Development banking: Back to square one!

The news itemwhich appeared on Sri Lankan newspaperstitled ‘A new Development Finance Corporation to be launched soon: Prime Minister,’ prompted me to write this article. I was surprised to see this news and felt some sort of mental discomfort when regretful history we experienced in development banking in Sri Lanka is considered.

Development financing is not a new concept to Sri Lanka as we established a fully-fledged development bank in late 1970s whichwas named as ‘National Development Bank of Sri Lanka’ (NDB). Development Finance Corporation of Ceylon was operationalin the country at that time though it wasn’t capable of providing comprehensive development banking services at that stage to address the gap that existed in development financing in the country.

Though the NDB was established in the late 1970s there was a painful path to navigate,starting from late 1960s,by dedicated and patriotic staff from Central Bank of Sri Lanka (CBSL) until NDBwas established.

At the outset, CBSL staff had to convince their Board of Governorsfor a need and how development financing is capable of contributing tothe economic development in Sri Lanka by filling the funding gap that lasted for many decades.To this end, they had to demonstrate the remaining gap in banking sector for such an institution to support their argument.

The main reasonin this regard found to be the inability of already established financial institutions to cater for emerging need for development financing as a mechanism for promoting viable enterprises for economic development.

Established commercial banks depend on customer savings strategies such as term deposits as sources of funding to structure their lending time frames.Since the term deposit timeframes are limited to few years commercial banks were unable to provide long term finance for projects which run for up to 10 years or more.

On the other hand, commercial banks require higher collateral which sometimes surpasses the value of assets bought using the proceeds of financial facility granted.Therefore, any entrepreneur who is capable of running a viable enterprise hardly had any chance of realising their potential unless they can offer collateral other than the assets of the proposed venture.

Development financing has the capacity to address these gaps as their funding originates from sources such asprompters’ equity injections, credit lines from international funding agencies like the World Bank (WB), Asian Development Bank (ADB), etc.

Assets bought for the project using the credit facility are used as collateral for lending and theviability of the project was a major criterionconsidered by development banks in providing financial assistance.Accordingly, development banks have the necessary ingredients to help any entrepreneur who is capable of developing ideas for an enterprise and implementing them to realise a viable business proposition.

Once endorsement was obtained from the Board of Governors from CBSL,the promoters also identified equity sources for the establishment of NDB.However, for more than ten years this initiative didn’t get off the ground since there was no political will for such an endeavour.

Finally, with the patronage of the then highly capable Minister for Finance Ronnie De Mel, necessary legislations were approved by the Parliament to establish the first fully-fledged Development Bank in Sri Lanka.

The WB undertook the groundwork for establishment of NDB of which organisationalstructure,staff training, introduction of lending/operational policies and the avenues to reach the potential customers through local branches of established banks in the country. NDB was formally established in latter part of 1979 which was a result of untiring, dedicated and praiseworthy efforts of staff from the CBSL.Significant and key positions of NDB were given to some of the staff from CBSL through secondments so that it will ensure that the Bank will be properly guided to achieve its established objectives.

On the other hand, we already had established Industrial Development Board of Sri Lanka (IDB) of which functions were enhanced and used for the provision of technical knowhow and required assistance to potential entrepreneurs, especially from Small and Medium Scale Industries (SMI), so that a total package for facilitating entrepreneurship can be offered to potential entrepreneurs.

After the establishment of NDB,it performed its assigned tasks remarkably which were aimed to enhance country’s economic development and to facilitate the smooth operations of financial markets.

Starting from providing direct lending facilities to larger industries as well as service providers and providing financing facilities to SMIs through the network of other banks,NDB provided merchant banking services such as loan/equity syndications, underwriting of share/debenture issues, etc.

Provision of equipment financing facility, rehabilitation of unviable commercial entities, establishment of Lanka Orient Leasing Company in collaborations with Japan, establishment of Capital Development and Investment Company are some of the other progressive initiatives undertaken by NDB.These activities were facilitated by staff training through the grants and facilities provided by international financing agencies such as the WB and the ADB. 

NDB never failed to achieve its original objectives and it established itself as a highly-capable, strong and premier financial institution in Sri Lanka and won the credibility, confidence and acceptability by all the stakeholders locally and internationally within a relatively very short time frame.

The smooth operation lasted for over a 15-year period until it was privatised by narrow-minded political leaders in Sri Lanka at that time with the influence of remaining trend of privatising state agencies in the country.It was disheartening to witness that even before the bank was privatised itstarted deviating gradually from its original objectives. 

This could be mainly due to weaktop-level staff succession plans implemented by senior leaders of the bank in addition to the civil conflicts that ran over many years in the country.These aspects played a significant role in restrainingNDB to operate smoothly to provide its mandated services to the economic development and these could have also been the influencing factors for its demise as a development bank.

Development banking was well established in India much before Sri Lanka embarked on it and they never deviated from its original objectives and development banking still continue to play a very active role in India’s financial economy.Development financing provided a substantial momentum and immensely contributed to India’s economic development during last few decades.

Establishment of a development bank was long overdue in the recent past in Sri Lanka, and the country felt its value for the last two decades in its endeavour to achieve enhancedeconomic development to address deterioration of economic activities in the country.It is a consolation and pleased to note, even at this latter stage, that the current Government has committed to establish another development bank (should be a bank not a corporation) to fill the vacuum left after the privatisation of NDB. This initiative will no doubt contribute to getting government acts together on the economic front.

Sri Lanka is already rich with required expertise and their knowledge and understanding of potential entrepreneurs who would use servicesfrom the proposed development bank to achieve their entrepreneurial ambitions.This environment is a blessing that can be harnessed to realise the proposed venture without prolong delays and get all necessary legislations through the Parliament as a matter of priority.

As in many other cases, this organisation should be free from political interference such as the environment the then Minister Ronnie De Mel ensured for NDB and let it run as a development bank and not as a commercial venture like NDB now.