BANKING SERVICES HUB
Compiled by Savithri Rodrigo
CORE BANKING POTENTIAL
Iresha Degamboda evaluates Sri Lanka’s financial hub prospects
Q: How would you describe the banking sector?
A: Unwavering, vibrant and fast-driven! There are about 25 well-established commercial banks, recording accelerated growth in assets and profitability, with an outlook towards overseas expansion.
This has been due to the rapid acceleration in loans and advances, consumption-related activities backed by low interest rates and availability of relatively short-term funding from domestic and foreign sources.
Q: Does the sector have a firm grasp of the ground realities?
A: The banking sector can become the most powerful force in the economy, having prudently understood emerging economic realities. In the new millennium, business realities do not guarantee survival by only being a domestic market leader – they call for crossing boundaries and constantly carving out new market positions.
Locally, financial inclusion is one of the key objectives of banks, with Sri Lanka boasting the highest financial inclusion in South Asia. In the global arena, large banks continue to become larger, spreading their wings across borders – some through organic growth, and others by means of mergers and acquisitions.
Different sector boundaries are witnessing the exchange of new experiences and knowledge that are created with integration, spurring a consolidation of industries. The one-stop financial shop brought new energy to conventional banking practices, with cross-industry services forming business clusters to provide a win-win formula.
Moreover, with banks holding valuable sources of customer data, this information can be used to build dynamic yet robust customer relationship management (CRM) platforms.
Q: What are the inherent risks, weaknesses and challenges of the current milieu?
A: The key challenges facing the banking sector, which are unique to Sri Lanka, are interest rate and exchange rate volatility, severe competition and cost escalations.
Due to the current inflation outlook and other macroeconomic parameters, interest rates have escalated to double-digit levels, and exchange rates have been broadly volatile. Banks need to be geared to manage such inherent risks.
State banks tend to dominate, representing half the sector’s assets. The Central Bank of Sri Lanka states that financial markets are more than competitive. It is implementing a consolidation programme to reduce competition, which could lead to an oligopolistic market in the banking sector.
Operating costs have increased significantly, with the banking sector subjected to a considerable tax burden, apart from the cost of expansion, technology and human resources, all of which are imperative to empowering unbanked segments, instituting customer convenience and spurring innovation.
Q: What role should the financial services industry play in driving economic growth?
A: With Sri Lanka’s aspiration to transform into an upper-middle-income nation, it needs to constantly reform its development model in terms of fiscal revenues, thus promoting a highly competitive export-led economy.
The emphasis must be on financial inclusion, improving income levels, developing rural economies, and creating a wide and strong middle class as key policy priorities. And the financial services industry plays a pivotal role in this context, by providing access and inclusion, with at least 90 percent of the population being provided formal and secure avenues for banking and project financing, which is extended to SMEs too.
Q: How can technology help develop the banking landscape?
A: Technology is a precursor to convenience in the banking sector. Thus, constant reforms are being effected on technological platforms across the country to centralise work processes, automate manual work and profitability analyses of products and services (to phase off low-yield products), which would eliminate unproductive work processes and improve turnaround times.
Q: So is it realistic to expect Sri Lanka to become a financial services hub?
A: Sri Lanka’s economy continues to grow, while attracting foreign investment from South Asia, the Middle East and Europe. This will lead to improved job opportunities and entrepreneurial prospects for Sri Lankans.
As presented by Prime Minister Ranil Wickremesinghe, the proposed financial hub aims to attract a client deposit base worth 10 percent of the island’s GDP over a period of five years. For the financial services industry to achieve hub status, it is imperative to implement strict regulatory controls for compliance and governance.
Mergers or consolidation of the big players in the market must be considered, while reforms to create and boost the corporate bond and debt markets would be in order.
Digitisation for shorter turnaround times, process centralisation, service-level enhancements and improved access to banking services – in addition to granting access to finance for SMEs, microfinance and encouraging investment – are key areas for which the financial services industry needs reforms to propel Sri Lanka in the direction of a financial services hub.