Individual Assignment: Blockchain Technology in Sri Lankan Finance

This individual MBA assignment report examines the application of blockchain technology within Sri Lanka's finance sector. It begins with an overview of blockchain technology, its benefits such as enhanced transparency and reduced costs, and then explores its potential within the Sri Lankan cont...Read More

Individual Assignment
Use of Blockchain Technology in the Finance Sector of
Sri Lanka
MBA/22/6281 I.D.K. Eranga
Sub Group No.: D-2
Word Count: 2035
Course: MBA 508 : Managerial Finance
Instructor : Mr. Tharindu Ameresekere
Term : April – June 2022
Postgraduate Institute of Management
University of Sri Jayewardenepura

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Declaration
I intend to submit this assignment as the Individual Assignment for the subject, Managerial
Finance of Master of Business Administration and I hereby declare, that my assignment is
entirely original and that the work, or a portion of the work, has not been submitted more
than once. Additionally, I accept that I am aware of the University's academic integrity
policy and regulations, as well as the disciplinary guidelines and procedures that apply in
the event of a violation of regulations and policies, as specified in the disciplinary policy
and regulations of the university.
………………………
Date: 08/06/2022

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Table of Contents
1. Introduction .................................................................................................................. 1
2. Blockchain Technology ............................................................................................... 1
3. Benefits of Blockchain Technology ............................................................................ 2
4. Blockchain Technology in Sri Lanka .......................................................................... 2
4.1 Blockchain in Trade Finance ................................................................................ 4
4.2 Blockchain in Cross-Border Payments ................................................................. 4
5. Challenges in Implementing Blockchain Technology in Sri Lanka ............................ 5
6. Conclusion ................................................................................................................... 6
7. References .................................................................................................................... 7

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1. Introduction
Blockchain technology has changed the way organizations store and access data. Its unique
characteristics of traceability and immutability are disruptive factors in a vast variety of
sectors. This research report analyzes strategies used in similarly developing and frontier
Asian countries to understand the advantages of blockchain development in Sri Lanka.
Following that, the report analyzes the banking and finance sector in particular to see how
blockchains can improve operational performance, minimize transaction time, and generate
cost savings. While doing so, we look at where Sri Lanka falls behind the competitive
market and what strategies to be implemented to close the gap.
2. Blockchain Technology
In 2008, blockchain emerged as the foundation of the Bitcoin protocol. Bitcoin's integration
between encryption and distributed infrastructure allows value transactions to proceed at
the same rate as internet data transfers. While this was first confined to supporting "spot"
transactions, emerging protocols such as Corda and Ethereum ultimately permitted users to
set conditions for future value transfers. Then, businesses, notably those in the financial
services sector were interested.
A blockchain is a new form of database that decentralizes data storage and access.
Blockchain is a network of databases that allows individuals to create, publish, and store
information securely. A blockchain record every transaction or exchange, creating a
timestamped database of information. Blockchain allows efficient auditing, tracing
and tracking as well. Immutability is blockchain's biggest advantage. Immutability is built
into blockchains since every record is co-located with every node or participant in other
words. Changing a record's data would require changing every part of the record at many
locations in the network. If one node's "copy" is tampered with, the other nodes will not
accept it. Blockchains are harder to manipulate than centralized databases.
Despite traditional databases, blockchain's unique features provide considerable financial
advantages such as reduced time in various processes, operational and maintenance costs,
increased security reduces compliance, audit, and other related expenses. Automation will
reduce labor costs as well (Seneviratne et al., 2019).

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3. Benefits of Blockchain Technology
Transparent records and a single source of truth increase efficiency. By synchronizing
ledgers across computers, blockchain may reduce the need for reconciliations.
Transparency has additional advantages. In trade finance, all parties can observe when
items have been dispatched and review all transaction processes in real time, which can
reduce settlement time.
Data integrity enhancements can reduce data loss. Blockchain's immutable records can
increase data security and accuracy, minimize fraud risk, and demonstrate compliance via
an audit. By putting supply chain information on a blockchain, businesses may eliminate
fraud and mistakes, enhance inventory management, identify problems faster, reduce
paperwork delays, and build confidence among all the parties involved.
Faster processing means happier customers. By adopting blockchain to exchange
information with customers and suppliers, organizations may be able to capture sales
opportunities and cater to those needs more efficiently. Blockchain can provide integrated,
accurate customer data accessible to all members of the network.
Blockchain, via consensus protocols and smart contracts, may reduce the amount of time
money is held up during a transaction, instead of initiating an automated transfer of cash
based on a pre-defined set of conditions. Blockchain will also reduce transaction costs by
eliminating the dependency on third parties (Seneviratne et al., 2019).
4. Blockchain Technology in Sri Lanka
The services sector, which accounts for the majority of Sri Lanka's economy, also provides
a significant opportunity for blockchain technology. The service sector, in contrast to other
sectors, is quite diversified. The value chains, supply networks, and business models used
by its sub-sectors are substantially diverse from one another. In light of this immense
variety, this report will analyze the subsector of the financial sector that is particularly
concerned with banking and finance. Since the beginning of this decade, this has outpaced
the expansion of any and all other significant sub-sectors. In addition, the finance sector is
leading the way in terms of innovation brought about by blockchain technology in
developing countries. It often functions as the major "technology incubator" for blockchain,
and the finance sector in Sri Lanka.

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Blockchain technology has a major impact on the financial sector across the world. The
world's largest financial institutions are undertaking several PoCs (Proof of Concepts) to
evaluate potential blockchain applications across various industries. Because of the
intrinsic benefits, blockchain solutions offer significantly better efficiency in payment
processing and automation, increased security, and reduced labour costs has a direct impact
on the company's profit and loss statements. Recent research conducted by Accenture and
McLagan revealed that potential savings of 70% can be achieved in investment banking
operations such as payments and cash management, inventory, collateral management,
clearing and settlement (Accenture Consulting, 2022).
Peers have identified multiple benefits of implementing blockchain technology and are
collaborating to create an environment that supports innovation for this technology. As the
finance sector depends heavily on the flow of money, the biggest value contribution will
be realized only if institutions collaborate to establish a shared blockchain architecture.
Compared to other sectors, the finance sector gains far less value from deploying
blockchain in existing internal databases. This difference is significant. As a consequence,
financial institutions are pushing significant efforts to establish blockchain-based
collaborations. A notable example is India's BankChain. It was established in February
2017 as a consortium of 37 banks working together to investigate blockchain technologies
(Seneviratne et al., 2019).
Sri Lanka's closest competitors also stepped to the challenge. Five major banks
in Indonesia including Bank Danamon, Bank Rakyat Indonesia (BRI), Bank Negara
Indonesia (BNI), Bank Mandiri, and Bank Permata are partnering with IBM to establish a
blockchain platform specifically for banks. Members of APFII (Advanced Pacific
Financial Infrastructure for Inclusion), a public-private collaboration that was originally
funded by the United Nations and SWIFT (Society for Worldwide Interbank Financial
Telecommunications) are now using the network. It was estimated to handle up to 60% of
all cross-border payments in the South Pacific region by early 2019. Fourteen banks in
Thailand including Siam Commercial Bank, Bangkok Bank, Krung Thai Bank, and
Kasikornbank are working together to digitize letters of guarantee for state-owned
organization auctions using a common blockchain. The system uses IBM's Hyperledger
Fabric technology and was tested in the Thai Central Bank (Milano, 2018).
While Sri Lanka has made some progress in this area, there is still a need for improvement.
However, Sri Lankan banks are still lagging behind international peers when it comes to

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large-scale collaborative initiatives. In order to go further, this research report has selected
two sub-sectors that have successfully used blockchain technology in the form of payment
settlements and trade finance.
4.1 Blockchain in Trade Finance
Two major service sectors wholesale and retail trade and banking mainly use trade finance.
According to the Asian Development Bank (ADB), the global trade financing deficit was
USD 1.5 trillion in 2016. Increased regulatory requirements, lack of collateral, and a
recorded history of commercial and financial activities make it harder for SMEs to acquire
trade credit. 57% of SMEs' trade-credit requests are denied, compared to 10% for
multinationals. Facilitating SMEs' access to trade credit is vital for developing countries
like Sri Lanka (Seneviratne et al., 2019).
Letters of credit (LCs) depend on manual, paper-based operations, which slow down trade
transaction processing. Authentication prevents fraudulent transactions. Deloitte's
blockchain technology enables cross-border LC transactions between an Indian private
bank and a Singaporean financial services provider. The bank reduced issuance time from
20-30 days to a few hours and enhanced transaction details visibility. Sompo Japan
Nipponkoa and Marubeni Corporation's blockchain initiative between Australia and Japan
improved all trade-related operations, from issuing LCs to transmitting trade papers
through IBM's Hyperledger Fabric. Reduced labour costs, Reduced transmission time for
trade papers, and improved transparency are key advantages (Sengupta et al., 2022). This
project also revealed blockchain's bottlenecks. Both sides need blockchain systems. Both
systems must be compatible with each other. Success requires standardized blockchain
platforms at an international level. Again, success required close collaboration and research
conglomerates.
4.2 Blockchain in Cross-Border Payments
Payment authorization and settlements are significant use cases for blockchain due to its
transaction-based structure. Ripple is a real-time gross settlement, currency exchange, and
remittance network used by banks in both developed and developing countries. According
to Ripple, banks can save payment operation costs by 48%, 33% on international payments

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by reducing liquidity costs by 65%, and Basel III compliance costs by 99%. Ripple-like
blockchain technology could reduce additional costs and make faster remittance transfers
for Sri Lankan citizens residing overseas who sends money for their loved ones in Sri
Lanka. In Vietnam, blockchain-powered OKLink launched real-time transactions. The
software can transfer $10,000 to a Vietnamese bank account for a delivery fee of 0.5% in
30 minutes (Fintechnews, 2017).
Sri Lankan banks are starting to try out the technology on their own without any
partnerships. Sampath Bank introduced Sri Lanka's first payment system based
on blockchain in June 2018, gaining 70,000 users at launch. Sampath "iGift" is an
application that allows all bank account users to send a certain amount of money to anybody
on their smartphones' contact lists through a blockchain-based system (Sunday Times,
2018).
5. Challenges in Implementing Blockchain Technology in Sri Lanka
The Central Bank is analyzing PoCs and assessing blockchain implementation possibilities
and challenges. Local startup initiatives such as iLoan (online loan platform) and Tracified
(agriculture supply chain platform) are utilizing blockchain technology to deliver distinct
services to customers.
No defined laws exist at the moment to regulate blockchains. Private blockchains are
considered just an alternate database. Each blockchain installation should meet or exceed
the old system's regulatory standards. Blockchain regulations restrict public cryptocurrency
transactions. Political instability is another concern for blockchain in Sri Lanka and other
developing nations as well. Following key challenges can be identified when adopting
blockchain technology in Sri Lanka (Fintechnews, 2016).
Lack of education - Many local institutions do not recognize blockchain or misinterpret
it. Conducting forums and organizations are key to spreading awareness of this technology.
Incompatible legacy IT infrastructure - Several businesses and sub-sectors need IoT
ecosystems to fully benefit from blockchain. Organizations such as banks may be reluctant
to implement blockchain due to the requirement to rebuild their existing infrastructure.
Corruption - Implementing fraud and crime tracking systems risks backlash from parties
with opposing interests. Strong government and public support will be needed.

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6. Conclusion
The implementation of blockchain technology will provide various advantages for Sri
Lanka. The characteristics of decentralization and immutability of blockchain technology
should have a significant impact on industries with complex finance processes, which is
most probably to generate short-term opportunities due to the relatively lower demands on
complex infrastructure deployments and the shorter implementation time
periods. Blockchain innovation has the capacity to enhance the negotiating power as well.
Financing, manufacturing processes, and logistics have the potential to gain the most using
blockchain technology. However, blockchain's fullest potential cannot be achieved due to
the inadequate IoT ecosystem (Kosala et al., 2021).
As discussed in this research report, the rapidly expanding banking and finance sector
can gain a great deal from blockchain deployment, with significant cost savings and in
terms of efficiency. Nevertheless, sector-wide collaboration is necessary. The majority of
local banks are awaiting the Central Bank's decision before moving further with blockchain
implementation. Therefore, we think that collaboration inside the limited competition
among major banks and financial institutions will provide long-term benefits in order to
maintain sustainability along the journey.
Locally, blockchain technology faces many challenges as discussed. There were legal
concerns, lack of knowledge in the field, government engagement, the expenditure
on technology, tax issues, and lack of investment can be identified as some of the
challenges. The government laws and regulations can reduce legal issues, tax concerns,
and as well as government enthusiasm. The government can impose laws and regulations
for blockchain technology and allow cryptocurrency transactions. Purchasing a blockchain
system from a software developing company will eliminate the lack of understanding and
costs associated with the technology. Using blockchain technology for pilot projects, it is
possible to handle low investments and change public opinion as well. This will motivate
investors to invest in blockchain technology. Accordingly, the outcomes of this blockchain
technology might aid in resolving a number of financial concerns while also enabling the
Sri Lankan finance sector to digitalize its future.

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7. References
Accenture Consulting. (2022). Banking on Blockchain : A Value Analysis for Investment
Banks. Accenture Consulting.
Fintechnews, Singapore. (2017, January 13). Blockchain Remittance Platforms Enters
Vietnam. Retrieved from www.fintechnews.sg:
https://fintechnews.sg/7915/vietnam/blockchain-remittance-platforms-enters-
vietnam/
Fintechnews, Switzerland. (2016, November 18). 87% of Financial Market Participants
Say Blockchain Will Disrupt The Industry. Retrieved from www.fintechnews.ch:
https://fintechnews.ch/blockchain_bitcoin/deutsche-bank-survey-87-of-financial-
market-participants-say-blockchain-will-disrupt-the-industry/8174/
Kosala, H., Francis, M., & Sirimewan, D. (2021). Applicability of Blockchain Technology
to Manage Financial Issues in the Sri Lankan Construction Industry. The 9th World
Construction Symposium.
Milano, A. (2018, 03 20). 14 Thai Banks Back Blockchain Platform to Digitize Contracts.
Retrieved from www.coindesk.com:
https://www.coindesk.com/markets/2018/03/19/14-thai-banks-back-blockchain-
platform-to-digitize-contracts/
Seneviratne, G., Hemantha, W., & Hameed, N. (2019). Exploring Blockchain
Implementation in Sri Lanka. Moody’s Analytics, Inc.
Sengupta, R., Joshi, G., Ignatius, G., Chatterjee, S., & Karanjia, B. (2022). Trade financing
redefined using blockchain technology. Retrieved from
https://www2.deloitte.com/:
https://www2.deloitte.com/in/en/pages/strategy/articles/trade-financing-redefined-
using-blockchain-technology.html
Sunday Times, T. (2018, June 24). Sampath Bank launches SL’s first blockchain-based
banking solution. Retrieved from www.sundaytimes.lk:
https://www.sundaytimes.lk/180624/business-times/sampath-bank-launches-sls-
first-blockchain-based-banking-solution-299008.html