Whenever a Finance Company fails or there is a rumor of a run on a Bank, the Central Bank had been at the receiving end with harsh criticism leveled at them for its role as the regulator.

If one takes an independent view it is not fair to hold Central Bank responsible every time a financial institution fails as there obviously is a duty on the part of the depositors also to be ware when financial institutions offer fancy rates of interest and also offer various other concessions such as exempting the depositors from tax connected with interest etc which is illegal.

Saying that and trying to be a bit fair to the Central Bank, one cannot totally absolve the regulators from responsibility for their inaction which had resulted in crumbling of many institutions resulting in many unsuspecting depositors losing their entire savings.

The gradual decline of standards of the Central Bank, had been evident over the past few years and this has a direct connection to the politicizing of the Central Bank. It is common knowledge that the last two appointments to the top job at Central Bank had been based on political affiliations.

First it was the appointment of Mr. Sunil Mendis, a very successful Business Executive to this crucial position and thereafter it was the appointment of Mr. Nivard Cabraal, an Accountant by profession to this top post. The Governor of the Central Bank by virtue of such position becomes the Chairman of the Monetary Board too making this position the most important position in the country’s financial sector.

Whilst there is no issue with these two highly respectable individuals who apart from their successful careers are gentlemen of the top order, we do question their ability to function in the position of the Governor of Central Bank which require experience, skill and professionalism in administering and regulating the country’s financial system.

Good Central Bank Governors do not grow on trees. But yet the country can be proud of some of the Governors that Sri Lanka has had after the establishment of the Central Bank by John Exter. Some of the names which come to mind are Sir Arthur Ranasinha, William Tennekoon, Dr. Warnasena Rasaputra and A. S. Jayawardene who could all be credited with the development of Central Banking in Sri Lanka.

A good Governor would make an impact on a Central Bank mainly by his ability to take independent decisions not tainted or influenced by politics. This unfortunately had not been the case over the fast few years or after the retirement of Mr. A. S. Jayawardene.

A Central Bank of a country follows certain fundamentals universally accepted in regulating the Banks. Some of these are the monitoring of capital adequacy ratios of Banks, stipulating single borrower limits monitoring key financial ratios such as non performing loan ratio’s, cost income ratios and liquidity ratios to name a few.

Apart from the above the Banking Act of Sri Lanka also spells out many conditions which the Banks and Financial Institutions would have to follow and it is the paramount duty and the responsibility of the Central Bank to ensure that these conditions and regulations are strictly adhered to by the Banks.

One such important regulation involves the shareholding of a Bank. It clearly spells out that no individual or group should hold more than 10% of the stake of a Banking Institutions. This is a cardinal rule in Banking which if not enforced strictly would spell disaster to the Banking Industry. In fact, allowing one party to control a Bank is worse than any other irregularity or malpractice.

In a normal business it does not matter if one or more people either hold 10% or 99% of the shares as we are referring to a situation where the owners are controlling only their own assets in running the business. However, this is not the case in a Bank where the bulk of the funds that is involved in the business are customer deposits which is so many times more than the capital of the Bank.

Hence a shareholder who has control over the Bank by holding a sizeable amount of shares could have access to a large deposit base and do as he pleases in managing or mismanaging this vast amount of wealth of others, ultimately bringing the institution to bankruptcy resulting in the depositors being left high and dry as displayed over the fast few weeks at many financial institutions.

Why Central Bank has chosen to ignore the shareholding limit when confronted with certain business magnates who are well known for their unscrupulous business practices can be understood only by drawing reference to what was said earlier on the politicizing of the position of the Governor of the Central Bank.

The Central Bank has continuously ignored the shareholding limit in the case of Seylan Bank and the Hatton National Bank and continued to do so when an attempt was made by an individual to take over Sampath bank.

When the Central Bank was turning a blind eye to the attempts of the individual who flouted the shareholder limits and tried to gain control over the Sampath Bank, it was left to the staff of the Sampath Bank together with the Buddhist clergy of the country to intervene and prevent the fall of this indigenous Bank into the hands of the predator.

Taking courage of the totally weak attitude of the Central Bank this predator tried his luck once again after a couple of years, this time to oust the Chairman of the Commercial Bank and to obtain control by the strength of shares held well over the permitted limit in numerous indirect ways.

This attempt which had sinister internal support of a few insiders nearly went through and was stopped at the nick of time by staff taking the matter before courts.

The inaction of the Central Bank was clearly displayed on both occasions and if this was not thwarted by the staff and the Buddhist clergy we could have seen a major, disaster involving some big Banks of the country.

By these examples it could be clearly understood that if the Central Bank could follow simple procedure spelt out in the Banking Act and regulate banks without being influenced by political or other connections it could play its role as the regulator much more effectively.

The simple message that one can offer the Governor is, to be brave and not to look the other way when breaches of the Banking Act are done or attempted to be done by individuals with financial and or political clout.

Mr. Governor and the Deputies, you are the custodians of the monies of millions of depositors so please stand up to the individuals who try to throw their weight around. Our money would be safe if you could do your job properly.