ADB to enhance capacity, size of capital market
'The Colombo Stock Exchange is owned and
dominated by brokers whose businesses take precedence over the
governance of their exchanges and overall market development (including
critical market infrastructure).'
The Asian Development Bank (ADB) last week said it would fund a study
to further develop Sri Lanka's capital market so that it could more
effectively channel savings to finance investment.
"The specific objective of the proposed Capital Market Development
Program (CMDP) is the enhanced capacity and size of the capital market
that is grounded on a strong legal and regulatory framework," it said.
The CMDP is due to be approved by the ADB's Board of Directors in the
second quarter of 2016 and implemented over six months, from April to
It aims to improve the legal and regulatory structure and develop the
bond market, financial instrument tax policies, an enabling environment
for derivatives and the insurance sector and pension sector.
The ADB said in a statement it expects CMDP's impact to be a "well
functioning financial system that supports basic capital and investment
needs, as well as Sri Lanka's longer term economic objectives."
The bank said that despite the large financing needs of the economy,
the capital markets in Sri Lanka have "not been particularly effective"
in channelling savings to support investment and growth.
"The Colombo Stock Exchange is owned and dominated by brokers whose
businesses take precedence over the governance of their exchanges and
overall market development (including critical market infrastructure),"
the ADB said.
While the annual increase in bank credit to the private sector
amounted to 4.1% of Gross Domestic Product (25.4% of national savings),
the capital raised by the private sector through equity and bond issues
together was equivalent to only 0.7% of GDP in fiscal year 2014.
"The economy also remains over-reliant on bank financing (total bank
assets are nearly 60% of the country's financial assets) that are unable
to finance the infrastructure investments that the country needs because
this would expose banks to credit risks such as maturity mismatch
issues," the ADB said.
"The corporate bond market remains at a nascent stage, undermining
long-term infrastructure financing requirements." The total corporate
bond market is only 2% of GDP, which is significantly less than that of
other middle income Asian countries.
Insurance companies and pension funds (particularly Employees
Provident Fund and Employees Trust Fund) have a limited role in
financing government securities which hampers formulation of a credible
government yield curve and liquid bond market, the ADB said.