“Banks in America and Europe collapsed, but our banks are strong”: Amunugama

“Banks in America and Europe collapsed, but our banks are quite strong and stable,” said Dr. Sarath Amunugama, Senior Minister for International Monetary Co-operation and Deputy Minister of Finance and Planning, when he opened the Bank of Ceylon branch at No. 13, Doranegala Road, Medawala. A large number of persons from the area as well as bank officers were present on the occasion. Following are excerpts of Amunugama’s speech:

Those members of the Human Rights Council of the United Nations who voted against us should be aware of the fact that although banks in the United States and in the European Union collapsed, banks in our country are quite stable. Lending agencies are now frightened to lend money to countries like Cypress and Italy. The future of such countries is not favourable. It is such people who preach sermons against us. The most suitable and effective reply to such adverse comments is to increase the speed and tempo of economic development.

The banking system plays a key role in the development of the country. The subject of economic growth and development is a topic that is being constantly discussed at foras like Parliament, public meetings, conferences and by the media. Then, we must raise the question as to how one can identify the ‘development’. There is one method of indentifying the concept and that is by improving the conditions of the numerous enterprises.

Our Government has provided numerous facilities to the entrepreneurs who have contributed their wealth, their labour and their knowledge for the establishment of small, medium and large scale industries in the country. How shall we increase productivity in the above industries? The increase in the production capacity of such investments will invariably increase the people’s incomes. If no capital is available, productivity in any enterprise cannot be increased. If production does not increase, the prices of various commodities will rise.

The banking system

If the price of any commodity rises far beyond its value, the sale of such a commodity will be a difficult task. Irrespective of the doctrines of capitalism or socialism that prevail, the investors should have adequate sums of money. The only method by which investors can be provided with money is through the mechanism of the banking system. There are two methods by which money can be provided. One such method is the provision of subsidies. When the population of a country increases, a vast sum of money will have to be spent on subsidies.

At the time we received Independence, we had a population of eight million, compared to the period we received our Independence. Today, the General Treasury will have to spend a stunning threefold sum of money. In the past the quantum of money spent on subsidies was quite small; today it has been transformed into a massive liability. If that is to continue further, the only condition under which it can be done is by increasing the assets of the country.

Subsidies can be granted if the wealth of the country too increases. On the other hand if the wealth decreases and if the inflows of wealth are slow and haphazard, subsidies will blow like a balloon, and we will reach a situation when it will be difficult to continue with the subsidies any longer. Hence we must increase our wealth through the banking system, through our available capital, through our services and through our intelligence and knowledge. We must increase our wealth. It is by increasing our wealth that we can proceed on that journey.

Banking beginnings

Out of the several sectors involved in that process are those with capital, i.e. the capitalists. In our country prior to our Independence, all the banks belonged to foreigners, who were mostly the British. The first branch of a bank in Sri Lanka was established in Hatton by bypassing cities like Colombo and Kandy. Why was it that a bank was opened at Hatton?

A British Bank was opened at Hatton for the purpose of investing in plantations. Those plantations received money from England. Income received from tea exports to England were retained at the Headquarters of the Bank in England. Hence only a branch of the bank was opened in Sri Lanka. Later, branches of the bigger banks in England were also opened in Sri Lanka. Only the amount of money required for its day-to-day operations were held in Sri Lanka. The surplus was retained in England. The first bank was established in that manner.

The first indigenous bank of Sri Lanka, Bank of Ceylon, was established in 1939 on the recommendation of the Pochkanwala Commission, which was appointed by the British Colonial Government. Through the Bank of Ceylon, capitalism commenced in our country. For purposes such as the purchase of tea and rubber plantations and for the entry of Sri Lankans into trade and commerce, the required financial assistance was granted by the Bank of Ceylon. There was a significant change in this situation in 1956. The Bandaranaike Government decided that the scope of the activities of the Bank of Ceylon should be considered in keeping with the aspirations of the ordinary people in the country.

In those countries where capitalism prevailed, one cannot do things without any tribulation. Banks in the USA collapsed. The global crisis arose through the crash of the US banks. Banks in America continued to lend money without any financial discipline. Banks in Sri Lanka are quite stable because the Government was backing them.

Financial stability

Why should people speak about the conditions of the economy of Sri Lanka? Practically every country sells bonds. That is being done by countries like China, Sri Lanka, and India. The financial stability of Sri Lanka is measured through the sale of such bonds in the international markets.

There are two important facts relating this matter. Paying of interest for those bonds is the first question. At every turn we are endeavouring to pay a lower interest for such bonds; we can do so only if our economy is stable and strong. The other pertinent matter is the question of the repayments.

Investors worldwide are keenly watching as to whether the economy is stable or weak. It is only after inquiring into such matters that they make investments. Generally, our people have no knowledge or understanding on such matters. As our economy has been successfully managed American business establishments have invested a billion dollars on numerous enterprises here.

There is a big demand for financial assistance from Sri Lankan banks under the Mahinda Rajapaksa Government. The rates of interest payable for Sri Lankan bonds are declining. At international level we can create a situation which is favourable to our country. Our State banks have given financial assistance to State organisations which are incurring losses. The loans given to the Ceylon Electricity Board and the Petroleum Corporation cannot be recovered. Almost 25% of the loans given by the State Banks are been given to the above two establishments. We must continue to do so.

Banks should give loans to earn money. But these organisations grant loans for consumption purposes and also as subsidies. In South India electricity is consumed mostly during the hours 7 a.m. to 11 a.m. This happens because water has to be pumped to the paddy fields and also to supply electricity to the factories. About 80% of the electricity supplied is consumed during day time, and the balance 20% is consumed during the nights. In Sri Lanka 20% of the electricity supplied is consumed during the daytime, and 80% at night, and that is largely for viewing television programs. We have to pay for these electricity consumptions.

Shroff system

After the State Council commenced functioning, our leaders realised that the banks in England were not giving us any money. Hence, I wish to remind you about one fact. At that time there was the shroff system. The ancestors of Anuruddha Ratwatta too held that respectable shroff’s post. Shroff means a ‘representative’ of the bank.

Banks then did not give loans direct. Then a ‘respectable’ person opened a bank account. It was like a miniature bank. If any Sri Lankans needed any money, they had to go to the bank’s ‘representative’. The bank’s ‘representative’ had to guarantee to the bank that the money lent by the bank would be returned. Consequently there was a great attraction towards those shroffs.

Businessmen in Sri Lanka had to go through the intermediary, shroff. The businessmen in Sri Lanka then could not step into a bank. The rate of interest charged by the shroffs was higher than the interest rates charged by the banks. In view of these factors a decision was taken to establish a bank in Sri Lanka by the private sector. It is in this background that the Bank of Ceylon was established in 1939, on the recommendation of the Pochkanwale Commission. The bank so established was a bank of the capitalists of Sri Lanka.

Capitalism

Capitalism of Sri Lanka was born through the Bank of Ceylon. To purchase tea and rubber plantations and to induce Sri Lankans to take to trade, the financial assistance required for such activities was provided by the Bank of Ceylon. This position was changed in 1956. The Bandaranaike Government decided that the objectives of the bank should be broadened in accordance with the aspirations of the ordinary people.

So, on the one hand, the Bank of Ceylon, the only indigenous bank in the country, became a fully-fledged State bank. On the other hand, T.B. Illangaratne, who hailed from ‘our area,’ established People’s Bank. The objectives of the Bank of Ceylon and the Peoples’ Bank, to some extent, were different. The Bank of Ceylon, evolved a scheme of giving financial assistance to the capitalists and simultaneously also of giving such assistance to the small scale and medium scale entrepreneurs.

People’s Bank was primarily established to give financial assistance to small and medium scale entrepreneurs. The difficult task is to create a new class of investors. Under the constant guidance of the Government, the two banks are taking steps to give financial assistance to entrepreneurs engaged in small scale and medium scale enterprises. It is for that purpose that a ‘network’ of banks is being opened.

The main objective behind this scheme is to provide financial assistance to competent persons from rural areas to invest on new enterprises and thereby ‘graft’ them onto the country’s development activities. Consequently, the country’s income will begin to increase, and there will also be new employment opportunities and the economy in rural areas will be strengthened. In other countries, those having transactions with banks do so with some fear and trepidation. If a bank collapses, the question that arises is how to pay back the money to its customers. However, banks referred to in this lecture are State-owned. Hence, there is nothing to fear. Whatever financial crisis that arises, the investors and the bank’s customers will be protected. The reason for that is because both banks are State-owned establishments. Therefore, depositors should not have any fear at all to have transactions with these two banks.