Dec 312013
Governance of financial institutions, key to governance architecture

By Dinesh Weerakkody
A few public policy issues have moved from the wings to centre stage as quickly and decisively as corporate governance. The regulators all over have made efforts in recent years to refine their views on how financial institutions should be organised and governed. The role that corporate governance plays in corporate performance is now well documented.

The success of a company is often directly connected to the character and the relationship of the directors and the top management of the company and in addition, when directors don’t put self-interest and self-preservation ahead of stakeholder interest. 
Good governance in general gives the company the protection to operate effectively, the ability to do what’s right for the company and for the shareholders, win the confidence of the public and improve the public rating of the institution. Promoting good governance ultimately separates good performing from poor-performing companies.

In Sri Lanka, attempts to improve corporate governance in the past have been through the adoption of voluntary codes. We have generally followed the British methodology of enunciating principles rather than rules.

The issue of governance has much to do with a value system and unless the values are clearly accepted, perhaps the only other way in which the end could be achieved is through imposition, although this is distasteful. Some of them have chosen to interpret these principles in a manner that gives them the flexibility to ignore the principles when it suits them.

Thus, in the context of Sri Lanka, the introduction of a mandatory code, which incorporates principles and rules to be followed, was timely, desirable and commendable because financial institutions occupy a special position of trust in the national economy. They are responsible for financial stability and to shape the pattern of credit distribution and the overall supply of financial services. Hence, the necessity and importance of enforcing effective corporate governance structures in the financial sector.

Better governance
Then one of the key factors on which the regulator has sought to build a better governance framework is by having a number of ‘independent’ directors on boards. While this is commendable in theory, it needs to be borne in mind that mere ‘independence’ as defined in the code will not ensure that the director concerned will or can make the required contribution.

In fact, given the incestuous corporate relationships prevalent in our small country, the Chairman’s school buddy who fits the code’s definition of ‘independence’ may in reality be less independent than someone who is ‘not independent’ in terms of the code.

It is also a matter for debate whether so-called ‘independent’ directors who receive fixed and rather nominal fees for their services and have no real stake in the business are sufficiently motivated to enhance enterprise value.

However, true independence and effectiveness of an ‘independent’ director can only be measured by the director’s actions in the boardroom and the freedom and willingness to leave the board if he is forced to compromise on the principles of good governance and not merely through the application of rules.

Boards therefore need to somehow find broader sources of information, so they are not relying on one or two people, there is no substitute for spending time with management of different departments or sectors having them present directly to the board, visiting operations- not interfering but to understand what is really happening.

A board is expected to create and enhance the competitive advantage of the firm, identify and manage corporate governance risk at firm level and to overcome the systemic risk across the industry through shared standards of corporate governance practices.

Way forward
The practice of good corporate governance followed by financial institutions will allow them to gain the trust of the depositors, investors, the customers and the community at large. This will have a positive impact on the firm’s reputation and it will be recognized as a fair and transparent company.

This image will help the firm to prosper in the long run and achieve its goals more quickly. In the final analysis, the solution for good governance can only lie with boards; they need to realize that good governance can only benefit the firm in many ways. They have to work up the courage to create exciting challenging jobs with real decision-making authority to both senior executives and other alike.

Therefore, independence is not about ‘no-shareholding’, it is more about how independent is the director in his thinking beyond and his ability to challenge proposals at the board meeting and look beyond.

Finally, good corporate governance is about instilling the ‘right values’ into the people and also to influence the company to move beyond just short-term considerations and contribute to economic and social development with a balance mindset.

(Above is a summary of a presentation made by Dinesh Weerakkody at the Central Bank NBFI)

Nov 282013
Middle-income status may push private sector for pension schemes: Cabraal
Sri Lanka’s private sector may have to look at models for superannuation and pension schemes in order to cope with the changing macroeconomic fundamentals, as Sri Lanka moves towards the middle-income country status, according to Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal.

“It is now time for all companies to realize that they will have to move into superannuation schemes a lot more seriously than they have done in the past.

We are in an era in our country where you will see interest rates coming down as a result of inflation moderating. We are looking at macro conditions that will ensure that inflation will stay in single digits, so interest rates will be much lower than what we’re used to,” Cabraal stated.

Delivering an address at the recently held Best Corporate Citizen Awards, organised by the Ceylon Chamber of Commerce, Cabraal warned that the time of depositing funds in finance companies and banks alone would no longer be sufficient to maintain a viable pension fund for Sri Lanka’s retirees.

“In such a situation, we will now have to look very carefully at what our pension products and superannuation schemes are going to be because the time when you could just put money into finance companies and banks may not be as attractive as it once was in the past.

When looking at employee relations, companies should also reflect on the new trends that the economy is taking and prepare themselves for these new trends in Sri Lanka’s economy,” Cabraal cautioned.

He added that the Sri Lankan corporate sector must also extend a holistic approach in employee and customer relations, as part of the efforts towards becoming responsible corporate citizens.

“Companies must look at the inherent manner in which they deal with employees and customers. We brought a customer charter for the banks and many embraced it willingly and they embraced it as part of the transition to a new level of development and service.

Companies also must tell their employees, customers and the public what their benchmarks are. It’s always a good thing to talk about your values and make sure the employees abide by those values as well, while also being conscious of their responsibility to be sensitive to religious, ethnic and national practices,” Cabraal advised.

“Sri Lanka’s success in the economic field has largely been achieved without damaging the environment of our country. Today, we recognize companies for their contribution to the people, planet and profit. All three are equally important. All of you are in the field for profit but these are highly interconnected ideas. The more we realize this, the more we will respect the role of the three Ps,” he noted.

Nov 182013
Economy grows 7.8% in 3Q
The Census and Statistics Department data showed the Sri Lankan economy grew 7.8 percent in third quarter (3Q) this year, accelerating from 6 percent and 6.8 percent recorded in 1Q and 2Q respectively.

The 3Q is the first full quarter after the Central Bank cut its key policy rates in May by 50 basis points to show high growth rates.

The growth of the US $ 59 billion Sri Lankan economy slowed down to 6.8 percent in 2012 from 8 percent growth in two consecutive years.

After the surprise 50 basis point rate cut again in October, Central Bank Governor Ajith Nivard Cabraal said the economy was well on track to achieve its full year target of 7.5 percent.

The data showed the agricultural sector expanding by a healthy 7 percent, recovering from the 0.5 percent contraction in the corresponding quarter in 2012.

Meanwhile the industry sector grew by 8.1 percent as against the 7.3 percent growth in 3Q’12. The services sector grew by 7.9 percent compared to 4.6 percent growth in 3Q12.

The economists have often pointed out the irrational use of demand management policies such as interest rates and exchange rates to accelerate the economy as they have always proved futile in the past.

They have called for tough structural changes in export growth, reforms to SOEs, effective tax administration and tariff reform to increase government revenues, enhanced revenue mobilization to support capital expenditure and improvements in the general business climate to maintain 8 percent growth for a sustained period.

The structural composition of t he economy by and large remained unchanged. The agricultural sector contributed 11.1 percent to the overall GDP while the Industry and the Services’ sector shares remained 29.9 percent and 59.0 percent respectively.

The sub sectors under the agricultural sector; paddy, livestock, other food crops and minor export crops grew by 56.5 percent, 8.3 percent, 8.3 percent and 2.9 percent respectively.

Among the contracted sectors are tea (5.1 percent), rubber (28.1 percent), coconut (32.3 percent) and fishing (9.9 percent).

All the sub sectors under the industry showed growth. The manufacturing, mining & quarrying, electricity, gas & water and construction sub sectors grew by 6.8 percent, 12.5 percent, 11.2 percent, and 10 percent respectively.

The hotels and restaurants sector growth was the highest under services with 13.6 percent. This is followed by transport & communication (11.8 percent), export trade (9.1 percent), import trade (7.5 percent), domestic trade (6.3 percent), government services (3.6 percent), private services (7.0 percent) and banking, insurance & real estate (6.7 percent).

Nov 142013
September trade gap widens over 40%

  • Imports up 23% to US $ 1.6bn
  • Exports up 11% to US $ 890mn
  • Fuel bill up 62% to US $ 517mn
  • Vehicle imports doubled

The imports to the country during the month of September rose 23 percent Year-on-Year (YoY) to US $ 1.61 billion and exports grew by 11 percent to US $ 890 million, expanding the country’s trade gap by 41.1 percent or US $ 698 million, external sector data showed.

The imports to the country during the month of September rose 23 percent Year-on-Year (YoY) to US $ 1.61 billion and exports grew by 11 percent to US $ 890 million, expanding the country’s trade gap by 41.1 percent or US $ 698 million, external sector data showed.

This is a reversal of the month of August’s trade figures which demonstrated a decline in both imports and trade deficit.

Imports were weighed mostly by fuel imports which rose 62 percent to US $ 517 million as a result of the government importing expensive refined oil from alternative markets due to the oil embargo on Iran.

The impact of fuel on country’s import bill is expected to increase further because the country is resorting to refined oil for the entire requirement.

Perhaps a backfiring of Central Bank’s interest rate cut in May, vehicle imports increased by 99.6 percent YoY, making the highest contribution to the consumer goods import increase.

Due to country’s current construction boom, the machinery and equipment imports rose by 37 percent YoY to US $ 197 million while building materials rose 21 percent to US $ 102 million. However transport equipment imports declined 31 percent YoY to US $ 36 million.

Expenditure on fertilizer imports also increased by 51 percent YoY to ensure availability of adequate stocks for the upcoming Maha season.

Consumer goods rose by 13 percent YoY to US $ 233 million, led by an increase in non-food consumer goods.

Textiles and garments continued to lead export earnings with a YoY growth of 28 percent to US $ 387 million.

However, tea exports edged down 0.6 percent YoY to Rs.140 million, despite the prices rising by 10 percent. Tea exports account for 15.8 percent of total exports.

Meanwhile during the nine months ended September, exports rose by mere 0.3 percent to US $ 7.3 billion while imports declined by 0.9 percent YoY to US $ 14.0 billion reducing the trade deficit by 2.1 percent or US $ 6.7 billion.

Nov 112013
CB leaves policy rates unchanged
The Central Bank (CB) yesterday kept the policy rates on hold for the month of November, providing a breather to the recent monetary easing to take effect during the next few months.

In October, the CB surprised the markets by cutting both the Repurchase rate and the Reverse Repurchase rate by 50 basis points to multi-year lows of 6.50 percent and 8.50 percent, respectively, amidst calls by the International Monetary Fund (IMF) to hold the rates over inflationary fears.

“We believe the time has come for the monetary policy measures that have already been taken to take effect and we also believe within the next few months these changes would hold the economy in the growth momentum. So, we don’t think of any further changes now,” Central Bank Governor Ajith Nivard Cabraal told Bloomberg TV.

However, Cabraal noted that despite the short-term interest rates have already started to come down significantly, easing of medium and longterm rates has been rather slow.

Despite the recent monetary easing, the private sector credit growth remained below 10 percent during the year so far. The private sector credit grew by 34.5 percent in 2011, followed by another 23 percent in 2012.

In September, domestic commercial banks have disbursed as much as Rs.20 billion worth of private sector credit. “September figures were rather encouraging, so have the October figures been,” Cabraal remarked.

The broad money supply (M2b) in September increased to 16.3 percent from last year, up from 15.3 percent in August. The projected M2b for 2013 is 15 percent. In 2012, it was 16.2 percent.

Cabraal said the macroeconomic fundamentals are strong and the inflation is under control. But October inflation proved otherwise with the headline inflation rising to 6.7 percent, picking up from 6.2 percent a month earlier.

However, sending some level of certainty into the financial markets Cabraal said, “Next three to four months we will probably see consolidation of policy we have been advocating because we are satisfied with the results we have seen.

I don’t see a major shift in the policies during this period because whatever required has already been done,” he emphasized.

Since last December, the CB has cut policy rates by 125 basis points, reduced the statutory reserves ratios of the commercial banks by 2 percent and also asked the financial sector to reduce the penal interests charged on the default loans, in order to oil the slow-moving economic wheels.

“We would be a little dovish than hawkish. But we will watch the December and January figures quite carefully whether they are in place with what we have in mind for 2014,” Cabraal said.

Nov 072013
Country is progressing without any deviation from original plan: Cabraal

The following is a speech by Central Bank Governor Ajith Nivard Cabraal, a guest speaker at Business Today Top Twenty Five 2012-2013 awards ceremony.
Let me start by congratulating the winners, the top companies of our country, who have contributed to our economy and continue to do so, showing excellence in their respective fields.

I know it is not easy to reach the top and what is more difficult than reaching the top is maintaining the position and very modestly, some speakers mentioned about how they have been retaining their positions.

I don’t think they really want to drop their rankings. Nevertheless, the challenge is difficult and to maintain your position, even after the challenges, is even more difficult.

As you grow, debt also grows
Today, we heard 12 business leaders speaking to you about their companies very proudly. I believe they have every right to do so. So, I was thinking, perhaps I should speak a few words about Sri Lanka incorporated, taking a cue from my friend Harry Jayawardena, as to what the government has also done in creating this enabling environment and also ensuring that Sri Lanka can retain its momentum in going forward. And in doing so, I believe, it is appropriate to use some of the business jargon, particularly the jargon that all of you are familiar with, in analysing Sri Lanka incorporated.

I believe I am reasonably qualified to do so, having worked in the private sector for 32 years of my life and in the last eight years I have been in the state sector. So, I have a four to one ratio as far as my contribution to this country’s economy is concerned. So, let me try and give you some assessment and analysis about how we could judge the government in relation to some of the analytical tools that you yourself use in your portfolios.

Let me begin by putting first the debt sustainability of the country. I know that it is a topic that has been considered and spoken of many times. But I would ask you, the old companies, if you look at the first 25, they are all there and I don’t think there is a single company, which is without debt. You have share capital, which is your obligation to your shareholders, then you have loan capital, which is your obligation to your banks, then you have other creditors all of which are your obligations, which is your debt.

As you grow, not only your shareholdings grow, your debt also grows and therefore, to keep a tab on your debt by using various ratios, I think that is prudent. When I was in the private sector also I used it, now since the public debt is managed by the Central Bank, we keep a close tab on that also and the main instrument that we use is your debt to income ratio, your debt to asset ratios and debt to share capital ratios, which you monitor very closely.

I can assure you ladies and gentlemen we do the same in relation to the management of debt, as far as Sri Lanka incorporated is also concerned. If I were to go over a few figures— in the year 2003, Sri Lanka’s debt to gross domestic product (GDP) ratio, which is equivalent of your debt to income, was as high as 105 percent. In the year 2005, it had come down to 91 percent. Over the last eight years not withstanding all the public investment and FC it should travel on, you should understand that the debt to GDP ratio has come down to 78 percent.  

Something has been done in order to make the country a lot more feasible and a lot more viable. And that is important for us to recognise, the same way that you in your companies assess your debt with various types of ratios and give you the comfort that it has been done in such a way that we maintain Sri Lanka’s overall viability and I can assure you that it is not in any danger.

Let me look at how you also develop your companies with diversification of your overall business models. You do that all the time. If you look at the top company, John Keells Holdings, each year it adds on new types of businesses to its overall types of work that it does. Its business model changes and that is the diversification I’m talking about. And when you grow, you need to diversify, at various intervals, in order to make use of the new opportunities that are created in the business world.

We worked hard on macro fundamentals
The same thing has to be done in a country as well. If we did not diversify, Sri Lanka’s overall income streams over the last several years, you would find that they would reach certain stagnation points. That is why the President in his wisdom, when he put forward the Mahinda Chinthana vision for the future, spoke about five hubs, new creations within our country, which will be the new stars in our economy. All of us know about stars and cash cows.

The stars have to be nurtured in order to develop into cash cows. So, Sri Lanka has now started on new areas, which are the maritime, aviation, commercial, knowledge and information technology—the new stars which will be the new cash cows as Sri Lanka grows into the next decade and beyond. So, again, a very important business strategy, that has been pursued by the government and which will bear fruit as Sri Lanka matures.

The third point that I want to talk to you about is getting the basics right. All your companies have to make sure that your overall fundamentals are in order. You have to see that your business processes are sound, good human resource management techniques in place and accounting systems and IT systems are sound and the equivalent of those in relation to a government is your macro fundamentals.

Over the last several years, we have worked hard on the macro fundamentals and that is why today we enjoy those macro fundamentals, which allow you to do your business without a little worry, about other areas that you used to worry about in the past. If your inflation is very high, if your financial system is not stable, if you have labour difficulties and problems, you will be distracted from the normal businesses that you should run and you’ll be worrying about those aspects, which are under threat or in danger.

So, the government, in its enabling environment, has to give you that comfort by making sure that those types of fundamentals are sound and that is what has been done over the last several years.

Another point that you look at and your shareholders look at is your earnings per share. If your earnings per share drops, your share value drops, your company will not be recognised as the Top 25 and you will probably not be in the same sound position that you are in today. So, you keep a close tab on your earnings per share. In the same way, the government and the overall economic managers, have to ensure that the country’s per capita incomes are rising.

We spoke earlier about Sri Lanka moving towards a four thousand dollar per capita income. What were we doing? We were actually talking your language, we were talking about ensuring that the overall per capita incomes rise so that the country conditions would be brought up to a level that people can enjoy a good life and a good standard of living.

As directors and as chairmen my dear friends, you also want to keep your shareholders happy. Several business leaders who spoke today spoke about that you are keen to ensure that your shareholders are kept happy. The equivalent of that in relation to the government is to keep the country’s shareholders’, every citizen in this country happy. Over the last several years, we have seen poverty reduced, have seen the regional disparities reducing, and those important signs of keeping your shareholders happy.

If your shareholders are not happy, they don’t want to keep you happy and then you worry and that is why you keep the shareholders happy and even from the government’s point of view, it is imperative that the key shareholders and all those who work in our country are kept happy.

Country has to give itself a brand
Let me also talk to you about another aspect, which is the company brand. All of you are very concerned about your brand. If you take every one of those 25 companies, you know and we all know how much you work on the brand. Your brand eventually exercises every type of activity that you do, has a foundation on your image building. A country also needs to do that. A country also has to give itself a brand to ensure that the people, who deal with the country, will feel comfortable, be keen to do business with that country. So, how do we create a country brand?

The country brand has to be done with good exposure and other people from other parts of the world coming to our country to see how we develop and our infrastructure has developed. These are all useful components of building a brand. I think the government, even recently taking the decision to organise the Commonwealth Heads of Government Meeting (CHOGM)—we are coming very close to that now—it is an important event, which will create a new brand.

Whether we like it or not, you have to understand that we did not have a great brand up until four years ago. We were known for the wrong reasons. The world recognised Sri Lanka, not for the great things that we have done. So, we have to shake off that brand, we have to create a new brand. I believe just like what you do in your own companies, building the brand, the country also needs to do that and that is what you see happening today and that is what we have seen happening for some time as well.

You concentrate on risk management in your numbers. You constantly look at your horizons to see whether there are impending risks, new threats to disturb your business. We do the same ourselves. The country’s risk needs to be also assessed at various times because the risks out there are huge. Every day you see new threats looming. Not only in the political scenes of the world and not necessarily only for Sri Lanka.

Today, you see IT connecting each one, as a result of which, threats can be transmitted very quickly. Those days, a particular threat took a long time to be transmitted but today it is not so, it is immediate. So we have to keep a very close search light on to ensure that Sri Lanka is kept free from threats and the economy is also made conducive for you to do business.

At the same time, we got to have procedures and processes in general to enforce. In the same way, the government has budgets, our policy statements and roadmaps to ensure that we stay in line and we are progressing without any deviation from the original plans. I also believe that all of you in your own companies take great pains to make your own infrastructure, your own company to be at a high level and high weight in order to make your stakeholders will feel comfortable when they come to see you.

A similar exercise should be carried out in the country to make it clean, to make it neat, to make it more conducive for people to come in. Today, what you see is that happening. So, the government is not very different to that of the private sector.

We are approaching the governance from the point of view of private sector values as well in order to give you a great life for you to do business. Let me also reflect on what exactly takes place when Sri Lanka incorporated has to go forward. We have to plan, we have to make sure that we reflect on what has taken place and we have to always be a step ahead in order to ensure that our country can be safe  as well as economically sound.

Sri Lanka on threshold of a new era
Let me conclude by telling you the story of a Polish immigrant, who was very wealthy at the time he was about to retire. He had educated his children. He has come to the US from Poland and worked hard and he has put his son through Harvard University. The son, after he qualified and came back to the business of the father, told the father after some time, “Papa, you are not running your business correct. You don’t have sufficient accounts. You are not in a position to tell me exactly what your profit is. You are not able to have a very good handle on the business like what they have taught me at the Harvard University.”

The old man was a little puzzled and he told the son, “You know, today, I have educated you at Harvard, which has cost me about 500,000 dollars. Your sister has been put through one of the most prestigious ballet schools and I have spent a million dollars on her education. Your mother has all this jewellery and all this finery, which have cost me another 500,000 dollars. I have now three cars, I have a cruise liner and I have also been enjoying life and that has given an asset base of around two and a half million dollars.

When I add up all that and I deduct the 18 dollars that I had when I came from Poland to the US – that is my profit. I think that is enough for me and the rest of it now you can build up on it.”

I think, if you look at Sri Lanka in 2008 or in 2005 and you look at Sri Lanka today, you can assess for yourself what has been the mega change that have taken place in our country. What has changed, what has improved and if you deduct from what you see today, what was available in 2005, that my friends would be the profit of our country and that is the profit which we all are going to enjoy. The only thing that we must now remember is that, that should not be our end but that should be our beginning.

Sri Lanka is on the threshold of a new era. We have set the platform for that new era and all of you are today poised to take Sri Lanka forward to the next level and the next era. I hope all of you will be up to the task and put your shoulder to the wheel in order to ensure that Sri Lanka will move to the next phase and with it we will all enjoy a much better life for all of us and for our children.

Oct 232013
Rupee under appreciation pressure at the moment: CB
The Sri Lankan rupee, which hit a record low at the end August, is under appreciation pressure and the Central Bank has been intervening to curb a sharp rise, the Central Bank Governor said yesterday.

The rupee has been trading at more than a threemonth high of 130.70/75 to the dollar, after having appreciated 3.42 percent since it hit a record low of 135.20 on August 28.

“There is actually more appreciation pressure than depreciation pressure at the moment,” Governor Ajith Nivard Cabraal told Reuters.

“The Central Bank is intervening when it thinks the rupee is appreciating too much.”

Currency dealers said inflows into the share market and government bonds amid weak importer dollar demand had helped boost the currency.

Some dealers had expected the currency to come under downward pressure after the Central Bank cut key policy interest rates to multi-year lows last week.


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