Sri Lanka will see more finance companies merging in the period to 2016, when the country will record US$ 4,000 per capita income, officials said. “There will be quite a few mergers and even acquisitions in the financial sector between finance companies. There’re a few ‘weak’ finance firms and on the other side there’re those [...]

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More finance companies expected to merge in Sri Lanka

By Duruthu Edirimuni Chandrasekera
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Sri Lanka will see more finance companies merging in the period to 2016, when the country will record US$ 4,000 per capita income, officials said.

“There will be quite a few mergers and even acquisitions in the financial sector between finance companies. There’re a few ‘weak’ finance firms and on the other side there’re those who are eyeing opportunities to acquire similar companies or merge with them. The next two years will see these types of consolidation happening,” a Central Bank official told the Business Times on the sidelines of the Director’ Symposium for non-Bank Financial Institutions (NBFIs) this week.

Delivering the keynote on “Positioning the Non-Banking Sector for the post $4K era”, Ajith Nivard Cabraal Governor, Central Bank (CB) said that Sri Lanka’s NBFI sector would need to consolidate balance sheets of some companies which may be weak to cater to growing demands and raise funds.

“Weak companies would pose a risk to the financial system stability as it could affect the depositor confidence. Small companies are encouraged to merge or consolidate to bring stability and play a dominant role in an emerging economy,” he said. He told the Business Times on the sidelines of the symposium that the CB is encouraging such NBFIs to consolidate. He said that the CB is discussing with some NBFIs about consolidation. “The Monetary Board has taken a decision not to give new licences in the next two to three years unless they are absolutely necessary,” he said, noting that weak companies cannot remain as weak companies. So far NBFIs have been reasonably resilient and vibrant, he said, noting that it’s approximately six per cent of the financial system.

The NBFI sector has been on a fast-track growth, he said, adding that for the past two years, 19 companies have grown their asset base by more than 100 per cent. “Recent trends have been healthy; the emerging economy is reshaping and redefining the Sri Lanka financial landscape. The Sri Lankan economy is envisaged to move to the next growth phase of $4,000 per capita income, rising income levels have resulted in society moving to the next level of standard of living, competition is expected to intensify significantly, new regulatory reforms changing cost structures, risk management and IT advancements-mobile banking. For this NBFIs have to access foreign funds and internationalize (the) NBFI sector, while tapping international sources of funds with significant foreign exchange inflows for various projects and improve ratings and standards to go global,” Mr. Cabraal said.

Traditional leasing business will no longer be the key business, he said. NBFIs need to change the entrenched practices, deeply rooted business model concentrating mainly on collateralized lending based on moveable assets, offering ‘Vanilla’ products such as finance leasing, hire purchases and pawning and catering to a specific segment of the population.

“Dynamic and resourceful human capital in the non-bank sector is the need of the moment,” Mr. Cabrall said, adding,“ the lack of professional, competent and dynamic human resources have given rise to, lack of professionalism accountability and transparency and corporate governance.” He stressed that NBFIs need to adopt integrated risk management processes to monitor and manage all risk elements such as potential risks, possible sources of such risks, mechanism of management information and reporting to identify and monitor such risks, and effective measures to control and mitigate risks at prudent levels.

He also noted that existing business processes need to be revisited and aligned in line with the market practices, use technology for risk management, cost efficiencies, improve productivity, financial accessibility and to advance business operations. Key factors have moved in the right direction, external sector has been robust, and per capita incomes have risen sharply, Mr. Cabraal observed, noting that the expectations for the Budget 2013 which are a poverty-free upper middle income economy, promoting small and medium enterprises (SMEs), strengthening food, water and environment security and technology revolution through quality education and skills development will see an upsurge in the financial sector.

Country-wide infrastructure development is in progress, thereby enhancing production capacity, he said, adding that infrastructure facilities have been continuously improved. The banking sector stability has improved tremendously, according to Mr. Cabraal.
‘Doing Business’ has also become easier in Sri Lanka, he said, adding that the ‘Doing Business Index’ has gone up to the 81st place from 89th and that Sri Lanka is the highest ranking country in South Asia and only country in the region to improve its ranking in 2013.

He argued that with all these factors, the environment is conducive; resources are in abundance; opportunities are plenty and infrastructure development is rapidly progressing, but more efforts will have to be taken to further improve private sector investment.

Licensed finance companies and specialized leasing companies will need to facilitate private sector investment, he added.




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