20 September, 2019

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Samurdhi – Divi Neguma: Consolidation And Microfinance

By Charitha Ratwatte –

Charitha Ratwatte

Charitha Ratwatte

Sri Lanka’s Central Bank (CBSSL) has detailed a road map for a process of consolidation of the financial sector. The position of the CBSL seems to be that the last quarter century has seen a number of events which justifies this consolidation.

From 1988 to 1990, 13 Registered Finance Companies failed, 11 of which had to be liquidated. The failure of a business group affected eight non-bank financial institutions. Today there is much bazaar gossip about other registered finance companies which are rumoured to be in trouble.

One point of view is that this is a reflection of the highly-fragmented structure of Sri Lanka’s financial system. However, there is another point of view, which does not seem to enter the thought process of the decision makers. That is, that this crisis situation, is in fact due to the incompetence, inefficiency and some say , even corrupt behaviour of the concerned regulators and managers of the financial service institutions, to the extent, it is alleged, of working hand-in-glove in some situations.

There is also, allegedly, the issue of the irresponsible issue of banking licenses and finance company registrations, on questionable criteria and political influence. As the pithy and apt Sinhala saying goes, banking licenses were issued and finance companies were registered “like mushrooms blooming after a shower of rain” – “wassata passe hathu pipenawa wage!”

Another allegation is allowing convicted criminals, ‘ass liquor’ cronies and unfit and improper people to hold positions on bank and finance company boards of management. Some of those characters do not have a qualification even ‘to scratch their backsides with,’ if the need arises, as the popular saying goes.

Financial services sector

The current position is that today, it is said, Sri Lanka has 16 licensed commercial banks. Five of them have a market share of 66% and an asset base of over Rs. 500 billion. The 12 foreign licensed commercial banks have a market share of 10%. There are 58 registered finance companies of which 17 account for 73% of the capital base. The nonbank financial institutions sub sector accounts for 7% of the total capital of the financial sector.

However, we would be fooling ourselves if we thought that this gives the complete picture of the financial services sector in Sri Lanka today and the profile of the money created by giving loans and the deposits taken by the various other institutions operating in the formal and informal ‘real’ money market.

A borrower or depositor in Sri Lanka today has a variety of options. Ranging from the money lenders, the pawn Brokers, the Cooperative Rural Bank, the Divinaguma Banku Sangam (successor to the Samurdhi Banku Sangam), licensed banks and registered finance companies, MFIs involved in micro finance activities, seetu (cheetu) groups (known as rotating savings and credit associations [ROSCAs]), and the infamous operators of Ponzi schemes such as Golden Key, Sakvithi Mudalali, Danduwam Mudalali and Dadi Danduwam Mudalali, to name only a few.

On the independent prudential regulatory aspect, while money lenders, pawn brokers and seetu groups have statutes providing a regulatory framework, there are no total overall numbers available of transactions by these entities. The Cooperative Rural Banks are regulated by the Commissioner of Cooperative Development. Licensed commercial banks and registered finance companies are regulated by the CBSL. Divi Neguma has its own statute, which by law rules out any application of the Banking Act and Finance Business Act to Divi Neguma. So no independent, competent, prudential regulation there too, like the Cooperative Rural Banks, seetus, money lenders and pawn brokers, etc.

It is reported that Samurdhi – the predecessor to Divi Neguma, had in 2012 a total 3,157,719 members, out of which to 117,921 members had been given loans totalling Rs. 15,324 million. The cumulative total number of loans given by Samurdhi up to 31 December 2012 is 5,085,275. Also in 2012 Samurdhi had accepted 6,206,484 deposits totalling Rs. 22,168,917 million. It is important to note that the Central Bank and the Monetary Board are by law prohibited from supervising/regulating all these Samurdhi/ Divi Neguma loans/deposits/transactions. Also MFIs involved in microfinance activities are not prudentially independently regulated. There is a draft bill, which has not been enacted.

So, this so-called consolidation of the financial services sector does not even scratch the surface of the ‘real’ money being handled by money lenders, pawn brokers, MFI, seetu groups, Cooperative Rural Banks, Divi Neguma and Ponzi schemers which pop up from time to time! It is alleged that it is a misnomer, used to brand an exercise to make the life of an incompetent and inefficient regulator, easier – and also to get statist control of the few remaining independent financial service providers.

Today when the telcos have been permitted to allow mobile phone users to transact mobile money (e.g. Dialog’s EZ Cash), a whole new money depositing, creating and transacting arena has been opened up. If Africa’s MPesa is a model, the potential here is huge. This opens up a whole new area.

Consolidation plan

The CBSL’s consolidation plan seems to be modelled on Seylan Bank being unloaded on the Bank of Ceylon, when there was a run on the former. So attaching institutions with liabilities which cannot be honoured onto strong institutions is not a new magic. That was a one-off case. Today we seem to face a more convoluted crisis, not of just one institution, but a liquidity and capital adequacy problem which is systemic across the board of the whole financial sector, or rather that part of it which is supposed to be regulated by the CBSL.
As has been pointed out, there is a vast area over which the CBSL has no power or is not interested in asserting its authority nor taking responsibility, where deposits are being taken and loans being given in astounding numbers, where the numbers are in the public domain. This ‘arm twisting’ consolidation, combined with incentives to pay for consultancies, etc., by macro market regulators is not healthy. It will create a few monopolistic financial service institutions to the detriment of the consumer. Stable banks and finance companies are being burdened with institutions which are liabilities. All will be dragged down!

It is alleged that the Guidelines issued by the CBSL to the banks and finance companies says that the present 58 finance companies will be reduced to 20 institutions and that ‘three of these would be specialised in microfinance’. This is a very interesting development.

The CBSL for some reason does not seem interested in having the draft bill providing for the Microfinance Regulatory and Supervisory Authority (MRSA) enacted. But they are setting up three specialist institutions to compete with a virtually unregulated field of competitors – the MFIs, the pawn brokers, the Cooperative Rural Banks, the money lenders, the seetu groups, Divi Neguma, Banku Sangam, etc. The three finance companies being prudentially regulated by the CBSL will have to compete on an uneven playing field. They will have no chance. It is a recipe for disaster. The taxpayer will have to come to the rescue.
India

The contrast with India regarding our policy on microfinance is illuminating.

India’s Ministry of Finance has announced that it will be soon submitting the new Microfinance Institution Development and Regulation (MID&R) Bill to the Cabinet of Ministers for approval and thereafter to Parliament The Indian MID&R Bill brings the microfinance sector directly under the Reserve Bank of India (RBI), India’s equivalent to our Central Bank.

In terms of the Bill the RBI has the authority to issue directions to MFIs on a number of issues including amount of micro loan extended, maximum annual percentage rate of interest, levy of processing fees and insurance premium among other things. The RBI is made the sole regulator for all microfinance institutions, with power to: register, direct, regulate, inspect, fix interest rate caps, margin caps, setting repayment schedules, standards for account keeping, rating norms, capacity building, management information systems, etc. and prudential norms.

The Bill also provides for the setting up of an advisory body, the Microfinance Advisory Council at the national level and Advisory Councils at the state level. A Microfinance Development Fund with resources for investment in, training and capacity building of MFIs, making donations, receiving grants, granting loans and other financial support to MFIs and other areas as determined by the RBI.

Analysts in India have welcomed the RBI being designated the sole regulator as the MFI sector has been operating in an area of regulatory uncertainty in India, up to this time. Indian policy makers see the MFI sector as playing a crucial role in the strategy for achieving Total Financial Inclusion (TFI) in India. The strategy is to provide access to financial services to the rural and urban poor and marginalised by promoting the growth and development of MFI as extended arms of the banks and financial institutions. All MFIs other than banks and cooperative societies will be governed by the MID&R Bill when enacted into law.

In an interesting development the Bill accepts that there is a distinct difference to large MFIs and the smaller localised MF operations, especially when the regulator has to deal and inter act with the different categories. The Bill creates a specific category of MFI called ‘Systemically Important MFI’. An MFI will fall into this category when it deploys such amount of funds for providing microcredit to a minimum number of clients as may be determined by the RBI.

The fact that more rigid standards of scrutiny, supervision and prudential regulation will be required by the larger state wide or multi state MFIs, as compared with small localised operations is an important one; it is important that the Indian Bill recognises this distinction.

Applying rigid standards to small developing MFIs will stifle and inhibit their development. Alternatively MFIs handling tens of thousands of depositors’ money cannot be treated, in regulatory terms, in the same way as small village based MFIs. The Indian Bill also provides for the appointment of a Microfinance Ombudsman for the purpose of redressal of grievances between clients of MFI and the MFI with powers to issue directions to MFI.

Sri Lanka

The Sri Lankan draft bill for the establishment of a Microfinance Regulation and Supervision Authority (MRSA) for the purpose of licensing, regulation and supervision of microfinance business among other things has been made public. The Finance Business Act No. 42 of 2011 prohibits any lending and deposit taking of all kinds, except certain categories already recognised by law, and the MRSA was said to be enabling legislation providing for microfinance institutions to continue in business, notwithstanding the Finance Business Act. However, unfortunately, the Sri Lankan draft MRSA legislation has not yet been enacted into law.

Some comparisons of the SL Bill with the Indian MID&R Bill are interesting. There are many areas of similarity and some of divergence. In the SL MRSA, Part II Section 10 (2) defines a microfinance business as the ‘acceptance of deposits and providing financial accommodation in any form and other financial services mainly to low income persons and micro enterprises’. This is a very broad definition, probably the broadest possible, and Section 10(3) empowers the Authority to lay down the criteria for determining who is a ‘low income person’ and what is a ‘micro enterprise’ by gazette.

It is interesting that the Divi Neguma Act defines microfinance as a ‘type of banking service that is provided to employed or low income individuals or groups, who would otherwise have no other means of gaining financial services’. The State’s two laws – one an enacted Act, the other a Draft Bill – differ in their definition of microfinance! One wonders how the CBSL will define microfinance for the three specialised registered finance companies it intends to set up!

Meanwhile, in the Indian Bill, by Section 2 (f) a ‘microfinance institution’ is defined as ‘an entity (irrespective of its organisational form) which provides microfinance services in the form and manner as may be prescribed, but does not include: a bank nor a cooperative society’. Section 2(g) defines ‘microfinance services’ as ‘ one or more of the following financial services involving small amounts to: individuals or groups: providing micro credit, collection of thrift, remittance of funds, providing of pension or insurance services and any other services which may be specified, in such form or manner as may be prescribed’.

S3 of SL MRSA Bill provides that the objects of the Authority are, broadly, to license, register, regulate and supervise the microfinance business. To strengthen and develop and qualitatively improve the microfinance business, to ensure its integrity and transparency, to maintain the confidence of stakeholders in the business, and minimise losses by establishing and enforcing standards of accounting, governance and disclosure for the microfinance business. It is commendable that a developmental object has also been included. The microfinance sector needs some support to expand its human resource capacity and improve monitoring and evaluation.

However, the SL MRSA Bill does not have a provision for a MF Development Fund which Section 29 of the Indian MID&R Bill provides. The Indian Bill provides that ‘the Fund shall be applied to provide loans, refinance, grants, seed capital or any other financial assistance to any MFI’. This is an unfortunate omission in the SL MRSA Bill. Especially since the MF business in Sri Lanka has for over two decades had access to concessionary funds and grants for development, from the Janasaviya Trust Fund (JTF) and its successor: the National Development Trust Fund (NDTF) and its successor: the Sri Lanka Savings Bank – micro finance window.

The INGOs also supported SL MFIs but today with a claimed poverty head count of only 8.9% and a per capita income of $ 2,800, the international donor community have taken Sri Lanka off their radar, as we are a Lower Middle Income category – even though we provide as much as 40% of our population with an income support safety net.

Divergence and discrimination

The Indian MID&R Bill by defining an MFI as one which provides a list of prescribed services catches up all players in the sector except the banks and the cooperatives. In Sri Lanka Section 13 of the MRSA Bill exempts certain institutions such Divi Neguma banking societies and farmer organisations which are in direct competition with MFI supervised by the MRSA. They all indulge in the microfinance businesses.

Today even licensed commercial banks and finance companies proclaim that they are providing MF. Is there a legal basis, in terms of fair and acceptable classification for exempting banks, finance companies and Divi Neguma from the Indian and Sri Lankan regulators’ supervision and regulation? In India, at least it is one and the same RBI, which is the regulator. So there cannot be much divergence and discrimination in equal treatment of the category.

In Sri Lanka we find two different regulatory institutions for institutions claiming to be providing the same service (micro finance) to clients. It may be unfair discrimination and placing microfinance business’ subject to the MRSA’s seemingly more rigorously empowered supervision under a disadvantage, due to higher costs of compliance, etc., which may be challenged under the Fundamental Rights, (equal treatment of same class of persons) jurisdiction of the Courts. Supposedly the proposed registered finance companies specialising in microfinance to be set up will be supervised by the CBSL

Benign neglect

The official attitude in Sri Lanka and India, to the micro finance sector over time has been one of ‘benign neglect’. (This phase was coined by the late Massachusetts US Senator Pat Moynihan, to describe the Reagan administration’s attitude to coloured Americans.)
Rarely was anything positive done, but there was no great damage caused to the sector either, by official acts. Of course the periodical loan waivers for agricultural and housing loans killed a credit culture painstakingly built up over the years by MFIs. On the positive side the Janasaviya Trust Fund’s (JTF) micro credit window brought in over 150 new partner organisations into the MF sector. The National Youth Savings and Credit Cooperative (NYSCO), CBSL’s Isuru project, the Credit window of the Janasaviya Trust Fund and Janasaviya

Program, Samurdhi and Divi Neguma mainstreamed Self Help Groups (SHGs) and savings mobilisation.

In India the work of the National Bank for Agriculture and Rural Development (NABARD) established in 1981 did extensive work with SHGs to promote MF. In India cotton farmer suicides last year in Andra Pradesh and neighbouring states due to multiple borrowing from money lenders, commercial banks and MFI caused uproar and MFIs were unfairly blamed. The political drive to regulate MFI in India came about due to this.

The remedy for over-borrowing is the creation of a database of micro business borrowers; over borrowing takes place when one micro borrower takes loans from multiple micro lenders way beyond his capacity to repay. Since MF loans are small, borrowers are tempted to take loans from multiple sources to source a big sum of money. Draft legislation in India and Sri Lanka changes this policy of ‘benign neglect,’ as does the setting up of three registered finance companies in Sri Lanka specialising in microfinance.

Analysts are of the opinion that consolidation of licensed commercial banks and registered finance companies will not result in creating a resilient and stable financial sector, as it is being done ‘artificially’ using strong arm tactics, and for the reason that it does not touch a vast area of the ‘real’ financial sector, both formal and informal.

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Latest comments

  • 1
    1

    Mr. Charita Rattwatta, good study of situation of unregulated MFIs which often riping off poor people.. What are poverty NGOs and talk shops like Center for Poverty Analysis saying or doing about all this?!!!

    • 0
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      What do the rating agencies like Moodys, S and P, and Fitch saying about the spreading of financial CONTAGION through the banking sector of Sri Lanka through irresponsible CBSL policy of enforced mergers of insolvent financial outfits run by crony capitalists of the Jarapassa regime with good institutions?!
      A massive melt down and economic crash is on the cards with the Lanka rupee set to crash as foreign investors pull out due to the totally irresponsible policies of the Corrupt clown at the Central Bank – Nivard Cabraal who should be forced to face trial for the economic crimes he has committed including getting the stupid Mahinda Rajapaksa regime to make a thankfully failed bid for the Commonwealth Games in Hambantota!
      Hambantota is a massive disaster zone of white elephant infrastructure that is a huge drain on the tax payer of the country – Hambantota port, airport, cricket stadium, convention center etc. Those funds should have been spent in the northeast and would have made far better investments.. But the racist Sinhala Modayas are so thrilled with the superficial beautification of Colombo that they have not got a clue about the coming crisis also due to the drought and electric and energy crisis given El Nino weather predictions for the year..

  • 1
    2

    Thanks Charitha – you should take of the CBSL and send that corrupt clown Nivard Cabraal home..
    “Sri Lankan shares fell for a third-straight session on Monday to a more than five-week low as foreign investors continued to dump the island nation’s risky assets, contrary to inflows into other emerging markets in Asia..”

    With sanctions-talk in the air scaring potential investor – for the regime’s crimes – and unethical and corrupt regime cronies running the banking and finance sector regulatory bodies, is lanka in for a massive economic melt down/ correction in 2014?

    • 0
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      The spineless financial sector of Sri Lanka must STAND UP and OPPOSE this plan of corrupt clown Nivard Cabraal to SPREAD CONTAGION and corruption throughout the banking sector in Sri Lanka.

      The enforced mergers will bring down the few remaining solid banks by forcing them to merge with insolvent financial outfits of the Jarapassa crony capitalists who are supposed to be bailed out by this..

      This is a most dangerous and irresponsible policy that must be opposed by one and all!

  • 1
    1

    The greatest blessing Mother Lanka can be bestowed upon is a crushing financial meltdown – complete bankruptcy – to force the Sinhala Buddhist population to vote out the thieving Medamulana bandits.

    • 1
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      How about minority Tamils?

      Will they survive?

      • 0
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        All Sri Lankans, including Tamils, the Sinhala Budhhists, ethnic and religious minorities will not only survive but thrive after the Medamulana bandits are taken away to langish in jails in a foreign land. You too will know this if you study the history of Nazi Germany and Japan after WWII.

  • 2
    1

    We know how the economy was when he was the treasury boss.

    Bankrupt!

    Poor Ranil lost.

  • 1
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    Fine analysis. Very informative. Indicative of a high level of incompetence in the Central Bank, and the Finance Ministry, a pointer to what happens when near dictatorial authority and impunity is exercised by powerful politicians and their minions. People who are upright and do not fear to voice a dissenting opinion are considered as traitors or LTTE agents. They leave and only the ‘yes men’ remain. There is no way to stop this now. Only a disaster and a change of guard can resurrect this situation. Do not entertain any hope for Sri Lanka. The good people are powerless. Mahinda Rajapaksa has ensured that.

  • 0
    0

    Good article.

    The issue is that most NBFI directors are not fit and proper to manage NBFIs. Most of them were family owned and family members and in- laws are directors. They have no clue as to how a NBFi should be directed and controlled. This is happening even today. It is important to note that a NBFI is run with majority depositors funds and not with shareholders funds. Hence strict governance requirements a must. For example large NBFI will have Rs 25 billion of deposits and Rs 1 billion of shareholder funds.

    The other reason is corrupt directors used depositors funds to enrich themselves via related party entities just like in the case of Mercantile Credit and Ceylinco groups. It was common for some executive directors to get paid as much as Rs 5 million per month and some non executive directors to be paid a board meeting allowance of Rs 1 million.

    The drawback is our laws are weak and slow to enforce and these corrupt directors and management can easily getaway. I would be surprised to see any director or senior manager from any of the distressed NBFIs to be seen behind bars. Even after five years, we are still struggling to settle depositors within the Ceylinco group and the pay out keeps reducing when there is a delay.

    It is easy to blame the regulator when something goes wrong but in all NBFI failures including the NBFIs in distress at the moment, all checks and balances have failed. The primary responsibility is with the directors and the management and they should be held responsible and accountable before pointing fingers at any other party including minority shareholders, depositors, analysts, rating agencies, regulators, external auditors, media etc.

    This is a national issue and we need to address this crime. Hopefully with the financial sector consolidation process, this issue may get addresses to some extent.

    • 0
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      Thank you for that comment Jagath Fernando. However, I disagree that the proposed consolidation is aimed at sorting out the shortcomings you enumerate, instead they are meant to hide the financial mismanagement and misappropriation by political appointees and to also ensure their future positions in the consolidated Boards. the fact that Divineguma and many other NBFIs remain unregulated shows that the government lacks serious commitment to the correct principles of governance.

  • 0
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    Excellent piece of work in giving perspective. Unfortunately these will not be taken into consideration by the dumbos who make decisions

  • 0
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    Please write more article abt Bank mergers mr.charith. Bcz most of trade unions are vert poor in knowledge abt this situation. Thanks

  • 0
    0

    I need divi naguma exam booh

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