News
Urgent need to strengthen the Central Bank
View(s):When Dr Indrajit Coomaraswamy took over as the Governor of the Central Bank (CB), he was given a veritable hot potato. He assumed office in the middle of investigations being conducted into the scam over the issue of Bonds by the apex body of the Banking system, which has had ramifications, both in the political and financial spheres of the country.
The fallout of the investigations and inquiries conducted by the Commission of Inquiry (CoI) into the Bond scam, the Parliamentary Committee (COPE), as well as Police investigations, clearly point to institutional weaknesses within the CB that go beyond the controversy surrounding the issue of Bonds in February 2015 and 2016.
Reports of the crisis facing micro credit Finance Companies (FC), as well as the bigger FCs, reveal a failure by the CB to adequately play its regulatory role satisfactorily, over the past several years. As a result, members of the public have undergone numerous hardships, with some facing the prospect of losing their lifetimes’ savings, as a result of the financial difficulties that some FCs have run into in recent times.
To a layman, the challenges faced by Dr. Coomaraswamy can, therefore, be broadly defined as threefold. Firstly, to assist the investigation process by the authorities, in their bid to get to the bottom of the Bond scam. Secondly, to ensure that the public, who are adversely affected by the collapse of authorised FCs, are rescued from their misery. Thirdly, to ensure that the CB is strengthened institutionally, so that, it can play its legitimate role in the financial landscape of the country, as well as to ensure there is no recurrence of the sordid happenings of the past. Experts may be able to add to the above, but those uninitiated in the intricacies of economics and finance, see these as requiring the immediate attention of the authorities.
Dr. Coomaraswamy has to tread cautiously in the minefield he has inherited, but is clearly equal to the task. He has already succeeded in restoring the image of the CB as being an institution of a technocratic character, rather than a politicised one.
If one examines the events of the recent past in greater detail, the magnitude of the challenges faced by the CB become clearer. It is unlikely, the scam that occurred in February 2015 could have been organised within a couple of weeks of the previous Governor taking office, unless there was a ready mechanism in place. Clearly, there would have been an extensive network in place, which facilitated the fraud that was carried out in February 2015.
President Maithripala Sirisena himself said as much, when he promised to appoint a Commission to probe the happenings at the CB pre 2015. He even disclosed a large figure, as the loss caused by the CB, prior to his assuming office.
There are also other indications that the CB has not been immune to the plague of corruption, which has afflicted the country. The recent arrest of a high CB official (irrespective of whether he is guilty or not) is an indication that all is not well at the apex body.
During the evidence led before the CoI, it transpired there were several officers within the web of corruption, who were known to the alleged perpetrators of the fraud, by various code names. These, together with various other evidence that has surfaced so far, points to an elaborate network of corruption which exists, and has probably not yet been dismantled.
The regulatory function of the CB too, needs to be urgently strengthened with more resources and increased capacity. The monitoring arm of the CB has to pro actively detect and prevent the collapse of FCs, in order to minimise the impact on smalltime investors in particular.
Failed FCs usually run into trouble due to, either mismanagement or fraud, or both. Close monitoring of these institutions will enable remedial action to be taken early, so that, the problem does not get out of hand. Besides, detection after the event often compels the government to pay its own funds, to minimise the impact on the investors.
Yet another area in which the regulatory function of the CB has left much to be desired is in micro financing. With the conclusion of the armed conflict in the North and East, several micro financing companies, literally, ‘invaded’ the region, offering easy loans to those who had been impoverished as a result of the fighting.
The recipients were virtually enticed into taking loans without any examination of pay back capacity, as a result of which, many were trapped in a circle of never ending debt. Most of the victims were women, who were easy prey to the machinations of these unscrupulous micro FCs.
According to a research study done by Vidura Prabath Munasinghe of the Law and Society Trust, extracts of which were published in the Island newspaper, the phenomenon of predatory micro FCs is not confined to the North and East. Mr. Munasinghe points out that, in Moneragala town there are 38 micro FCs within a radius of 300 metres. It is no coincidence that both the North and East and Moneragala District share a common characteristic, namely abject poverty, which these FCs are exploiting.
The situation has not escaped the attention of the UN Independent Expert on the effects of Foreign Debt, who reports that 2,439,137 women in Sri Lanka have obtained micro finance loans to the tune of Rs 263 billion.
Mr. Munasinghe sums up the situation well. “Ultimately, capital that can be accumulated within the rural community has been extracted by private companies, through micro credit systems, dragging the entire rural community down to the bottom of indebtedness. The initiative which was intended to eradicate poverty has completely ruined the rural economy, local family structures and social networks in rural Sri Lanka. In this backdrop, activities of these predatory companies need to be stopped immediately, and immediate action taken to address this serious human catastrophe that has been created by micro credit companies.”
The CB should also take steps to lay down rules of conduct (if there are none) for employees of FCs and micro-credit companies, who are often a law unto themselves. Instead of resorting to remedies provided by Law to recover outstanding dues from defaulters, these employees browbeat such defaulters through various forms of intimidation.
Some visit the homes of defaulters or send so called collection agents to coerce them into paying. They cause public humiliation and discomfort to the defaulters, as a means of obtaining their dues. Most of the defaulters are the poorest of the poor, who take these individuals lying down. Clearly this has to be stopped and the CB, with the help of Law enforcement authorities, need to ensure that the agents of these FCs and Micro-Credit Companies do not act in violation of the Law of the land, when attempting to collect their dues.
(javidyusuf@gmail.com)