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By Ravishanka Withanchchi
It is often said that the combined asset base of the banking system of the country have surpassed Rs. 5 trillion which is a sign of the strength of the country’s banking system. But are our banks sufficiently supporting the economic activities of the country to thrive?
Firstly Sri Lankan banks avoided and escaped the dire consequences of the financial turmoil triggered in 2008/09 largely because they were not indulged with complex financial instruments and activities such as hedging and derivatives, as happened in the US and other Western countries. Therefore, although our banks are smaller in size compared to the Western and US banks, because of the domestically driven operations and minimal exposure to overseas operations and financial transactions they were largely
resilient to external shocks.
It is true that many Sri Lankan banks have shown unprecedented growth over the past years becoming a pivotal role in the economy. Financial assistance of the banking system had been extended to the many successful projects and entrepreneurs of the country in the past and even present many projects and development activities are being kicked off with the financial support from leading banks in the country.
However, time has come for banks to focus more on the economic sectors that have been largely ignored by the organized banking sector such as agriculture and emerging new industries. Although the state banking sector has given some financial assistance for the agricultural sector, the participation of the private banks has been minimal and this has led the farmers and other crop cultivators being victimized by the unorganized and even unauthorized money lenders and institutions. There are many reasons associated with the reluctance of the private sector commercial banks to provide financial facilities to the agricultural sector.
Firstly most farmers cannot offer collaterals against any loans and they also cannot guarantee a reasonable repayment plan of the loan due to the uncertainty of the natural events and other inherent risks associated with the agricultural sector. However commercial banks with their high financial literacy can take a step forward by designing new financial facilities and products exclusively for the agricultural sector. Although there might not be short term profits associated with the above strategy the long term gains and benefits will surely weigh much more.
Also it is high time for banks to shift a little bit from the traditional commercial banking activities and to engage more on development banking. In development banking banks would become just not lenders for businesses but stakeholders in enterprises and business. Although development banking is more riskier than conventional commercial banking and long term in nature, this would undoubtedly derive more returns for banks than by engaging in traditional lending activities. Banks can establish separate entities to exclusively deal with the purpose of development banking and other venture capital financing activities possibly through collaboration with other non banking financial institutions. Since development banking has still been remaining a largely untapped segment in the country’s economy, any bank which is entering this field would gain a first mover benefit and the competitive advantage.
Also there is a tendency for banks foraying into new business lines such as pawning and leasing which are non banking activities. Currently there are lot of non-banking financial institutions in the country that offers these services and the entry of banks into those business areas would give a upper hand for commercial banks as they can mobilize a large pool of funds by charging lower interest and fees from customers who obtain these services. This situation would be disadvantageous for the non-banking finance company, specialy for the small finance companies as they don’t have much pool of funds to mobilize for the leasing and pawning services since banks are entering these business lines they are compelled to compete with the banks and therefore creates an unnecessary rivalry in the financial services.
As Sri Lanka is on an accelerated development drive, banks both government (State) and private sector as an important pillar of the economy has a major role to play. Reshaping of the existing operations of the banks and the adoption of country specific strategies, would enable the banks to fulfill its’ obligations towards achieving the overall economic objectives of the country.
- See more at: http://www.nation.lk/edition/opinion/item/18450-are-sri-lankan-banks-on-the-right-track?.html#sthash.2bCLcWCd.dpuf
It is often said that the combined asset base of the banking system of the country have surpassed Rs. 5 trillion which is a sign of the strength of the country’s banking system. But are our banks sufficiently supporting the economic activities of the country to thrive?
Firstly Sri Lankan banks avoided and escaped the dire consequences of the financial turmoil triggered in 2008/09 largely because they were not indulged with complex financial instruments and activities such as hedging and derivatives, as happened in the US and other Western countries. Therefore, although our banks are smaller in size compared to the Western and US banks, because of the domestically driven operations and minimal exposure to overseas operations and financial transactions they were largely
resilient to external shocks.
It is true that many Sri Lankan banks have shown unprecedented growth over the past years becoming a pivotal role in the economy. Financial assistance of the banking system had been extended to the many successful projects and entrepreneurs of the country in the past and even present many projects and development activities are being kicked off with the financial support from leading banks in the country.
However, time has come for banks to focus more on the economic sectors that have been largely ignored by the organized banking sector such as agriculture and emerging new industries. Although the state banking sector has given some financial assistance for the agricultural sector, the participation of the private banks has been minimal and this has led the farmers and other crop cultivators being victimized by the unorganized and even unauthorized money lenders and institutions. There are many reasons associated with the reluctance of the private sector commercial banks to provide financial facilities to the agricultural sector.
Firstly most farmers cannot offer collaterals against any loans and they also cannot guarantee a reasonable repayment plan of the loan due to the uncertainty of the natural events and other inherent risks associated with the agricultural sector. However commercial banks with their high financial literacy can take a step forward by designing new financial facilities and products exclusively for the agricultural sector. Although there might not be short term profits associated with the above strategy the long term gains and benefits will surely weigh much more.
Also it is high time for banks to shift a little bit from the traditional commercial banking activities and to engage more on development banking. In development banking banks would become just not lenders for businesses but stakeholders in enterprises and business. Although development banking is more riskier than conventional commercial banking and long term in nature, this would undoubtedly derive more returns for banks than by engaging in traditional lending activities. Banks can establish separate entities to exclusively deal with the purpose of development banking and other venture capital financing activities possibly through collaboration with other non banking financial institutions. Since development banking has still been remaining a largely untapped segment in the country’s economy, any bank which is entering this field would gain a first mover benefit and the competitive advantage.
Also there is a tendency for banks foraying into new business lines such as pawning and leasing which are non banking activities. Currently there are lot of non-banking financial institutions in the country that offers these services and the entry of banks into those business areas would give a upper hand for commercial banks as they can mobilize a large pool of funds by charging lower interest and fees from customers who obtain these services. This situation would be disadvantageous for the non-banking finance company, specialy for the small finance companies as they don’t have much pool of funds to mobilize for the leasing and pawning services since banks are entering these business lines they are compelled to compete with the banks and therefore creates an unnecessary rivalry in the financial services.
As Sri Lanka is on an accelerated development drive, banks both government (State) and private sector as an important pillar of the economy has a major role to play. Reshaping of the existing operations of the banks and the adoption of country specific strategies, would enable the banks to fulfill its’ obligations towards achieving the overall economic objectives of the country.
- See more at: http://www.nation.lk/edition/opinion/item/18450-are-sri-lankan-banks-on-the-right-track?.html#sthash.2bCLcWCd.dpuf
