The other deficits

Sri Lanka’s banks occupy an elevated position in the economy, the pinnacle of all that is good and right about the private sector. Depositors and businesses assume that behind the buildings, balance sheets and regulatory ratios sits a system of controls that is difficult to fool.

Recent allegations have disturbed that assumption.

The investigation into nearly $ 1 billion allegedly remitted overseas for imports that never arrived remains an investigation. The four private bank officials arrested have not been convicted, and guilt cannot be attached to their institutions merely by association. But the scale and duration alleged by investigators demand questions. How did thousands of transactions apparently pass through the financial system without the underlying deception being detected earlier?

Bank managements, Boards, auditors, compliance functions and regulators, including the Central Bank, will have questions to answer. There are plainly gaps worth finding.

Yet fraud survives by avoiding suspicion. If forged Customs documents, incorporated companies, bank accounts and apparently routine import payments were woven together over several years, that may expose failures in controls. It also says something about the depth and deftness of the alleged deception. Regulation can make fraud harder. No rulebook has yet made dishonesty extinct.

There is a wider problem here, another deficit not discussed often.

Since the economic crisis and debt default, Sri Lanka has repeatedly diagnosed the State. Government must reform. State enterprises must change. Regulators must perform. Public servants must become more competent. Much of that criticism is deserved.

The private sector has received less examination.

At a recent economic forum, a member of a private bank Board lamented the absence of national vision and went as far as questioning whether democracy was working. Beneath such arguments sometimes lurks an old Sri Lankan hope: that a competent, benevolent ruler will eventually arrive, impose order and straighten out the country.

Waiting for that person is hardly a business strategy.

The private sector is comfortable questioning the calibre of politicians and public servants. Governance failures in the State are studied, measured and prescribed remedies.

Why should business escape the same examination?

The public and private sectors do not recruit from different countries. The politician, bureaucrat, banker, company Director, professional and entrepreneur emerge from the same education system and society. Poor judgment, patronage, pettiness, weak governance and mediocre leadership do not suddenly disappear when somebody walks through the doors of a private company.

Sri Lanka ultimately has a people problem. That does not erase the many businesses that contradict this picture. From multinationals to SMEs, companies have built markets, exported, innovated and multiplied the sweat on their brows without waiting for handouts. Too few of these stories are known. They matter because they show that enterprise remains possible even in an economy that frequently makes enterprise difficult.

But business leadership also means accepting the consequences of business. It is difficult to demand fiscal discipline from the Government while seeking concessions for oneself, or competition for everybody else while requesting protection for one’s own industry. Companies will sometimes fail. The test is whether their leaders can learn, adapt and reinvent themselves rather than ask policy to preserve an ageing business model.

We need a governance diagnostic of our private sector.

The banking investigation makes the case more uncomfortable. Despite the alleged scale of the transactions, no bank has publicly disclosed that the payments under investigation passed through its branches.

There may be sound legal, reputational and investigative reasons for that silence. In a country adept at victim-blaming, one can understand the reluctance. Still, transparency is easiest to worship when somebody else is being asked to practise it. The same may be said of accountability and intellectual honesty, virtues Sri Lanka demands rather more readily than it practises, the other deficits.