Sri Lanka’s financial market regulator Central Bank (CBSL) will be introducing a 25% percent ownership limit in licensed finance companies (LFCs) following stakeholder consultations on the plan, a recent consultation paper calling for public views outline on the Central Bank’s website.
A letter from Central Bank said that the new move is to strengthen corporate governance practices, proper delegation of duties, collective decision making process and internal controls. Accordingly the master plan is intended to bring down the ownership limits to 25% within a timeframe of 5 years by 2025, the letter signed by Department of Non-Bank Financial Institutions Director W. Ranaweera noted.
“A consultation paper on introducing ownership limits of the LFCs has been drafted with a view to obtain stakeholder observations,” Ranaweera said in the letter and those interested can submit views to the CBSL until June 14.
However, under special circumstances, ownership limits can be increased to 30% according to the suggested proposals. Planned sanctions for non-compliance will include suspension of business activities and cancellation of license. The CBSL said that a number of LFCs have failed and become almost bankrupt due to mismanagement, with influence of the main shareholder causing distress to many depositors.
Reports outline that bad loans in Licensed Finance Companies (LFCs) reached 7.8% by end-December 2018, up from 6.31% a year earlier. Meanwhile CBSL report highlights that currently 30 LFC’s, has a main shareholder who owns more than 50% of shares. Further in 8 LFCs, more than 50% is owned by the main shareholder and related parties. In 2 LFCs, ownership is limited to two shareholders and only three LFCs have diversified ownership. The report also said that some LFCs are fully owned by banks, and these would be exempt from the new direction. CBSL also suggests that finance companies already in trouble and are being restructured will have to follow such plans instead of the 25% limit. Proposed regulations also suggest Subsidiaries of other LFCs will be required to merge by end-2020.
According to regulations already, banks in Sri Lanka have a shareholding limit of 10%, which could be increased to 15% with special approval.
Sri Lanka financial industry analysts point out that despite Sri Lanka’s non-banking financial sector facing continuous trouble and bankruptcy, deposit runs from early 1990’s on wards had emerged starting from first Sinhalese Central Bank Governor N.U. Jayawardena family owned Mercantile Credit to Lalith Kotelawala once owned first Sri Lankan Credit Card company Golden Key and The Finance & Co, and several other finance companies in 2009’s. And latest collapsed finance company being Sri Lanka’s once famous E.A.P. Edirisinghe, who built his empire with a pawning license in the 1930s ‘tiling’ the establishment as Edirisinghe Trust Investments Limited (ETI) that soon expanded into deposit taking, a group that was later expanded by his wife Soma Edirisinghe to date until she passed away in November 2015. ETI once hailed as a leading and strongest finance companies in the country, and positioned many of its investments prominent places in the businesses of financial services, property development, jewellery sales, Entertainment and Leisure controlling over 40 cinemas in the country that has little over 50 cinemas. ETI profits were used to diversify and acquire new businesses and prime commercial property but after the EAP Edirisnghe’s demise, the businesses and assets of ETI went to Edirisnghe’s wife Soma and children, which became a problematic situation after the Central Bank tightened the screws on the financial sector after the Ceylinco Group’s Rs 26 billion Golden Key Credit Card Company collapse in 2008.
According to analysts Sri Lanka’s Big Brothers of Finance Companies in Sri Lanka had always been the Sharks that had gobbled up hard earned money of general public promising higher interest rates per annum, making some families and businessmen the billionaires of US $ 87 billion economy, at the expense of depositors’ money, in the 22 million populace. Further analysts further outline that many domestic investors and thousands of public depositors over the last 30 years history had lost millions and billions, and some have even committed suicide, and had faced family clashes and bankruptcy due to the mismanagement by some businessmen who ran non-banking financial companies in Sri Lanka.
– Reporting by Devendra Francis
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