29th Annual Convention of the Association of Professional Bankers
Colombo, 21 - 22 November 2017
H.E. Dr. Indrajit Coomaraswamy, Governor Central Bank of Sri Lanka;
Mr. Senarath Bandara, President of the Association of Professional
Bankers (APB) - Sri Lanka;
Distinguished Members of the APB's Executive Council;
Esteemed Speakers, Dignitaries and Guests;
Ladies and Gentlemen,
Good Evening and Ayubowan!
It is indeed a great pleasure for me to be here today to address the 29th
Annual Convention of the Association of Professional Bankers (APB) of Sri
Lanka. I have always enjoyed visiting this beautiful country and am a great
admirer of the friendly relationship that both our countries enjoy.
Pakistan and Sri Lanka are time tested friends and share cordial bilateral
relations which date back to as early as 1948. We have stood together and
have shared strong cooperation with each other during difficult times.
Pakistanis are also grateful to the people and government of Sri Lanka for
the visit of their cricket team to Pakistan last month which is a major step
towards the revival of international cricket in our country. Pakistan and Sri
Lanka also share excellent economic cooperation. Pakistan is the second
largest trading partner of Sri Lanka in South Asia while Sri Lanka was the
first country to sign a Free Trade Agreement with Pakistan, which became
operational in 2005. I have no doubt in my mind that the bilateral trade
between the two countries which is approximately USD 330 million today,
has the potential to increase to more than USD 1 billion.
I would also like to commend the role of Central Bank of Sri Lanka in
fostering financial stability in the country and achieving decent economic
growth. Central Banks of both our countries also regularly collaborate on
SAARCFINANCE which provides an excellent platform for exchanging
ideas and lessons learned among central banks of SAARC member
countries. I hope that the experiences especially in today's rapidly evolving
banking and financial sector can further be shared as these are interesting
times for Central Banks around the world.
Before sharing my thoughts on the main topic, I would like to felicitate the
Association of Professional Bankers of Sri Lanka for regularly organizing
annual conventions on topics that are in sync with today's changing
realities and contribute to the debate on pertinent financial sector risks and
challenges. The theme for this year's Convention i.e. "Changing
Dynamics: Bank of the Future" is of particular interest to banking
professionals and policy makers given the fundamental shifts taking place
in the financial sector and the wider economy. I am confident that the
discussions held during the event will result in generation of innovative
ideas for banks and provide important insights on the challenges being
faced by the banking sector today and in days ahead.
Ladies and Gentlemen; in my speech, I would therefore reflect on the
prevailing course of banking and the emerging challenges that are
reshaping the banks' business models along with developments in the
supervisory approach of regulators. But more importantly, I would like to
talk about the challenges that banks and their regulators face due to
technological advancements. I will also briefly discuss the measures taken
by State Bank of Pakistan (SBP) to keep up with the changing dynamics
and in the end will make a few suggestions that can help prepare the
banking industry to adjust to the new paradigms.
I will discuss the future of banks and banking by focusing on two themes:
The first one relates to the Global Financial Crisis of 2007-8 which was
perhaps the most significant event in recent financial history that presented
challenges relating to financial stability to regulatory authorities around the
globe. The second theme that I would like to discuss today is the impact of
technology on banks and their customers. As you all will appreciate, the
bank customer of today, equipped with sophisticated gadgets and devices
is demanding state of the art financial services from the comfort of their
homes. Neither do they want to visit a branch, nor do they want to fill up
long forms in order to open an account. Is this a threat for the banks or an
opportunity to transform? I believe the latter is true which I will explain
afterwards in my speech.
But let me begin by talking about the Global Financial Crisis and its impact.
The decade preceding this crisis saw remarkable expansion in international
banking. As a result, heightened cross border lending coupled with
sizeable presence of international banks across the globe, and particularly
in developing countries, manifested an increasingly integrated world of
banking and finance. The financial crisis actually forced regulatory attention
towards ensuring financial stability by beefing up capital and liquidity
buffers, more stringent regulations, and introduction of macro prudential
policy toolkit. There is no doubt, that the coordinated efforts made by the
multilateral bodies and regulators have facilitated to better internalize
systemic risk and strengthen the overall international financial system.
Ladies and Gentlemen; while the post crisis regulatory response has
resulted in a more robust financial system, it has also increased the
complexity of regulatory framework. To give you an idea of the complexity
of regulations, I will briefly describe some significant financial regulatory
reforms which have been designated as priority areas for implementation:
• Number one: creation of a quick and effective resolution regime with
no tolerance for using tax payers' money to bailout failing banks;
• Two: application of stringent AML/CFT regulations to prevent the use
of banking channels for illicit transactions.
• Three, Implementation and adoption of policy framework on Global
Systemically Important Financial Institutions and Domestic
Systemically Important Banks as the prevailing regulatory regime and
policies may not be sufficient to address the "negative externalities"
that large financial firms create.
• And finally, full and timely implementation of Basel III to ensure a
sound and properly functioning banking system that is able to support
economic recovery and growth on a sustainable basis.
Therefore, an important challenge and one of the top priorities of banking
sector, is to adapt to the complex regulatory landscape while maintaining
profitability. And let me tell you, this is a big challenge as not only the
number of regulatory changes that banks need to comply with has more
than tripled since the last decade but the scope and complexity of these
regulations have expanded from multiple perspectives.
I will now briefly discuss some of the consequences of the financial crisis
and measures I just described.
- First, while the focus of these measures was to repair banks' balance
sheets and improve financial stability, they also led to contraction of
the cross border lending activities.
- Second, you may all agree that since the Financial Crisis, a partial
reversal in international banking continues as multinational banks
from the developed world have scaled back their offshore operations.
- Third, we have seen that the post crisis profitability of banks has
declined as a result of deleveraging in international banks, a sharp
slowdown in revenues due to lower demand for credit, high cost of
compliance, and various other policy measures adopted by central
banks like the sustained lowering of interest rates.
Ladies and Gentlemen; before we discuss how banks can address these
challenges let me switch to a second theme which is about the
technological and digital revolution that may be threatening the very
existence of banks today. Traditionally, the banking industry has been an
early adopter of technology; they have embraced technology to automate
and consolidate their core banking operations and offer services like the
credit cards. 1970's saw the emergence of SWIFT, enabling rapid and
secure cross-border financial messaging thus speeding up trade and
remittance transfers across countries. During the decade of 1980's and
90's services like the ATMs and Point of Sale terminals started becoming
ubiquitous and central banks implemented large value payment systems
like the Real Time Gross Settlement Systems. But, I think that the banks of
our time have mostly been unable to keep up with the rapid technological
evolution of the post dotcom bubble with regard to innovative product
offerings and enhanced customer experience.
Let me briefly describe some of the technological trends that our banks are
facing today:
First is the rise of internet, Social Media and mobile devices. On one hand
social media allows banks to reach their customers directly in ways that
were not imagined before to offer them a variety of services like faster
payments and instant credits while on the other, negative perceptions
about banks and their services can also spread like wildfire. I therefore will
not be surprised if Social Media becomes one of the most important
sources of systemic risk going forward. But banks can also use these
technologies to strengthen their core functions like collateral monitoring and
investment and lending decisions to manage their risks better. At the same
time, banks can collect and analyze data about the spending behaviours
and other related transactions of their customers to proactively respond to
their growing needs.
Second, there have been tremendous enhancements in tele-density and
mobile broadband coverage while simultaneously the cost of not only these
services but of end user mobile devices has also rapidly decreased.
Customers can therefore afford smart cell phones, watches and other all-
time connected gadgets and by using those can access their bank
accounts, avail financial services and advice, and make payments anytime
from anywhere. Most importantly, they can decide to switch their service
providers as easily as their mobile phone SIMs.
Third, Fintech companies who are small start-ups are using technology to
challenge banks in providing innovative financial services like digital nano
credit, crowd funding, peer to peer lending, online payments and financial
advisory services with enhanced customer experience and in a more cost
effective manner. On the other hand, large tech companies like Apple and
Facebook are using their network power to make inroads in the domain of
financial services thus threatening the very existence of banks themselves.
Regulatory technology companies known as Regtech are offering low cost
solutions to regulatory authorities for compliance purposes. In all likelihood,
we would like to see the formation of partnerships of banks and these non-
bank entities for lowered costs and superior customer experience in the
financial industry.
Fourth is the rise of what is called cloud computing or cloud hosting. These
cloud based arrangements can offer extremely cost effective fully managed
solutions including hardware and software as a service. Businesses now
don't have to worry about high cost of managing their IT or managing the
associated risks rather they can simply outsource them to these cloud
based digital platforms. These platforms are now offering the concept of
"Banking as a Service" or "Digital Banking" which usually runs on
infrastructure provided by a licensed entity and offers services using an
ecosystem of Fintech start-ups. These platforms have the potential to drive
down cost of providing banking services, especially for smaller banks, and
open new opportunities of product innovation and service delivery.
Fifth, advancements in artificial intelligence, machine learning and big data
analytics are set to transform the financial industry in many ways especially
in areas of intelligent customer relationship management systems, fraud
detection and prevention, e-commerce and detection of AML/CFT issues.
Sixth, many of the financial services customers around the world do not
want to go to a brick and mortar branch to open a bank account or even
conduct financial transactions; they would like to be identified, authorized
and served digitally. So regulators and government authorities are now
focusing on instituting Digital on-boarding programs using National Identity
Databases.
Finally, I would like to talk about the emergence of Block Chain technology
that enables customers and financial institutions to be directly connected to
each other without the need of trusted third parties to perform
intermediation functions like settlement and reconciliation. This would mean
that, for example, a security trade may settle bilaterally in almost real time
without the need of a depository function; or smart contracts would
eliminate the need of escrow arrangements in cross border transactions.
While virtual crypto currencies like Bitcoin that run on Block Chain
technology are being frequently mentioned for their, mostly, upward price
fluctuations it is unlikely that they will gain systemic importance as a means
of payment. However, Central Banks can experiment with the Block Chain
technology and consider issuing digital currency of their own. Block Chain
also has the potential to change the landscape of cross border remittances,
trade finance, payments and settlements and identity management, etc. I
am therefore not surprised to see the interest of many large international
banks that are experimenting with Block Chain technology these days and
would like to see banks of our region do the same.
While combination of all these aspects will likely drive down costs for the
banks and help them improve their service delivery and product innovation
capabilities and offer enhanced experience to the customer, we must be
aware that technology has its unintended consequences. These
unintended consequences will primarily be related to consumer protection,
data privacy and money laundering which are easier to camouflage using
sophisticated technology.
I must also mention that banks are facing aggravated challenges relating to
cyber security. During the last decade or so, hackers and cyber terrorist
have gained much superior capabilities of espionage and afflicting damage
and are now targeting the financial industry. The theft of electronic identity
through hacking could wipe off bank accounts of customers causing not
only financial but reputational losses especially to larger banks and their
regulators. The proactive detection and response to these cyber threats
requires not only specialized security infrastructure within the organization
but also enhanced mutual cooperation and information sharing among the
banks.
Since I have discussed various challenges that
Ladies and Gentlemen;
the banking industry is facing and certain worrying developments that are
threatening its performance, let me briefly share with you what we at the
State Bank of Pakistan (SBP) have done so far and plan to do in the future
to transform our banking sector.
In Pakistan, the banking sector constitutes around 74 percent of the
country's financial sector with an asset base equivalent to almost 55
percent of the country's GDP. As such, the stability and buoyancy of the
banking system is of critical importance. Over the years, continuous
improvements in prudential regulations in line with international best
practices and capital strengthening measures have significantly improved
the resilience of the banking system of Pakistan. The Capital Adequacy of
the banking system at 15.6 percent is well above the local and international
benchmarks.
Like elsewhere in the world, SBP has set strengthening the financial
stability regime as one of its key priorities under its Vision 2020. SBP is
also working on adopting Risk Based Supervision (RBS) in order to
advance its current supervisory regime and improve its supervisory
efficiency. We are also looking towards a sustainable financially inclusive
system which can spur socio-economic development in the country.
Recognizing the gaps leading to financial exclusion, we have already
developed National Financial Inclusion Strategy (NFIS) 2020 which lays
down sound foundations for promoting financial inclusion and identifies the
gaps leading to persistent financial exclusion. Our strategic approach to
tackle financial exclusion is focused at creating a proportionate policy and
regulatory framework that addresses sector-specific risks and strategies
regarding infrastructure development and policy interventions - both on the
supply and demand side for development finance sector like Microfinance,
SMEs, Consumer Finance, Agriculture, Islamic Banking.
I am also happy to share with you that Pakistan has one of the most
sophisticated National Identity Systems which is run by a government entity
called National Database & Registration Authority or NADRA. NADRA has
gained international recognition for its success in providing biometric-
enabled identity solutions to all the citizens of Pakistan. The government of
Pakistan undertook a massive initiative to biometrically verify all SIMs
issued in Pakistan and around 130 million SIMs were re-verified using
NADRA's database. State Bank of Pakistan also capitalized this
opportunity by requiring banks to use the NADRA database for digital on-
boarding of customers, especially the unbanked population, and mitigating
the risks relating to Money Laundering and Terrorist Financing. This is a
great example of how technology can be used for not only customer
facilitation but for compliance purposes also.
Due to rapid technological progress, the global financial and payment
landscape is transforming very rapidly. SBP has long recognized the
importance of technology and has been facilitating banks and financial
industry to reap the benefits of digitization. To keep pace with technological
transformation and mitigate the associated risks, SBP has issued various
guidelines encompassing frameworks for Enterprise Technology
Governance and Risk Management, Payment Systems' Designation,
Security of Internet Banking, prevention against cyber-attack, Risk
Management in Outsourcing Arrangements by Financial Institutions, etc.
I am pleased to share that last year SBP facilitated the issuance of our
domestic payment scheme called the PayPak. The encouraging aspect of
PayPak is that it has been issued by a private entity that is owned by 11
private banks thus ensuring full blessing and participation of the private
sector in this payment scheme. Moreover, SBP is developing a National
Payment System Strategy to modernize the clearing and settlement
infrastructure for reducing cost, improving efficiency, enhancing security,
and strengthening its regulatory and supervisory oversight.
SBP is also playing a very important role of facilitator and catalyst and our
doors are open to innovation and innovative ideas. SBP is also facilitating
the entrance of non-banks particularly in payments arena and has issued
Rules for Payment System Operators and Service Providers. We have
seen encouraging response to these regulations and now a variety of non-
bank, digitally enabled businesses have entered or are preparing to enter
the Pakistani market with innovative and customer centric products. SBP
also engages with the Fintechs in the country on regular basis to
understand their business models and facilitate them if required.
Ladies and Gentlemen; keeping in view the discussed challenges and
opportunities, banks need to devise certain strategies that can help them
grow and stay on course. I must say that banks are essentially required to
acknowledge that times have changed and in order to stay competitive they
must embrace technology and forge new partnerships to re-invent their
business models. I will go to the extent of saying that the upcoming age
may become the age of less or even non-intermediation where role of
intermediary institutions like banks and their regulators could become
limited if they don't embrace these changes pragmatically.
Now I will present few suggestions which can help to proactively address
the challenges of the future:
• First, with regards to the global financial regulatory reforms, we need to
be proactive and consider adopting them at an early stage. However,
any implementation needs to be proportional to the complexity of the
financial institutions and the system. While implementing the standards
and regulations relating to AML and CFT we must be pragmatic in our
approach so that growth of banking industry or their customers is not
hampered.
• Second, authorities are now increasingly focusing on improving the
situation of financial inclusion in their respective jurisdictions. Banks and
other players of the financial industry need to come forward and help in
this regard. Without compromising on the basic regulatory
requirements, technology-enabled, risk based approach for assessing
client risk and customer on-boarding may be adopted.
• Third, Central Banks and other regulatory authorities must work towards
creating a strong, robust and ubiquitous payments system with focus on
developing an enabling legal and regulatory environment that is
commensurate with the new technological environment. Some of the
areas to be covered may include, but should not remain limited to cloud
computing, data privacy and protection, cybercrime and formalizing the
role of non-banks including critical service providers in the area of
technology services.
• Fourth, it is important that we place special focus on formalizing the role
of non-banks which include fintechs, Payment Service Providers and
especially Critical Service Providers like technology and telecom
providers because the dependence of financial entities on these players
is becoming critical and their failure may threaten the overall financial
stability. Regulators must especially be wary of issues relating to
consumer protection, data privacy and money laundering arising due to
new and complex partnerships and data sharing arrangements between
banks, fintechs and IT service providers.
• Fifth, banks and the financial industry are facing threats from cyber
terrorists which now have far superior capabilities, and probably a good
knowledge of the internal vulnerabilities. In order to mitigate this risk,
banks will have to pool-up their resources and share their experiences
with each other on regular basis and devise strategies and programs to
counter the threats they face as an industry.
• Sixth, if the industry concludes that block chain enabled services and
their providers will gain more prominence going forward then it is
important to take proactive measures to contain their influence. For
example, smart contracts and their legal enforceability in a court of law,
role of crypto currencies, cross border trade and payments and
customer identity management are some of the areas that I think will be
important to be looked into.
• Last but not the least, continuous capacity building of bankers and their
regulators is the key for growing and thriving in a digital future.
Empowering finance professionals with requisite skills will be necessary
in wake of increasing complexity of global standards and transformation
taking place in financial industry. Financial industry has to adopt
collaborative approach for enhancing professional capacity of their
human capital through local and international solutions to keep pace
with the changing financial land scape. Central Banks must acquire and
enhance the capacity and skill set of their staff especially in areas of
algorithmic based system audits, system integrity & security audit and
data analytics based regulatory compliance skills.
While the challenges are huge, I have full confidence in the skills and
abilities of banking community in our two countries. I am sure that you will
adapt to the changing realities of times ahead, take these challenges as
opportunities and deliver the best of best to citizens of your great country.
Ladies and Gentlemen; In the end, I would like to once again thank the
Central Bank of Sri Lanka and the Association of Professional Bankers -
Sri Lanka for inviting me to deliver the Keynote Address for this year's
Annual Convention.
Thank you for your attention!