before? ” but it is necessary to remember that sooner or later and those who have not attended to as yet, will be required to replace or integrate their core banking systems, given the rapid changes that are taking place in banking services as well as it developments. 9. 1. 4 a core banking system replacement as part of a business transformation is not a minor task. however, the potential benefits include doubling of revenue growth owning to increased differentiation, cross sales, retention of high value customers, improved credit quality, speedy product creation and through enhancement of access to finance by vulnerable groups. it will also reduce annual it costs including simpler application, optimization of hardware configuration and back office automation. moreover, it would enhance reputation with clients and investors with exact regulatory compliance and better results in risk and financial management. 9. 1. 5 the effects of using ageing core banking systems were revealed by several surveys conducted on banks in europe, asia / pacific and north america in 2001. given heavy reliance on manual processes that hamper productivity, banks in the asia / pacific region have indicated that they spend 48 % of their time on back office activities. north american and european banks spend a significantly lower amount of time on back office activities, ranging from 34 - 36 %, respectively. although the survey results are fairly old and things have changed dramatically since then, there is a clear call for modernized and integrated core banking solutions. the more encouraging news is that a significant number of banks around the world are planning major core banking replacements over the next few years. banks, which have done comprehensive changes can relax, at least in the near future. 9. 2 use common or shared systems instead of propriety systems 9. 2. 1 it is also noted that, currently, an overwhelming majority of large banks in europe and the asia / pacific region are running propriety systems. this percentage is expected to decline over the next few years, as banks tend to move towards vendor provided common solutions. many sri lankan banks take pride in operating their own propriety systems, which may not be sustainable in the future. there appears to be reluctance on the part of the banks to move to common switches, common platforms or shared systems. this is partly because of the inordinate fear of one bank peeping into another ’ s operations, huge sums already spent on propriety systems or due to pressure from the staff or management to retain existing and workable systems. as long as these reservations exist and there is reluctance to use common or pooled

devising appropriate decisions for maintaining financial system stability. going forward, there is an overarching need to amend the banking act to ensure that the banking sector is guided by legislation which sufficiently accounts for the change in the sectoral landscape and the challenges that may arise as the sector rapidly grows and evolves, across the country and beyond. the central bank is proactively working with all relevant stakeholders of the banking sector and looks forward to finalising a new banking act in the near - term. strengthening the regulatory and supervisory framework for the banking sector remains at the centre of our financial sector policy. as such, we are continuing to upgrade and enhance the bank examination methodology to ensure that the focus of examinations is not entirely a rule - based one that concentrates only on compliance, but also one which gives due consideration to the efficiency, effectiveness and sustainability of individual banks and the entire banking sector. accordingly, initiatives are underway to assign ratings to banks based on a combination of quantitative and qualitative indicators that will assess their efficiency and sustainability. during the course of this year, we expect to finalise the bank examination methodology based on the bank sustainability risk index ( bsri ) to facilitate the transition from an annual ‘ on - site ’ examination approach to a ‘ risk - based ’ supervision approach. further, we intend to incorporate bsri to examination reports of all licensed banks and assign a supervisory rating grade for banks with effect from 2019, on a staggered basis. banks have also been engaged in the implementation of basel iii capital standards and implementation is to be completed by 1 january 2019. while banks have been working on the improvement of their capital adequacy ratios, a capital conservation buffer and a surcharge on domestic systemically important banks have been imposed to ensure that banks actively build capital buffers. the direction to increase the existing minimum capital requirements was targeted at improving the quality of capital to ensure that these buffers are of a more resilient nature. this will help safeguard the banking sector during periods of excessive credit growth and / or adverse economic conditions. it will also minimise the systemic risk arising from the interconnectedness among banks. under the basel iii guidelines, banks will also be required to comply with guidelines regarding a net stable funding ratio with due consideration to the composition of their assets and off - balance sheet exposures. a consultation paper has already been issued to banks in this regard and the relevant standard is to be implemented during this year. the leverage ratio is also to be introduced as