BY EDWARD THEOPHILUS

The major crisis in the banking and finance sector in Sri Lanka has been the shortage of capital in individual corporates since the early 1960s and the control mechanism in the regulatory authority (Central Bank) had little understanding and the capability of forecasting on the control requirements.  Regulatory reviews for the efficiency, despite the limited legal provisions in the banking act animated slowly and the permission to take necessary initiatives for required legal and regulatory changes discouraged by the less competitive market environment. Since the establishment of the People’s Bank, nationalization of partly private ownership of Bank of Ceylon, the establishment of Hatton National Bank and Commercial Bank that established converting Eastern Bank, capital issues had been in the banking and finance market, but they were not openly seen. The operational results of the market from 1960 to 1978 did not indicate how the problem expanded and traditional and quantitative control measures of central bank disciplined the players in the market without relegating to obscurities. 

Originally, the enactment of Central Bank did not permit to touch non-bank financial institutions, but unexpected failures reported in non-bank financial institutions after 1970 forced Central Bank to take little initiatives in the regulatory environment. When the regulatory authority has been seen actual results of the market economic policy on liberalizing banking and financial regulations after 1978, Central Bank had to open eyes.  Many foreign banks invaded /embarked to the market and some organizations departed after 1983 without clear explanations for the departure.

Capital crisis in the finance and banking sector has been developing in many countries and off-balance sheet items such as exchange contracts, insurance contracts, financing items for stock dealings and leasing items in corporate banking or non-bank corporates reflected developing risks. Bank for International Settlements begun insisting international regulation for capital requirements based on risk-weighted assets in individual trading bank organizations in the early 1980s and late 1980s Sri Lanka also had to accordant with international regulations. Sri Lanka’s executives of the banking and finance sector had little understanding of the capitalist crisis as they were in a misunderstanding of bank management and international practices or strategies relating to capital management in corporate institutions.

There were many reasons for changes in the regulatory environment and the major issue of the market was a regulatory weakness to maintain good capital structure in individual organizations. Many trading banks and non-bank financial institutions in developed countries without adequate capital to deal with the market risk and the most effective policy action in the developed world were to allow mergers and acquisitions in the sector.  It was observed in the UK, USA, Australia, Canada, and others, besides, many governments allowed mobilizing equity and debt capital using a variety of techniques. Failures of banks in the late 1990s (Asian crisis) and the crisis created in the first decade of 21^st century in the US banks and others further echoed the capital crisis to a global level and forced toughen BIS regulations

Sri Lanka’s economy faced uncontrollable inflation, which was a combined theory of cost-push, demand-full theories of H.G. Johnson and the Quantity Theory of Money presented by Milton Friedman resulting in the market economic policies and the LTTE war.  In this weak environment central bank permitted to establish many trading banks and non-bank financial institutes and why the central bank promoted such a policy while it was looking international banking crisis (Asian Credit Market) was a question and did so-called banking experts, retired non-Sinhala bank executive pressure to allow establishing such organizations? 

While remaining capital crisis in the sector the government permitted to establish new banks and non-bank financial institutions in Sri Lanka and my opinion at that time was the government worked without understanding the market trend in the country and the developments of the international level. There were uneducated non-Sinhala bank executives with dishonest elements in the banking and finance sector and the regulatory authority allowed such personnel to rob the sector without understanding possible consequences to the financial system. Later central bank bond crisis reflected that the non-Sinhala executive circle was secretly working in the financial system of Sri Lanka with a dualistic aims, to create troubles in the system and cheat the system to gain undue enrichment, and Mr. Gotabaya Rajapaksa has an unambiguous responsibility to eradicate dishonest finance executives circle in government own banking organizations.

Economic liberalization began before and after the cold war and many countries in the world including India concerned about the international crisis and developments of the sector. If Sri Lanka ignores the capital crisis in the bank and the dishonest nature of non-bank finance sector, there is no doubt that it would not give freedom to Mr. Gotabaya Rajapaksa to launch the country to a developed nation.  There is no harm allowing the domestic capital of Sri Lankans to the banking and finance sector as the experience had through Industrial Zaibutshu in Japan.  However, the privatization of government assets is not the government policy and the president of Sri Lanka in his policy speech at the opening of the parliament in January 2020 clearly stated that selling government assets to foreigners is not his will, but he did not reject the rights of Sri Lankans and their ability to contribute to capital structure of government institutions. Alternatively, the government may allow for mergers and acquisitions as a temporary measure. There is no doubt that the economy of Sri Lanka will rapidly expand during the next ten years.  There may be internal or external shocks to the economy and in such a situation Sri Lanka needs several banks to hold domestic and international assets and Bank of Ceylon and Peoples’ Bank can be worked as megabanks with strong capital and business base.

Megabanks can go to regional level constructing high rise buildings at the regional level with a network of rural branches supporting for decentration of urbanization providing all finance and other government and private company services to rural people uplifting rural life. The megabank concept would demonstrate the stability and exalted strength of the financial system of Sri Lanka to foreign investors in creating a less risky environment.

If small banks don’t agree with megabank concept, megabank can make hostile bids and make acquisitions and create synergies and eliminate financial bullshits such as no interest lending supporting religious divisions in the country.