A Few large banks better than a multitude

By Gamini Warushamana

Kingsley Bernard is the CEO and Director of Bimputh Finance PLC and Group Director - Corporate Planning and Business Development of Daya Group of Companies.

He has over three and a half decades of private and public sector experience of which more than two decades have been in top management positions. He was the President of the National Chamber of Exporters from 2004-2006 and Chairman of the Joint Business Forum 2004-2005. He also served as the District Governor of Lions International District 306 B2 in 2009-2010.

He holds an MBA from the University of Colombo, Post Graduate Diploma in International Marketing from the Colorado State University, USA and BSc in Mathematics and Statistics from the University of Jaffna. He is a veteran marketeer and visiting lecturer to a number of universities.

Having completed an extremely successful corporate career in diverse fields, he is bidding 'good-bye' to the corporate business sector to join academia in a few weeks.

Excerpts of an interview the Sunday Observer had with him:

Q. What is your view on the stability of the financial sector of Sri Lanka today, especially after the 2008 global financial crisis?

A. Sri Lanka was not affected much by the 2008 global financial crisis and therefore, we did not have major obstacles in achieving financial targets, macro targets of the Government and the Central Bank or micro targets of businesses. As we know, after the crisis global economic growth is not strong and even countries such as China and India have lowered growth forecasts.

Every quarter the IMF lowered growth forecast. Therefore, it is difficult to forecast future global trends.

However, the Sri Lankan situation is different compared to the global scenario. Although our economic growth rate came down marginally in 2012 and 2013, growth figures are still healthy.

Our economic growth largely depends on export performance. I can see a few major challenges in developing our export sector through diversification.

We still depend too much on export earnings of the apparel sector. We have spent too many years trying to come out of this situation.

Although there is some growth in the services sector, the potential for growth is huge.

We are doing fairly well in the IT sector. But even after the end of terrorism we have not been successful in achieving significant growth in other sectors which have huge potential.

Therefore, diversification of products and service in our export portfolio is a major challenge. The present situation hinders growth. Although we have been talking about developing the light engineering sector it has not got off the ground as yet.

This is one of the key areas of our export product portfolio that we need to diversify. Without developing a industrial sector it would be difficult for Sri Lanka to get on to the next stage of development overcoming the middle-income trap.

The development of infrastructure holds the key to industrial development. We are doing well with regard to road development. However, there are many more areas to be developed such as physical infrastructure to bring down the cost of supply of major inputs such as electricity in industrial production.

In addition to basic infrastructure development, consistent and predictable policy environment is a must for the development of the industrial and export sectors in the country.

In this connection, the tax and levies and other duties and policy decisions come to play. With regard to exports, factors such as exchange rate, duty structure, revenue tax policies are important for entrepreneurs to plan future strategies.

Q. What is your view regarding Sri Lanka's export competitiveness?

A. Our production base compared to most our competitors is small, hence Sri Lanka has to be necessarily a niche player in global markets. Finding a niche market opportunities is not an easy task and needs a fair amount of research.

There is a need to increase R and D. At present expenditure on R and D is a meagre 0.11% of the GDP. But what is more alarming is that the private sector share of this is only 18%.

Allocating sufficient resources for R and D is a major challenge for the public and private sectors. Getting the private sector to invest in R and D is not an easy and practical task in the absence of even a single Multi National Corporation (MNC) in Sri Lanka, whereas our competitors are fortunate to have their own MNC such as Samsung, Hyundai, KIA Acer and the likes to substantially invest in R and D.

Sri Lanka's product and market concentration is a cause for concern. For example our major export market, the USA, accounts for almost 50% of our exports and the number of products which earn over US$ 200 million annually are less than 10 while apparel, tea and rubber earn more than 70% of our annual export earnings.

Slow growth of industrial products and its composition is a major drawback. Our selection and prioritisation on winning export products have not yielded the expected results.

We have not focused our efforts on developing and adapting such industrial products to cater to the export market.

In global markets 'brand image' of products is essential for success. Export brand development is a slow process needing lots of resources.

Except for the tea and apparel sectors other export sectors have not been successful in export brand development.

Export brand development is almost a luxury for Sri Lankan exporters manly because the resources they possess is small and they are micro operators in a global sense. Some of the successful Sri Lankan tea brands would not have got off the ground if not for the financial assistance and facilitation offered by public sector facilitating institutions such as Tea Board and the EDB.

The cost of brand development is a major challenge for Sri Lankan exporters, who need state sector involvement and assistance. Sri Lanka has not obtained the full benefits of trade agreements entered into so far and being the weaker partner to many of those agreements, the benefits that we derive are much lesser than that of our partners in most cases.

Q. Increasing government debt is one of the hot topics today. What is your view?

A. We can see a significant increase in the Government's commercial borrowing from foreign and local sources. Most of the borrowings are for long-term infrastructure development projects.

It appears that the impact of these projects on the economy is little and resulted in disturbances to natural financial market forces.

Therefore, the Government will have to carefully study the impact of such borrowings from the point of view of macroeconomic conditions in the country and take corrective measures to mitigate any negative impact.

Q. The Central Bank has introduced a bank and financial institution consolidation program. Do you think that this will help to strengthen the financial sector of the country?

A. Yes. I think consolidation of financial institutions and creating strong financial institutions is a real need. Because today we are in a global economy and Sri Lanka should match any global player of the 21st century if we are to be successful as a growing economy.

Today, according to international standards all our banks and other financial institutions can be categorised as small. Therefore, rather than having a large number of small banks it is appropriate to have a relatively small number of large banks and other financial institutions.

However, the present consolidation program is a regulator driven. It is a foreign model which have been successful in an Asian country. However, the question that arises is the applicability of the model to suit Sri Lankan conditions and the time frame envisaged for the completion of the program by the regulator. This is an artificial and imposed program on the financial sector institutions which is against open market policies. The main criteria to consolidate has been the size of the organisation and not the performance of the organisation.

As a result large organisations which are not performing healthily at present would get an advantage as against small institutions which are performing efficiently and healthily.

The danger is that a merger between a well-performing small organisation and poorly performing large organisation can create an inefficient organisation. As a result the objective of the consolidation program may not be forthcoming.

This kind of consolidation should be through the natural performance of these financial institutions. Implementation of a strict criterion related to performance of these organisations would be a more effective method in addressing these issues.

On the other hand, one could argue if we have a large number of small and medium financial institutions the risk is distributed and in a crisis it would not impact much on the economy or the sector.

During the 2008 global financial crisis large banks collapsed in the US and the impact on the financial sector was severe. Therefore, we have to be watchful in increasing the size of operations of financial institutions as against a large number of small organisations.

The rise of small and medium financial institutions is mainly related to the market gap which has not be fulfilled by large organisations.

There is evidence of this in Sri Lanka. We have almost 60 finance and leasing companies involved in large, small and micro scale operations. This situation is true even with regard to banks.

Suppressing of small organisations and forcing them to form large organisations would affect customers. Specially very small and micro level businesses would find it difficult to finance their future financial needs.

Q. Your organisation, the Bimputh Bank plays a role in micro finance. Do you think that the micro finance sector in Sri Lanka has matured?

Irrespective of the scale of the economy, micro finance is a must for any country. Micro financing is not a new concept and it has a long history but it gained importance due to the good work done by Prof. Muhammad Yunus of Bangladesh who won the Nobel Prize for his contribution to the sector.

The micro finance concept was upgraded by several personalities in Indonesia, Malaysia and India. In Sri Lanka micro finance as a discipline was introduced around 15 years ago and it has now grown gained importance as most of the finance companies made use of micro finance as one of their products to better their profitability.

Banks too have added leasing, hire-purchase and pawning into their product portfolio which was the forte of the finance companies earlier.

Micro finance operations by these finance companies become feasible because the needs of the small scale clients were fulfilled by unscrupulous money lenders who charged exorbitantly high interest.

The lending rates of micro finance companies for the micro finance sector are generally higher compared to the lending rates of the banks.

But they are much lower compared to the rates charged by money lenders in the informal sector.

The success of a micro finance program depends mainly on the discipline of the lending organisation. One major challenge that should be looked at is whether the customer has the capacity to repay.

This is important because multiple borrowing is common in the micro finance sector. As customers have borrowed from many organisations it affects their repayment ability and finally they become debtors and go out of business.

Bimputh Finance launched its micro finance program a little more than two years ago focusing much attention on the welfare, economic and social development of the very poor segment of society.

We have a special focus on rural areas in the Eastern, Uva and Northern provinces. We need to run viable micro finance programs. However, unless there is a strong focus on customer development we may not be successful.

Our micro finance program is not merely lending money and collecting instalments on time.

We provide loans to women and it is a customer-oriented program. Customer education, their motivation, their regular participation at workshops are key contributory factors for the success of the program. Bimputh launched the program in 2011 with a client base of 2,500 and it has increased to 38,000 today.