Wasted lessons on DFIs

Have we ever learnt from lessons and mistakes in the past? The forthcoming merger between the SME Bank and Lankaputhra Development Bank (LDB) is going to be a classic case of where we will go wrong, once again. No surprises, anyway!

Consider this. The country needs a development bank to help small investors at the lower end and what do we do? The only bank – of course there were problems at the beginning with political lending, etc – that is geared to do this is to be swallowed by another bank that is turning out to be a typical People’s Bank or Bank of Ceylon in the 1980s-1990s when political lending was the fashion.

Consider this too. The authorities want regional development banks to merge with the SME Bank and LDB in a so-called bid to maximize the benefits to rural Sri Lanka. Now isn’t this going against the grain of decentralization where the focus is giving more powers to the region rather than keeping it at the centre, which has been the bone of contention in our political system for many years and caused death and destruction in the past three decades?

While the argument of bringing regional banks under a centralized set up is to provide it more powers and efficiency, won’t politics have taken over the funding decisions, as we all see in Colombo-based state banks? Regional banks must be governed by the regions and if there are flaws, it should be corrected at that end. They should be empowered to do so.

The unions at these banks resisted and the move has been shelved, at least for the moment.

The history of good development banking in Sri Lanka is explained very well in the World Bank document on DFCC titled “DFCC – one among the successful few”. The Bank says it wants to recommend this model to the rest of the world during a period when DFIs have suffered many reversals. However DFCC and NDB in recent years have become purely commercial operations after the two were privatized. DFCC now cannot be considered a development bank given that it is controlled by one individual (Harry Jayawardena) and risk taking is not on its vocabulary anymore.

Criticism over the role of DFCC and NDB in recent years has been growing because of the focus on commercial lending and less on riskier small ventures. The SME Bank was essentially set up to take on risky lending, not however lend to every Dick, Tom and Harry, as it did in the initial stages due to political pressure. Entrepreneurship is all to do with risk taking. For that matter any business is. But in the case of the DFI’s here, the moment they become privatized, they are answerable – and rightly so - to their shareholders. Thus decisions are based on viability and profitability, not whether – in the national interest – entrepreneurship and small businesses should be encouraged.

The SME Bank was also created arising out of a call from chambers of commerce representing small industries which didn’t have access to bigger banks for the reasons explained earlier. Unfortunately these chambers haven’t protested over the move or sufficiently drawn attention to the need to have such a financial institution functioning to serve the needs of the smaller investor.

Ironically, its big business or political cronies who take the money and run and loans are written off as a result. History has shown how micro credit has been very successful given examples like Bangladesh’s Grameen Bank (more than 100 percent repayment), Ceylinco Grameen (some 120 percent repayment) and many other cases here. Most micro credit units run by simple people – women entrepreneurs, small entrepreneurs, estate workers, etc – have proved their success which also reflects the urgency for banking for small businesses.

We have said this over and over again – this country is full of entrepreneurs who have plenty of ideas, vision and dedication (as our feature on Laugfs Group founder W.K.H. Wegapitiya last week showed) but lack the financial support to pursue their dreams, their goals and in term enrich the country. A successful idea is turned down at the doorstep of any bank. Try walking into a bank shabbily dressed with just dreams and ideas in your pocket and nothing else? Chances are the security guard will shut the door or bar your way.

Successful entrepreneurs like Wegapitiya (who once drank water and skipped a meal because he didn’t have money) made it because they fought against a national system that frowns on ideas and entrepreneurship. The impending demise of the SME Bank is a manifestation of this national malady.