By Uditha Jayasinghe
Fighting poverty with new weapons, the Central Bank is planning to link freehold land titles with a slew of measures to expand financial inclusion by funnelling a larger share of bank deposits to loans for rural customers.
Central Bank Governor Arjuna Mahendran told reporters recently that the bank was considering introducing a law, similar to the US, where banks have to give 35% of its deposits in loans to areas where they are sourced from. The step, if implemented, would increase microfinance opportunities for entrepreneurs and encourage business expansion.
“We have established five new departments to monitor loans of banks, finance companies, cooperatives and microfinance. Each department has been given a geographic space along the provincial system to track credit flows and lending compared to deposits. Colombo-centric lending has to change,” he insisted.
The Bank is also examining US legislation that makes it mandatory for banks to lend 35% of its deposits back to the same community but admitted they would need to talk to bank mangers to make the loans viable and prevent a credit bubble. The push for greater financial inclusion would be linked to Government measures to increase free-hold land titles that can be used as collateral, increase farmer productivity and flow of credit.
Another step would be to liberalise the currency through changing the foreign exchange act so companies such as PayPal can operate in Sri Lanka, Mahendran noted, recalling PayPal representatives have already had discussions with the Government but the “ball is in their court”. Most business establishments in Sri Lanka are small, with profound implications for productivity. The 2014 Economic Census found that 93% of private economic establishments had fewer than five employees. Nearly 22% of those establishments are in manufacturing while 70% are in the service industry including 40% in wholesale and retail along with 8% in hotel and food services. SMEs are particularly prevalent in regions outside the Western Province. A recent study by the World Bank found larger firms have easy access to loans and lower collateralisation requirements while accessing finance is particularly difficult for smaller firms and firms managed by women.
“Despite high penetration of regulated financial institutions in Sri Lanka, an estimated 64% of micro, small and medium enterprises remain without checking or savings accounts. Financial institutions appear to be complacent with their current client base and do not face market pressure to go after the SME segment. However further analysis is merited to identify specific bottlenecks reducing the ability of creditworthy firms and economically viable projects from getting financing, especially among SMEs.”