Compiled by Savithri Rodrigo


Shirani Jayasekara urges financial services providers to embrace change

Q: How would you describe Sri Lanka’s financial services industry?

A: It’s mature but overcrowded and capital constrained. Lending is restricted by economic slowdowns in addition to government fiscal and macroeconomic policy measures.

The Central Bank introduced a maximum interest rate on rupee deposits. As its spread differential with banks narrowed, non-bank financial institution (NBFI) customer retention and funding through deposit mobilisation has become hard.

So the industry faces issues such as managing net interest margins, controlling the cost to income ratio, handling non-performing loans (NPLs) and rising direct taxes that impact profits.

Q: What challenges and risks do you foresee?

A: The industry must sustain and grow in a competitive environment, comprising banks and licensed finance companies. This is compounded by commercial banks moving into spaces hitherto occupied by the non-banking sector.

Gold and personal loans, and vehicle leasing arrangements, are now part of banks’ product portfolios. And this has prompted NBFIs to tap high-risk borderline borrowers or resort to low margin lending. Also, it is challenging to retain skilled talent. While the industry invests in human capital, unplanned turnover impacts growth. And combatting cybercrime is also a challenge amidst the growing number of cybersecurity related incidents.

Q: Do industry results reflect the ground realities?

A: Recently, the industry has displayed weak profit growth. Pre-tax profits in the banking sector have grown by 0.1 percent while NBFIs showcase 1.6 percent growth.

With the fiscal measures introduced recently, tax provisions have increased substantially for banks and NBFIs.

Construction, agriculture and tourism have been impacted. They lean on financial services for support and managing NPLs, leading to bad debt provisioning.

There may be provisioning variations amongst industry players but procedures are clearly laid out and compliance is mandatory. Amid volatile ground realities, it may take time for underperforming industries to stabilise.

Q: Can Sri Lanka become an international finance centre (IFC)?

A: It must demonstrate progress in core areas before being ready to build credibility as a full service centre. A stable government and consistent policy framework are prerequisites. The role of the regulator is critical for success.

Global finance centres facilitate transactions through business friendly rules with the aim of making operations easy. Sri Lanka must make this happen.

A competitive tax regime is an imperative for IFCs. Sri Lanka’s track record on tax policy has been poor. An IFC requires a workforce aligned with the skillsets for customer friendly and efficient operations. Global finance centres also provide high quality infrastructure.

Q: And how is digitalisation affecting the industry?

A: We must follow the digital trend and be more responsive to customers by offering secure payment platforms. And the introduction of financial apps makes services easier and more accessible to many, and helps reach new customers in underbanked communities.

Real-time payment data from smartphone wallets capture behavioural footprints, which can be used by digital banking systems to rate creditworthiness and offer loans without collateral. Past data and data science techniques enable the industry to anticipate customer needs. AI paves the way for predictive analysis to expand into new products or areas.

Q: What are the emerging global trends?

A: Social media is driving market change with the young easily influenced, and requiring e-wallets and related apps to make instant purchases, returns or cash reversals. Banks are moving away from bricks and mortar branch networks to branchless paperless instant services. Mobile money is replacing physical engagement with banks.

There’s a need for tighter security, however. Solutions could be through biometric confirmation. Processes are changing to accommodate this behavioural shift worldwide.

Q: So is Sri Lanka ready for these shifts?

A: Youth influenced by social media enjoy the digital trend and ease of web-based purchasing. The older generation is wary of using credit or debits cards, or other electronic means on common platforms. They prefer to visit banks and aren’t comfortable with technology so the industry must cater to them too.

Telecom strives to support the digital transformation but must improve to offer islandwide data connectivity. Future unpredictability warrants the industry to be agile while staying abreast of technology to reflect global changes.

The interviewee is a former Chairperson of LB Finance