{"id":103324,"date":"2020-06-08T16:48:21","date_gmt":"2020-06-08T23:48:21","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=103324"},"modified":"2020-06-08T16:48:21","modified_gmt":"2020-06-08T23:48:21","slug":"the-central-bank-should-take-responsibility-for-finance-companies-under-its-administration","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2020\/06\/08\/the-central-bank-should-take-responsibility-for-finance-companies-under-its-administration\/","title":{"rendered":"THE CENTRAL BANK SHOULD TAKE RESPONSIBILITY FOR FINANCE COMPANIES UNDER ITS ADMINISTRATION"},"content":{"rendered":"

BY EDWARD THEOPHILUS<\/strong><\/em><\/span><\/h2>\n\n\n

A\nrecent statement of Mr. Mahinda Rajapaksa, the Prime Minister of Sri Lanka has\nstated that the responsibility for the failure of the finance company must be\ntaken by the central bank as the company has been under its administration.  I am fully agreed with the statement of the\nprime minister and would like to analyze why the central bank should take\nresponsibility. Theoretically, the statement of the prime minister is based on\nthe point that the account administration of the finance company and\nconsidering the finance regulations introduced in the country. If there were\nregulations to prevent bankruptcies of finance companies what were the causal\nfactors for the insolvency of the finance may be a question of depositors. There\nmay be other reasons that could not publicly state such as the political\ninfluence and other dishonest relationships may be associated with the issue. I\nhave no idea to look into such points.     <\/p>\n\n\n\n

As\nI reiterated many occasions by posted articles in the Lankaweb the Central Bank\nas the regulatory authority of the financial system of Sri Lanka must take the\nresponsibility for the regulatory role and administrative strategies that have\nbeen applied to manage the finance company ltd after the undertaking of the\ncompany.<\/p>\n\n\n\n

 In the early stage, although the Central Bank\ntreated as the banker to banks it had not performed regulatory responsibilities\ntoward non-bank financial organizations. Later, when the market dynamic came to\nlight the Central Bank was given more power to regulate finance companies. Were\nthe power given by the new laws suffice to rescue might be an additional\nproblem associated with the problem.  <\/p>\n\n\n\n

Under\nthe regulatory responsibilities, the Central Bank\u2019s role was to supervise the\noperational activities of the finance companies. Was the Central Bank given\nsufficient power by new legislation and required muscles to manage finance\ncompanies is another question? The original law of the Central Bank gave the\nspecific role on account of the trading banks and was the same authority given\nto control the finance companies is not clear to analyze the role of the\nCentral Bank\u2019s power towards the non-bank financial institutions.  The extent of the Central Bank\u2019s power has\nnot clearly defined and the role of the Central Bank appeared confusing. The\nregulatory framework adapted after the bankruptcy of the finance ltd disclosed\nthat the regulation adopted by the Central bank was not sufficient to prevent\nthe insolvency and after the bankruptcy of the company the Central Bank has a\nlittle option and to play the receivership role. The most vital role was to\nprevent insolvency rather than taking action after bankruptcy.  <\/p>\n\n\n\n

In\nthis stage, it needs to understand that the management responsibilities of\nfinance companies are vested with the company directors and general management.\nRegulatory advises of the Central Bank usually direct the company management to\nconsistent with the advice which would be dependent on the finding after a\nregulatory audit.  For example, if the\ncentral bank identified the finance company was operating without sufficient capital\nto contain the risk of company financial assets in such a situation the central\nbank should have advised to maintain adequate capital to cover the total risk\nassets. Practically, increasing the quantum of capital might be confusing\nadvice, and deposit holders may not know the advice with a view to responding\nagainst the regulatory advice of the Central Bank.   <\/p>\n\n\n\n

The\nbank directors should have contributed the additional capital requirement or\ntransfer annual profits to reserves or convert deposits to the capital with the\nconsent of depositors. In that way, the regulatory advice should have directed\nto the finance company management, which is responsible for compliance and\nthere is no evidence for depositors whether the Central Bank played the right\nrole to protect depositors.  <\/p>\n\n\n\n

Did\nthe Central Bank play such a role as the regulatory authority?  The statement of the prime minister implied\nthat the Central Bank had not played the regulatory role. If the Central Bank\nhad been played the regulatory role the failure of the finance company could\nhave prevented or minimized. If the professional role had not been played by\nthe central bank it must take responsibility for the failure.  The management of the Central Bank (the\ngovernor, members of the monetary board, and the executives of the central bank\nare personally responsible for the breach of trust and this type of harsh responsibility\nhas not been insisted over the executives of the Central Bank before. <\/p>\n\n\n\n

According\nto the freedom of information customers of the finance company (Deposit holders\nand Credit Customers) have a right to obtain information about what kind of\nregulatory role was played and advice was given by the Central Bank to the\nfinance company. Generally, the advice of the central bank to the finance\ncompany treat as confidential and the court can decide to what extent\ninformation could be released to customers and government authorities such as\ncompany registration, taxation, and others.  \n  <\/p>\n\n\n\n

This\nwas an issue in many countries such as Australia, England, and Canada and\nduring the early 1980s in other countries, and such countries have changed\nbanking laws and regulations. In Sri Lanka, finance law and regulation have not\nbeen changed by various governments elected to the office. Why it was delayed,\nmight be a question to the public.  <\/p>\n\n\n\n

Banking\ntexts published in Sri Lanka and overseas pointed out the management issues of\nNon -Bank financial institutions and it is difficult to see that educated officers\nin the Central Bank informed the government to change the existing legislation\nto adopt the new environment. <\/p>\n\n\n\n

The\nother point raised from the statement of the prime minister is that the Finance\nCompany was undertaken over by the Central Bank and at this stage, the Central\nBank has been responsible for the entire administration (company management and\nconsistent with the compliance of the regulatory authority) of the finance\ncompany. The nature of the transaction is similar to receivership, which has\nbroader responsibilities like the owner of the finance company. Under the\nreceivership, the central bank has limited options and the best option is to\npay depositors a reasonable amount liquidating the company.  The statement of the prime minister implied\nthat the Central Bank has not performed due responsibilities to take out the\ncompany from the management mess and the prime minister stated that on that\nground the central bank is responsible for the failure of the finance company.   The Executive Officers of the Central Bank\nhave no practical experience in financial institution management though they\nhave higher degrees of finance subjects.<\/p>\n\n\n\n

Customers\nof the finance company must take responsibility for their deposits.  They were not risk-averse customers and they\nloved to take the risk to make higher returns than the interest yield offered\nby trading banks of the country. As a strongly Buddhist country, customers\nshould have concentrated the teaching of Lord Buddha on the desires.  <\/p>\n\n\n\n

The\ngovernment of Sri Lanka needs to develop policies for finance company\nmanagement and operations and I would like to point out some vital areas.<\/p>\n\n\n\n

  • The registration of a\nfinance company should be based on five-pillar factors ( (a) Industry\nEnvironment of the finance industry, (b) Competitive Position of the proposed\nfinance company based on the industry average and the proposed company\n(environment and standards of the proposed company), (c) Operational Knowledge,\nExperience, Skills, and Capability of the management, vision, mission, and\nobjectives of the management. All these called management quality of the\nproposed company ( d) the Volume of paid-up capital and the quality of existing\nassets of the company (e) Accounting Quality of the proposed company).<\/li>
  • Before registration of a\nfinance company, it needs to ensure that the company chairman and directors\nhave contributed more than 50% of paid-up capital from the authorized capital.\nDebt capital or preference shares should not allow at least 7 years of successful\noperations. The Central Bank needs to insist to transfer a least 10% of annual\nprofits to reserves of the proposed company. <\/li>
  • The Central Bank should\ntrain the proposed finance company management on setting rates of interest for\ndeposits and debt finance (credit extension, leasing, Jewelry mortgages,\nPromissory Notes, floating and fixed charges, fixed and others) based on the\nprime rate of the Central Bank and contain the risk.  The highest risk factor of finance company\nmanagement in Sri Lanka is the rate of interest (for deposits and charge).  The practical experience indicates that\nfinance companies cannot offer higher rates of interest for deposits over the\ninterest offered by trading and saving banks to attract more deposits\nmisleading customers and charge a higher rate of interest from borrowers, who\ncannot afford a high rate of interest.<\/li>
  • The intention of\ndirectors and the past behavior of them must be checked for more than ten years.<\/li><\/ul>\n\n\n\n

    Sri\nLanka has sufficient finance companies and many companies need to merge,\nsometimes may need to merge with hostile bids.<\/p>\n\n\n\n

    It\nis clear that the Central Bank has a massive regulatory role and it should not\nplay an operational role in the market like superannuation management, rural\ncredit, and others.  It is a conflict of\ninterest and legally wrong. <\/p>\n","protected":false},"excerpt":{"rendered":"

    BY EDWARD THEOPHILUS A recent statement of Mr. Mahinda Rajapaksa, the Prime Minister of Sri Lanka has stated that the responsibility for the failure of the finance company must be taken by the central bank as the company has been under its administration.  I am fully agreed with the statement of the prime minister and […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[124],"tags":[],"class_list":["post-103324","post","type-post","status-publish","format-standard","hentry","category-edward-theophilus"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/103324","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=103324"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/103324\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=103324"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=103324"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=103324"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}