Finance companies to fuel economic growth

The 2008 financial crisis in Sri Lanka will go down in history as an averted crisis, due to the timely steps taken by the regulator. Its genesis was similar to the earlier ones, where one or two major finance companies failed. In earlier instances the collapsed companies were closed, and depositors lost their money, with no protection from any source.

In 2008, the crisis hit the market with the collapse of unregulated financial entities which accepted public deposits through Ponzi schemes despite warnings given by the regulator from time to time.

In Sri Lanka not a single finance company was allowed to wind up its operations by the regulator which provided guidance to resurrect its operations and pay depositors in licensed finance companies. Directors and their management were made personally liable by the new regulations to ensure the resurrection of the companies.

It was the Central Bank of Sri Lanka that averted the crisis with timely action. Unlike in the US, tax payers' money was not used to bail out anybody.

The Central Bank simply used the public goodwill of State and private banking institutions to restore credibility, by appointing managing agents. The strategy by the Central Bank was to transfer the public goodwill of credible public and government brands, to be associated with the affected institutions; this has helped regain the lost credibility of affected LFCs.

Of course the immediate 'fire fighting' was followed by restructuring the managements, and the Boards of Directors, and it is to the credit of the Central Bank and the Monetary Board that the rehabilitation packages are working, slowly, but steadily.

The crisis in Sri Lanka, came in wake of the mega scale financial crisis in the USA markets, with one of the biggest names in finance, Lehman Brothers, failing, and panic overtaking the financial markets, only to be bailed out by the US Federal Reserve Bank (Central Bank) by injecting US$ 9 billion of tax-payers' money into the system.

In the US, money and capital markets collapsed, millions lost jobs, and millions of foreclosures in housing loans deprived the average man of their lifetime savings. The crisis spilled over to the rest of the world, and threw the global economy into a recession.

In that context, Sri Lanka not only averted the spillover from the global crisis, but also tactfully handled its own local crisis without severe casualties in the regulated financial sector.

It is in that context the Central Bank has now intensified and broad based the regulatory framework for licensed finance companies (LFCs), ensuring their sustainability, stability and public confidence.

'The Finance Company Act of 1988' was repealed and replaced by the 'Finance Business Act No. 42 of 2011' and LFCs were required to secure listings in the Stock Market and maintain Liquidity Ratios, Core Capital and Capital Adequacy Ratios, in addition to introducing a mandatory Deposit Guarantee Scheme which is now in effect, providing additional comfort to depositors.

The Central Bank has also approved a credit guarantee scheme for bank loans for LFCs that have severe liquidity constraints. LFCs also are subject to regular direct on-site supervision by the Central Bank, and are backed up with off-site supervision through a system of regular reporting of their operations.

It would be clear from the above, that the LFCs are now on a par with the licensed commercial banks (LCBs) with respect to CBSL supervision.

The new Code of Ethics brought on by the Finance Houses Association of Sri Lanka which is a guideline for business operations of member finance companies in terms of customer services, confidentiality of information, legal obligations, competitive initiatives, will be used to further support the Central Bank's efforts to ensure public trust and confidence.

A media release of the Finance Houses Association