Financial regulations should be perfected before implementation, as both over and under-regulation cause economic crises, according to Finance State Minister Mahinda Samarasinghe, who was speaking at the 10th Asian Forum of Insurance Regulators (AFIR) held in Colombo this week.
“In the pursuance of regulation, it is vital that the regulator gets his policies right the first time round. The effects of over regulation have blighted the growth prospects of this continent for decades,” Samarasinghe said.
Sri Lanka’s financial regulations are considered to be somewhat tight, ensuring a clear-cut financial sector.
However, the regulations have made it hard for small and medium enterprises, as well as individuals to borrow money and grow, while the system’s processes have become sluggish and financial institutions are forced to innovate within the constrains.
The government is attempting to digitalize the process to speed up the system, while key officials in state-owned financial entities are attempting to introduce innovations in line with international practices to modernize the regulations, the success of which would depend on how dynamic the upcoming government would be.
Meanwhile, Samarasinghe cautioned against under-regulation as well. Sri Lankan banks were spared the effects of the 2008 financial crisis due to stricter regulations.
“The effects of lax regulatory standards have resulted in financial meltdowns of monumental proportions,” he added.
While under-regulation fosters innovation, it could also cause newer and possibly unethical behaviours to surface in financial institutions, causing the regulator to play catch-up.
Therefore, Samarasinghe said that the regulator is faced with a near-impossible task. “There is great onus on the regulator to be both streamline and flexible on one hand and prudent and circumspect on the other hand,” he noted.
He said that regulators could learn from cross-border dialogues and said AFIR is an ideal place to share knowledge. “The strengthening regional co-operation among member states’ insurance regulation, the AFIR can provide regulators with a platform to meet and exchange views on insurance regulations. We can all, in effect, learn from each other,” he further said.
Samarasinghe added that while the insurance industry is an integral part of the financial system of any country, Sri Lanka’s insurance market is small compared to many in Asia.
However, he noted that the continuing urbanization of the country will make the industry grow.
Sri Lanka is facing a low market penetration in life and health insurance markets. (CW)