Interference in the banking sector

" With the war ending and more power-play emerging in Sri Lanka’s economy, particularly in the hotel sector and urban development, the government’s intervention in the banking sector will backfire and send wrong signals to foreign investors and the stock markets. As we have repeatedly said before, there is no role for the state in business which would do well to maintain a ‘hands off’ strategy."

by FS

(April 03, Colombo, Sri Lanka Guardian) Events at the Commercial Bank’s annual general meeting on Wednesday where Ranjit Fernando, a veteran Sri Lankan banker, was ‘forced’ to withdraw his bid for re-election as a director despite the nomination being approved unanimously by the bank board, brings us back to the problem of governance and state interference in the private banks.

Ever since state institutions and state funds like Sri Lanka Insurance (SLI), EPF and ETF began investing in private, commercial banks, alarm bells have rung in governance circles as to whether the government was attempting to control the banks.

Exacerbating the issue, Hatton National Bank (HNB) recently appointed Dr Ranee Jayamaha, currently an influential advisor to President Mahinda Rajapaksa and a former senior Deputy Governor of the Central Bank, to its board as a nominee from stakes held by state institutions. She is expected to take over from Rienzie Wijetilake who retired as chairman and stepped down on Thursday at the bank’s AGM.

The new HNB chairperson was not announced at the meeting but like in the case of the Commercial Bank where the government nominee was appointed to the board only after the AGM was over, Jayamaha’s appointment as chairperson is likely to be on similar lines – though strictly no one can oppose the right of the board to name a chairperson later.

“We were not told at the AGM as to who would fill Ranjit Fernando’s vacant position and only learnt in the newspapers that Lakshman Hulugalle, an influential government official, had been appointed,” noted K.C. Vignarajah, a veteran investor and whistle-blower who had urged the Commercial Bank board to retain Fernando and ‘resist’ state interference in the running of the organisation. He raised the question of state institutions – EPF, ETF and Sri Lanka Insurance which together has over 25 % - and a Japanese fund acting in concert to oppose the appointment. “In the first place how does a Japanese fund know about the credentials of an individual like Mr Fernando who has wide experience in the banking sector and is highly respected?” Acting in concert is banned under Central Bank rules.

In Fernando’s case, shareholders were told at the AGM that the government wanted a another nominee and would oppose the former’s re-appointment (by virtue of its control through shares held by state organisations). Faced with a crisis and Fernando expressing a willingness to step down rather that trigger a confrontation with the government, the board decided to accept Fernando’s withdrawal from the race.

Whether the move to oust Fernando was a political one due to his links to the opposition UNP or for some other reason remains to be seen. However, Fernando has maintained his independence and integrity, whatever his political connections are, and his work and experience over the years in several boards of companies is reflective of his passion to improve the growth of a company with the kind of professional input that he offers.

Vignarajah says that the government instead of making inroads into private banks, should ensure state banks are efficient, profitable and not give out loans to ‘cronies’ which result in bad debts. “By this intrusion (into the running of private banks) the state can control or have a say in the loans given by banks to individuals or companies,” he said. Vignarajah has been knocking on the doors of corporate boardrooms for proper governance and transparency for many years, so much so that directors dread to see him at AGMs where he fires unpleasant questions. In most cases directors have little answer to the issues he raises particularly, in recent times, on the question of the independence of auditors and also ‘independent’ directors. Ironically there were ‘hurrahs’ for Vignarajah this time from some corporate bigwigs for defending Fernando’s right to be re-elected.

While economists like Harsha de Silva, now a UNP parliamentarian, are opposed to the idea of using public money (EPF) to ‘play’ the stockmarket, Vignarajah says investments by state funds – so that there is a better return for all stakeholders – is okay as long as there is no ‘politics’ involved.

Wednesday’s events saw Chandra Jayaratne, a former Chairman of the Chamber of Commerce and a respected business leader, fire a lettter to IMF Sri Lanka Representative Koshy Mathai urging the IMF to intervene and ascertain whether there has been a “level of direct involvement, coercion and interference by the ‘Independent Key Regulatory Governance Institution and its leadership (meaning Central Bank and its Governor)’ in the management and operations of financial institutions coming directly under its supervision, and whether such actions would be a norm in Sri Lankan governance and administration, and what negative impacts and consequences it would have.”

Jayaratne said he hoped Dr Mathai would discharge ‘your governance role and accountability as the Head of the Sri Lanka Mission office of the IMF meeting the Sri Lankan Citizens Good Governance Expectations’. Interestingly this Wednesday’s pressure tactics by the government came just before a citizens’ group met on the same evening to discuss ‘good governance, transparency and accountability’ at the OPA auditorium in Colombo. Key speakers were Jayampathy Wickramaratne, PC (Presidents’ Counsel), Srinath Perera - PC, and human rights lawyer and campaigner J.C. Weliamuna with each raising concerns on these key issues.

With the war ending and more power-play emerging in Sri Lanka’s economy, particularly in the hotel sector and urban development, the government’s intervention in the banking sector will backfire and send wrong signals to foreign investors and the stockmarkets. As we have repeatedly said before, there is no role for the state in business which would do well to maintain a ‘hands off’ strategy.