By Dr. Shirley Perera
The Sri Lankan financial industry was exposed to repeated financial scandals in the recent past, where billions of rupees belonging to innocent depositors were swindled away by a few unscrupulous individuals and finance companies and the public confidence in the financial system of this country was shattered and suffered a setback, leaving thousands of people confused, as to how to get their money back.
Banking and finance are sensitive sectors in the economy and the slightest breach of confidence will lead to serious repercussions in the society and the speculation starts working in a vicious cycle. In this scenario, it would be very pertinent that the average depositor is expected to exercise more care and caution, before taking an investment decision to invest their hard earned monies.
With that in view, I wish to introduce a new model to the investors and to the general public, in assisting to select a model financial institution to invest their monies. This is very important and relevant, considering the losses and hardships, the people had to face over the years.
New model for investments
In selecting a good financial institution to invest their monies, there are several criteria and important aspects to be looked into, before selecting an institution. At present, there are over 40 finance companies and several banks, registered with the Central Bank and all are equally good and performing well. What are the factors we should examine and evaluate before selecting a suitable financial institution?
The most important factor is the ‘stability’ of the institution. Its financial strength, past track record, the profitability, its capacity to face any shocks or crisis situations, are the main factors for evaluating the stability. Its future outlook, plans and vision, the integrity and experience of the directors and main shareholders are also important factors in looking for stability.
The next factor in the model is the ‘honesty’. The honesty and integrity of the directors, its past track record in settling customer withdrawals on time, maintaining a high transparency in operations, adherence to Code of Corporate Governance and Ethics and Norms in the industry are the important features in this aspect of honesty. The perception of the public on the company and preserving a good name goes a long way in attracting good deposits and retaining depositors.
The IMAGE of the institution is evaluated by the factors like preserving a good name for long years, maintaining a high degree of transparency in the conduct of its affairs, the future outlook and the vision and mission etc. An unblemished record of service and experience and integrity of the directors also would reflect much upon company Image. Public should consider the corporate Image, as a good yardstick for safety of their funds.
The ‘rating’ of the company would help the public to choose the best institution to invest their monies. The two rating companies in Sri Lanka – Fitch Ratings and RAM Ratings have rated all financial institutions in Sri Lanka, both on future outlook, on the long term and short term and on special debt instruments offered by these institutions. Their rating criteria and observations would certainly give valuable information to the investing public on asset quality, financial ratios and performance, capital adequacy and liquidity position etc.
‘Leverage’ is another important factor in selecting a good financial institution. It means the borrowing of funds from others, for finance activities and for their investments. In other words, if the company invests their own money, in a worst situation, it can lose its own money only. But, when they use borrowed funds for investments, it can lose more than it has. As such evaluation on the leverage on their investments and analysing the Debt/Equity ratios would be a good yardstick to ascertain the risk factor in any investments.
Another important yardstick is the ‘experience’ of the company in the financial services sector. The number of years existence in the industry and its long history and the survival for long years itself, would be an achievement itself, in this turbulent market. The number of years in the industry and the experience of the directors who are managing the affairs, is also an important criteria, in selecting a good financial institution.
The most important and vital factor for many people to select a financial institution is the highest ‘yield’. They can derive from their investments. Nowadays, financial institutions are having different interest rates and also offering attractive incentives to have a higher yield or return to their depositors. For example, for senior citizens, who are depending entirely on the interest income for their day to day living, the highest yield or return is the most important factor. For them, the risk factor is not that vital, as they have only a short period ahead and not believing in the long term benefits and the risk factor.
In selecting a good financial institution by the public for their investments, above factors would form our ‘Model for investments’, as summarised below.
The combination of the first letters of the above factors, would create a new word, symbolising my name ‘SHIRLEY’ and I will present this model to the Sri Lankan investors and to the public, as the best model for selecting a good financial institution, to invest their hard earned monies safely.
I take this opportunity to introduce this novel concept ‘SHIRLEY’s Model for Investments’ for the first time to the business community, through our first news bulletin of the Management Club – Kalutara.
(The writer is Founder Chairman of TMC – Kalutara and Former Chairman – Finance Houses Association of Sri Lanka)