28th September 1997


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By Business Bug

Bourse takes nosedive

The stock market was up, up and away for a while but has been brought down to earth once again, with most foreign buyers conspicuous by their absence.

This has prompted the release of plantation stocks to the market and the process may be expedited to give the bourse a much needed boost.

The target is to privatise the remaining plantation sector stocks by the end of the year...

Cell phones hit badly

Despite what the advertisements say, there are hard times for the cellular networks.

The main problem for most of them is that the cost of expanding the network is not matched by demand in the provinces.

A hike in call charges is also not on the cards due to cut-throat competition between the networks.

So, one network has now discreetly begun offering government offices a special package - discounted call charges for a specified period - provided ten phones are connected to the network from a particular office...

Banks: effective regulations

The recent developments in financial institutions should greatly strengthen theinstitutional and financial capacities of the banking system. For some time now there has been a degree of anxiety regarding several banking institutions. The National Enterprise Bank was not given permission to operate. There were rumblings within the Pan Asia Bank's directorate and uncertainty regarding the future of the Commercial Bank. All three issues appear to have been resolved. The entire financial sector should feel a sense of relief that these banks have resolved their problems and are likely to expand their activities.

Although banks compete very strongly with each other the worst scenario would be for any bank to be weak and create a banking crisis. A strengthened banking system is to the benefit of all banks and financial institutions. Sri Lanka has had a fairly stable banking environment since independence and can even boast of being the only country which did not allow the collapse of BCCI to affect Sri Lankan clients.

The Development Finance Corporation of Ceylon had recently even changed its name to the DFCC Bank, which indicated its intention for a major thrust in banking. DFCC's recent strategic partnership with the Commercial Bank should strengthen both institutions. The world over financial institutions have tended to be multi-purpose in nature. The concept of universal banking has come to stay. Commercial banks are moving into a wide variety of financial intermediation, including development banking.

Development banks have moved into areas other than project lending and long term finance. These include leasing, bills discounting and short-term financing associated with commercial banks.

Other financial institutions, whether they style themselves as investment banks or merchant banks or venture capital companies, are also undertaking a variety of functions. No doubt the involvement in such diverse financial activities is prompted by both profitability and viability criteria.

Recent months have also witnessed new development and savings banks being established. The Pramuka Savings and Development Bank, Sanasa Development Bank are some of these new banks. The expansion of banking activities has been such that some may even question whether the country is over banked.

The efficiency of these banks and their performance will largely determine the answer to that question. Although at a given time the existing financial institutions may seem adequate, the growth of financial institutions themselves could be a significant source of economic growth. In that sense one can welcome the new savings and development banking institutions.

The widening and deepening of the financial system is an essential pre-requisite to economic growth. Innovative financial technologies and larger financial resources are two important ingredients for the success of financial institutions. These processes are going on. This augurs well not only for the country's economic growth but also for gearing the country towards playing the role of a financial hub in South Asia.

There are however two factors that should be observed to make the new institutions a success. The first is that the Central Bank must perform its regulatory functions with greater expertise and vigilance. It must ensure that banks keep to the rules and regulations that have been determined and no breach of these should be permitted. Prudence is indeed a cardinal principle of stability in finance.

The Central Bank must ensure that the new institutions place emphasis on prudential considerations and do not risk their capital away. What happened to the finance companies should never be allowed to happen to banks.

The second issue relates to the behaviour of the banks themselves. They must accept an ethical code and not allow the aggressive competition among banks to make them adopt unethical practices. Unethical practices by even one bank lead to others adopting similar practices and such practices could become widespread. This can create a situation where ultimately all banks suffer.

The best protection against unethical banking practice is for the banking community itself to monitor their activities and ensure that all banks conform to a code of banking ethics. If this peer monitoring and control is not effective then the Central Bank must indeed step in.

The growth of new banking institutions and strategic alliances among financial institutions have the potential of contributing significantly to more effective and competitive financial intermediation. They certainly contribute to the strengthening, widening and deepening of the financial system which is indeed an important pre-requisite to rapid economic transformation.

Turnover records, promising

Market focus by Analyst

Renewed buying interest by foreign institutional investors and stock picking by retail investors propped up the market to ASPI 780 levels. Turnover levels recorded over the week were exceptionally high mainly due to the large parcel of commercial bank shares being traded. This parcel was bought by DFCC bank.

Maskeliya Plantations 'IPO' was heavily over-subscribed with nearly 16,000 investors applying for the 4 million shares offered. The offer of these 'IPO's in the course of this year would result in the market declining from time to time due to the liquidity situation arising among mainly retail investors. All together nearly another 11 (RPC) are expected to be privatized.

Mocro-economic outlook is rosy with fundamental economic indicators showing strong performances. Interest rates being low, foreign investments increasing, it is expected that the CSM would react favourably.

It is also speculated that the up-coming budget would have a favourable impact on the financial services industry, with the opening up of the debt and debenture market to foreigners.

It is also expected that drastic changes would come into effect, with regard to property ownership, with foreign investments being allowed in this sector without the present detrimental 100% property tax.

DFCC Bank's purchase of 7.375 million shares of Commercial Bank for Rs. 1.003 billion, was the largest single transaction in the history of the CSM. DFCC Bank expects through this aquisition to have a strategic partnership to achieve a high level of synergy.

Amalgamation of complementary institutional strengths and skills would enable concentration in areas where the competitive advantage is highest. Through the network of 40 Commercial Bank branches, DFCC Bank would be able to fund programmes country-wide.

Furthermore, Vanik Inc., taking a hands-on investment strategy in respect of Pan Asia Bank, would consolidate the company's position in the financial industry.

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