of NBFIs
Sri Lanka’s non-banking financial sector is at the threshold of a landmark restructuring process, and accordingly, the Central Bank of Sri Lanka (CB) has been pushing proposed amendments to the Finance Business Act (FBA) No. 42 of 2011,
This was the foundational legislation governing non-bank financial institutions, or NBFIs, and deposit-taking entities.
The new amendments are aimed at strengthening the regulation and supervision of Finance Companies (FCs), investigation and prosecution of unauthorised finance business, resolution and winding up of non-viable FCs.
Now open for public consultation until November 30, these reforms aim to close long-standing regulatory gaps, restore public trust, and prevent the recurrence of high-profile institutional failures.
The FBA, enacted in 2011 to replace the older Finance Companies Act, was intended to provide a robust framework for licencing, supervision, and operational conduct of finance companies.
Hitherto persistent governance failures, illustrated by the collapses of institutions like ‘The Finance Company’ and ‘Bimputh Finance’, have exposed weaknesses in enforcement and oversight, eroding depositor confidence.
The CB emphasises that the amendments are designed to “modernise the law to meet evolving market conditions and align with international best practices”.
Among the proposed measures, the regulator will be granted increased powers of investigation and enforcement to take fast action against unauthorised deposit-taking activities and illegal finance businesses.
The amendments also introduce pre-emptive intervention tools, enabling the CB to restructure, merge or liquidate failing institutions before they pose a threat to systemic stability.
Significant changes target governance standards. Stricter “fit and proper” criteria for directors and major shareholders are set to ensure that only qualified, reputable individuals manage licenced entities.
The reforms raise the capital adequacy thresholds, call for increased transparency through more detailed financial disclosures, and regulate advertising practices against misleading deposit solicitations.
However, despite wide support for tighter regulation, there are growing concerns about its impact on the smaller NBFIs.
The heads of finance companies say that increased compliance and capital requirements could force consolidation-or even drive some of the smaller players out of the market-restricting access to credit for small and medium enterprises, which are the crucial drivers of economic recovery.
The CEOs of several FCs have urged the CB to consider a phased implementation approach to reduce disruption.
The Finance Houses Association of Sri Lanka has called for more time to study the amendments, and its Chairman Arjuna Gunaratne elaborated on the need for scrutiny before formally sending feedback.
Anuruddha Jayawardena, an independent financial analyst, spoke of a delicate balancing act ahead: stringent oversight is called for to restore trust and protect depositors, yet over-rigid application could inadvertently restrict legitimate credit flows, especially in the under banked communities.
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