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Problems
of savings in Sri Lanka
Today, household savers are facing a multitude of problems. The interest rates on regular bank saving and fixed deposit accounts have declined. The cost of living has increased. This has forced them to look elsewhere in search of higher returns. They have to wade through a plethora of financial instruments offered by various institutions to find a suitable investment. Consequently savers can be easily duped into putting their hard-earned savings into various schemes that offer high returns unless they are extremely cautious of the risks involved. The most susceptible are the poor, naive professionals and pensioners that are dependent on interest income to live. Risks involved Savers must be concerned about 'adverse selection' (the possibility of putting your savings in the wrong place because of the difficulty of distinguishing between low risk and high risk investments) and 'moral hazard' (the possibility of the management not honouring their commitment once the money is taken and using the funds for a completely different purpose because the Management is able to 'tunnel' the funds out of the company they control). The best protection against adverse selection and moral hazard is robust accounting, financial disclosure and transparency, and an efficient regulatory and enforcement system. It is therefore imperative that savers are familiar with the regulatory oversight and the risks relevant to various investments. Regulatory
oversight Supervision of these institutions is carried out by means of monthly and quarterly information received and by regular inspections of their books and directions such as capital adequacy requirements, etc. that encourage these institutions to act in a prudent manner to give protection to the depositors. The CBSL also regulates and supervises Registered Finance Companies that accept fixed deposits from the public. However, make no mistake. The CBSL does not guarantee the safety of deposits. What it does is stipulate a list of 'Do's and Don'ts' to such institutions and more importantly encourage transparency so that the public can make its own decisions with regard to the risks of such institutions. Not regulated Whilst only regulated institutions are allowed to mobilise deposits, unregulated institutions get around this by offering other financial instruments, which are essentially de facto deposits. Unfortunately, it is hard for an average saver to distinguish between deposits and other financial instruments that pay a fixed interest. This should be clearly understood, when evaluating various investment options. All companies that have their equity or debt listed in the Colombo Stock Exchange (CSE) are regulated by the Securities and Exchange Commission of Sri Lanka (SEC). The SEC attempts to protect the interests of investors by way of disclosure based regulation. The SEC and CSE ensure that these institutions publish a prospectus when soliciting public funds and require filing of quarterly and annual accounts that meet established laws and regulations such as accounting standards and corporate governance practices to ensure that the investors are adequately informed of the activities of the institutions. What this means in plain language, is that the regulatory emphasis is to ensure adequate, fair and timely disclosure to the public and only if there is non-disclosure or lack of disclosure that the regulator will intervene. It is therefore up to the investors and their advisors to carefully appraise such disclosures (i.e. prospectuses, quarterly and annual reports and other CSE announcements) and take appropriate action, before investing, and while invested, to protect their money. All other private
companies other than those already described (i.e. licensed commercial
and specialised banks, registered finance companies and listed companies
of the CSE) are only registered with the Registrar of Companies.
Obviously, having a company registration number or filing of annual returns (financial statements and shareholder information) with the Registrar of Companies does not protect savers' money. There is no public financial disclosure and transparency and nobody reviews the financial condition or monitor how private companies utilise monies invested. Perhaps, the only remedy for investors who have lost money by investing in a private company could be to take the company to Court to exercise their rights. Recognise
risks Just because an institution is duly incorporated under the Companies Act and display the Company Registration number, or have other government approvals such as BOI approval or is listed in the CSE or have the word 'Bank' or 'Finance' in its name does not provide much of a protection to your money. It is also unwise to think, when you see prominent advertisements in the media (TV, newspaper, radio) that the institution concerned has the required authority and approvals to solicit public funds. Although the CBSL seeks to achieve safety and soundness of the institutions regulated, it does not guarantee the deposits with the institutions regulated, and their performance depend largely on the management of the respective institutions. Therefore, it is the responsibility of savers to exercise due care and vigilance when placing savings with various institutions and financial instruments. Reliable
information That is why the regulators such as the CBSL and SEC require the institutions under their supervision to publish financial statements. However, users of financial statements must have assurance that the information is reliable and credible. The report of the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) released on Oct 25, 2002, highlight some of the issues and the names of the companies whose accounts it found as irregular. Regrettably, until financial reporting is in plain language and standards are developed for the benefit of investors, the primary users of financial statements, instead of for the benefit of issuers, enabling management to manipulate earnings and hide liabilities and losses, investors will be disadvantaged. Therefore, it is always sensible to make use of independent analyst recommendations and credit ratings from recognised third party advisory services to find out the risk of investing in a particular institution or a financial instrument. Ratings watch The opinion of the agency is published in the news media for the benefit of the public. Credit ratings are not guarantees against loss. Neither are they recommendations to buy, sell or hold securities, which have to be based on many other market and investor-specific considerations. They are simply opinions about relative measures of default risk. In a number of countries, ratings are mandatory for entities and financial instruments that solicit public funds. In Sri Lanka,
even though, FRL has assigned over 20 ratings, only the following
ratings have been voluntarily published by the respective entities.
Timber plantation
companies One can certainly grow the timber, sell the timber, and there is a growing market for it. They also save rain forests and are environmentally friendly. But as with any investment/project, there are risks. Unscrupulous promoters in several countries have been touting bogus ventures, promising impossibly high returns. There have been instances where most of the money went to management fees, and less, went to acquiring the land and putting the trees in. Indian saga SEBI guidelines include mandatory credit rating, minimum capital requirements and prohibition of diversion of funds to businesses other than the one for which the money was raised, which had been many a time a cause for failure (Source: Indian Express). In Australia, two high profile companies that control tens of thousands of hectares of timber plantations are struggling with financial problems; a number of other ventures are barely staying afloat. One of Australia's biggest plantation companies, Australian Plantation Timber Ltd. (APT) that was listed in Australian Stock Exchange (ASX) went into receivership. APT owned 45,000 hectares of land and managed 22,000 hectares of plantation timber and investments of $650 million. Commonwealth Bank sent APT into receivership, by refusing to extend a $50 million loan facility. Investment experts say, 'even the listed companies had taken out as fees and expenses somewhere between 45% and 55% of the investments. there's no industry in the world where if you took out up to half of the investments you could expect to have a viable business'. The Australian Securities and Investment Commission is looking into regulating the industry (Source: Australian Broadcasting Corporation). It is timely, regulators in Sri Lanka as well, consider regulatory oversight of this industry as once the confidence of the investors is lost due to a handful of greedy people who make millions at the investors' expense, the industry itself would be lost. |
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