A large number of financial establishments in Sri Lanka are facing a liquidity crisis.
The global economic recession and the current concerns among the investors, triggered by the recent discovery of fraud and mismanagement are the root cases of this situation. It is very pathetic to mention that not only the finance companies which experienced malpractices and mismanaged by its higher officers but also the other properly managed finance companies were also affected by this.
The objective of this article is to explain how both the customers as responsible citizens and the finance companies as a significant part of financial markets in the country should act in this crisis situation. Unless both parties behave with proper mutal understanding, the collapse of a significant portion of financial system in the country is unavoidable.
If this unrest continues, there is a significant probability of losing the trust and confidence of the depositors towards not only the finance companies but also the other financial institutes. The loss of confidence over the financial system will keep the depositors away and take the Sri Lankan economy back to the 20th century which will be a greater setback as far as the entire economy is concerned. Hence if the depositor’s impatience continues, the collapse of finance companies incurring heavy losses is unavoidable.
Depositors should only select banks, finance companies and leasing companies which come under the supervision and purview of the Central Bank (CB). The investors should take into consideration other corporate governance practices to be adhered to by finance companies as a prerequisite for registration under a government regulatory body. Investors should check if companies prepare their finance statements in accordance with Sri Lanka Accounting Standards (SLAS), a requirement under the Companies Act and other best accounting practices. It should also be noted that audited financial statements are more reliable than non-audited financial statements, the auditor being a party independent from the company.
Depositors must be aware of what companies they invest in. Leasing, credit, real estate and property development are popular investment avenues of finance companies. Well diversified portfolios consists of such products and can earn a fairly a higher return while minimizing the risk.
Companies should be headed by a professionally qualified, well experienced board of directors and operated through a competent team of senior management. It is advisable for depositors to be aware of the professional qualifications, level of experience etc. of the senior management.
Higher rates of return attract depositors but carry a higher risk as well. The depositors must understand the simple fact that, to offer a higher rate of return, the company must also earn a return which can cover up the return offered plus a fair margin to cover up both the company’s overhead costs and a profit margin too. Accordingly, the depositors should evaluate whether there are investment opportunities within legal and ethical boundaries in a crisis situation like this.
After deposits are made, the investors should be on alert whether finance companies prepare and present financial statements annually. If the institution is registered under the Securities & Exchange Commission (SEC), the depositors should be vigilant as to whether the company publishes financial statements on a quarterly basis in at least two national newspapers.
It is not adequate to merely see whether financial statements have been audited. Instead, the nature of the auditor’s report should be seen as an important concern for evaluating the financial statements. The auditor may have added certain qualifications to his opinion. Moreover, uncertainties might have been highlighted and the auditor might have disclaimed the opinion. Depositors can place a higher level of confidence over the audit report as the auditor has an indirect responsibility towards the general public who make a decision by depending on the report.
Depositors should avoid premature withdrawals as much as possible except under special circumstances at least until the crisis is over. On the other hand, finance companies should also fulfill their duties to protect the trust of the financial system and protect customer confidence. According to my opinion, the mutual understanding between the depositors and financial institutions is essential in this crisis situation. |
E-mail