Central Bank Governor Ajith Nivard Cabraal, speaking at the Economic Summit in Colombo went on public record last week saying that registered finance companies will have to get themselves quoted on the Colombo Stock Exchange. He subsequently told this newspaper that a two-year deadline would be set for this purpose and agreed that the reaction to this proposal from the finance companies is likely to be mixed. As we report in our columns today, depositors of some of the failed companies are being driven from pillar to post and seem to have far too little information about exactly where they are placed. They get dribs and drabs from various sources whose reliability is unconfirmed and are living in a state of perpetual uncertainty. A group of them gather under the trees at the Vihara Maha Devi Park every Wednesday to compare notes. Our reporter who was there last week filed a report indicating that not only are these people, many of whom are past the psalmist’s span, undergoing great hardship, but also some are on the verge of penury.

Admittedly it is no easy task for the regulatory and investigatory agencies of the state working on the Golden Key case, with its many ramifications, to unscramble what appears to be much more than a scrambled egg. There are so many related companies involved that unraveling the complicated interlocking arrangements between them require accounting, legal and investigative skills of a high order; God knows that these are not abundant in the poorly paid state sector in this country. But the public, and more so the depositors left high and dry, must be periodically informed about the actual state of play and that is not happening as it should. How much has each of these companies borrowed and what is the value of their identified resources? Can they be realized? If so can depositors expect to get back at least a proportion of their investments and when can they hope to get at least some of their money? Various figures surface at different times and the sum total of these suggest that those unfortunates who made risky investments are unlikely get all their money back. Those who hope to get interest arrears as well as their capital appear to be whistling for the moon. The best case scenario seems to be that they will only get back a proportion of their investments which, hopefully, will be substantial; but that is in no way certain.

According to Cabraal, of the 34 registered finance companies in the country only eight are quoted on the Colombo Stock Exchange. The Central Bank, which cannot be everywhere all the time, believes that requiring all these registered finance companies to get listed will create a second line of defence against the Ponzi schemes that have proliferated in this country - Sakvithi, Danduwan, Golden Key and what have you. These, in effect, run on the principle of borrowing from Peter to pay Paul. They work as long as new investments keep flowing in and there is no run on old deposits. While we have said it before, it bears repetition that making so-called trust deposits – that is deposits secured with no more than a paper certificate - with any borrower, like most other investments, is a risks and rewards exercise; higher the risk, greater the reward. That is why those who chased higher-than-market interest rates have found their fingers burned.

But there are many who over the years have for good reason trusted reputed finance companies paying better interest rates than the banks and they have done very nicely for themselves as have the companies. They have been regularly paid their interest dues and have been able to withdraw their capital at maturity or sometimes prematurely on demand, perhaps with a small penalty attached. Nevertheless they must know that their deposits are usually re-lent and any finance company, if it is to remain viable, must command lending rates higher than its cost of funds. That could often mean making risky loans.

If finance companies are listed on the stock exchange, they become subject to the rules of the CSE which includes filing annual and quarterly reports which must be sent to all shareholders of the company. A prudent depositor could by a small number of shares in a finance company which holds his deposit and that way be privy to a lot of useful information relevant to the safety of his money. These are indicators of how well or badly a particular company is doing and such information is useful to those who have deposits with them. Their annual general meetings too are forums where the directors must face shareholders and answer questions. All these, plus other stock exchange rules and regulations are checks and balances against any hanky panky benefiting not only their shareholders but their depositors as well. The prices quoted finance company shares command on the trading boards of the CSE are also a fairly reliable index of their stability. For example a small quantity of Central Finance shares traded on Friday at Rs. 225 each – a better price than most commercial bank shares. This is true of many other quoted finance companies as well. But it must be understood that the stated capital of finance companies are way below that of banks; thus their share prices would naturally be higher.