Regaining Capital Market Mojo: Part 3 – Innovation
The great Sinhala scholar, late Kumaratunge Munidasa, fittingly wrote for the benefit of the future of Mother Lanka, “Aluth aluth dea nothakana daya lowa nonagi” (a nation that fails to heed to innovation, its progress shall be stalled).
As the capital markets strive to consolidate its position and be a dynamic contributor of the GDP, the focus must be on the qualitative element and innovation.
I take the view that there is no further need for any elaboration or deliberation as to the significance of integrating education and innovation.Many a study conducted by the G7 nations would speak to the need for state sponsored/funded innovation. I am a strong proponent of facilitating delivery of meaningful education in an effective manner so that there will be innovation at grass-root level. I ask the question if our system of education has effectively been able to do that. I stand to correction when I am compelled to believe that for the most part our higher education has become a degree popping-out mechanism at the cost of the taxpayer. If the primary national purpose of investing on higher education is for those degree holders to be contributing for the forward march of the nation and for the national economy to operate at NAIRU (Non Accelerating Inflation Rate of Unemployment), then what is demonstrated is an inverse relationship between the degree and employment!
In this connection, the capital market can be the “employer of last resort”: to provide a conceptual overview of the model, as opposed to wasting tax payer money on mass production of BA and Bsc degree holders, part of that money can be channelled towards creating comparative advantages and self reliance initiatives.
Capital Market: Employer of the last resort and poverty eliminator:
If a percentage of the funds allocated to produce unskilled graduates (for the most part) are utilised towards self-employment programmes, then that money is well invested. There are plenty of opportunities in a dynamic capital market offering self employment opportunity. This must be fully explored, developed and harnessed. The capital market must develop programmes/infrastructure/investment products to shift from the present static and humdrum market to that of a dynamic market where potential self employment and poverty reducing opportunities are made possible.
The capital market must take the initiative to make the general public aware of infinite opportunity the capital market can offer in terms of creating suitable self employment opportunities. The equity trading space is unchartered waters and offers lucrative economic opportunities to those budding entrepreneurs to make a career as “stock traders” provided the proper foundation is laid by the policy makers.
A tie-clad sales representative is a common sight: they sell everything from ‘dantha muktha (the herbal tooth powder) to Samahan. While the less sophisticated vernacular youth is busy selling herbal medication, the sophisticated ones go about from promoting new pharmaceuticals to imported dry milk powder among the medical fraternity.
However we are yet to see sales representatives selling equity or other financial products. The “Equity sales representative” development must draw the attention of the policymakers. Once they are trained to be investment product sales representatives, they shall bring results.
There is no need for the seats of higher education to keep popping out excess amount of degree holders if they cannot be gainfully employed. It negates and thwarts the intent and the purpose of their very existence. Besides, it is futile to invest tax revenue to merely create mass graduates for political and for ego reasons. After Advanced Level examination, only under 10 per cent gets the opportunity for further studies and that too they are unable to find suitable employment unless with political patronage.
In this connection, the capital market can effectively find a solution to unemployment/poverty in rural areas driving the village youth to the metropolis in search of “work”. The capital market can re-position and re-invent itself beyond that of an intermediary between capital seekers and capital providers, to train youth as stock traders and sales representatives providing them the required tools.
What I am suggesting is no overnight process. It is an evolution and innovation.
Capital market classification of service providers
Having come from a hospitality background, as we see there was re-branding and re-classification of the properties/service providers. Be it a hotel or guides, service providers are classified based on services offered and room strength. The capital market operates on a foundation of integrity. Running parallel to the hotel industry, the financial services industry too must introduce a process of classification based on the services (full service, discount brokerage, discretion account management) or asset under management, the strength/profile of the staff or even annual value addition to investments under their management. Above all, an integrity matrix must be developed so that can be the guiding indicator for an investor to select a potential advisor/a broker. Such a classification will eliminate the “ponsi” schemes, and operatives of the likes of Sakvithi.
Capital market product and strategy development
As I write this final chapter of the three part series contributing to the endeavours of the capital market policy makers, I will fail in my bounden duty not to mention about my passion, Derivatives, and how this financial instrument can make it to the Sri Lankan capital market.
Sri Lanka unfortunately though, had a tormenting experience with Derivatives. In particular, the Standard Chartered Bank, Citi Bank and Deutsch Bank did an outstanding job making a complete mess of Derivatives trading when they got involved with the CPC hedging saga. These banks have made the introduction of Derivatives so much difficult: nonetheless, it has to be done and Derivatives must be introduced in the capital market development. I am here to state, notwithstanding this one bad experience, we must introduce Derivatives to the Sri Lankan capital market.
In 2002, there was a study undertaken under the auspices of the then Minster of Consumer Affairs Ravi Karunanayake, to introduce Futures trading to Sri Lanka. The Sugar-Coffee-Cocoa exchange was interested in getting involved with our project and to set-up a satellite commodity Futures operation in Colombo. Foreign funding was coming our way. Sadly, due to regime change and official apathy the project died a natural death. This was a costly loss to Sri Lanka. If we had gone ahead with the implementation at that point in time, today Sri Lanka would have been the hub of the global tea trade. Our loss is Dubai’s gain. Without even planting a single bush of tea or plucking a “bud and a tender leaf”, Dubai was able to have a Tea Futures operation. Perhaps, not fully fledged, but they have it up and running. We got none: Today the tea planters are faced with unprecedented low prices due to external factors. My school friend, Roshan Rajadurai, chief of the prestigious Planters Association, writes about the problems associated with tea as an industry. I am certain; introduction of Tea Futures trading will solve half of his problems. While I am no planter, I know that a price discovery and a price guarantee mechanism is mandatory for the tea industry. Coffee and cocoa as commodities trade in futures contracts. Regional plantation companies at one time mooted the introduction of Tea Futures trading but, got no traction on that initiative.
During our preliminary feasibility study done in 2002, two of our observations were the absence of a forward market and the absence of short trading.
Short trading is an integral part of a dynamic capital market. Lack of liquidity has been a perennial problem in the Sri Lankan capital market. Introduction of short trading will ease the liquidity crisis to some degree. In particular and more importantly, proper reporting and monitoring of ‘tik” rules must be strictly adhered to. Short trading is a pre-requisite to the introduction of derivatives trading.
Introduction of Option trading
Introduction of Options trading will definitely, add stature to the Colombo market. By way of more enhanced activity, more sophisticated fund managers will be attracted to the Sri Lankan capital market.
It is a long way away even before we can think of placing that first call option trade. But we must start our capacity building today if we are to even think of introducing Options trading. Not doing anything but idle talk will yield zero results. The politicians, and the mafia must be kept at bay and the policymakers and the rain makers who can get the job done must be put to the task and be held accountable for the timely delivery.
Introduction of Option trading must be done but with caution. In North America the first option contract was developed in 1973 and the market is yet evolving and new products and new strategies keep evolving. There is constant training to create awareness and educate the Option trading investor community.
(The writer is based in Canada. This is the final installment of a 3-part series on the capital market)