Creeping Nationalisation of BanksApril 16, 2011, 3:04 pm
by Eran Wickramaratne
Nearly two years after the end of a bloody military conflict the government is getting exposed on its stewardship of the economy. Daily we hear conflicting messages and encounter economic and financial signals that are contradictory. Government Members of Parliament from suave business personalities to ancient socialist ideologues speak in Parliament on financial matters little realising the policy contradiction and consequent damage to the progress of the economy. The economy is stuck between socialist idealism and the pragmatism of the market.
The creeping nationalisation of the banking industry is a case in point. Thirty to forty years ago the socialist would unashamedly nationalise any industry it deemed to be in the national interest. But today fearful of the consequences that followed those dark days they resort to gradual ownership and control. The Bank of Ceylon, Peoples’ Bank and the National Savings Bank have more than 1,665 billion rupees in assets, which is about 50% of the total banking assets of the country. Then why is the government resorting to purchase and control the remaining banking assets? What does it hope to achieve? Does it require to takeover the whole banking sector to achieve that end? Or has the decision to purchase shares of well run banking institutions been presented by some policy makers to their political masters without much thought and weighing the drastic long term consequences.
Government institutions have invested more than rupees 60 billion in recent months to end up as the largest group of investors in almost every stock market quoted bank.
The EPF investment is about 25% of total government investments. In addition to the EPF, the ETF, BOC, Insurance Corporation of Sri Lanka and the National Savings Bank have contributed to the creeping takeover; while officials would have the public believe that the decision to purchase and vote at Annual General Meetings has been made independently by each institution. Government Members of Parliament defended the move on the basis of Temasek Holdings role in purchasing shares on behalf of the Singapore government. It is instrumental to quote from the Governance framework of Temasek Holdings that "Neither the President of Singapore nor the Singapore Government is involved in our investment, divestment or other business decisions." Temasek Holdings is a commercial investment fund operating independent of the Monetary Authority and Singapore Government.
Conflict : The Central Bank’s role as Manager & Regulator
The government purchase of shares has also been justified on the basis of giving EPF holders better returns on their retirement funds. While EPF holders could justifiably demand better returns on their investment funds through investments in the stock market the problem arises because the Central Bank manages the funds of the EPF. The Monetary Board has access to all data of commercial banks because of its regulating role under provision of the Monetary Law Act, and Banking Act No 30 of 1988. Many including the IMF and multilateral agencies have pointed out the conflicts that arise out of the Central Bank being regulator with access to non-publicly disclosed information and also as ‘player’ in the market. According to the Securities and Exchange Commission Act No. 36 of 1987 the Central Bank is exposed to the charge of potential insider trading. While legal arguments will be made and defended, the moral and ethical conflicts will continue to remain.
Government entities acting in concert
Apart from the EPF, the National Savings Bank, the Insurance Corporation of Sri Lanka and the Bank of Ceylon are all owned and controlled by the government. According to the Banking Act a single shareholder can own only 10% of a bank while 15% could be purchased with the approval of the Monetary Board. To overcome these ownership limitations parties may act in concert. While it is often difficult to prove that parties are acting together, the fact that there is common government ownership is undeniable. Either the government is in breach of single owner limits or it has been assumed that the relevant law does not apply to government.
Independent Directors being replaced by major shareholders
It is widely known that government institutions have withdrawn their support of independent directors serving on the Boards of some stock market quoted banks. Government nominees have subsequently been appointed to the Board of the banks. How can the major shareholder replace an independent director by its own nominee? This makes a mockery of the concept of an independent director. The ouster of Ranjith Fernando from the Commercial Bank Board is the most recent example of such a manoeuvre. The press release by the Commercial Bank was factual but not completely truthful. According to the latest disclosures in the press the recent appointment to the Board of Commercial Bank though claimed to be in conformity with banking regulation appears to be in violation of such regulations. Unfortunately the Board of Directors are falling victims to pressure against their better judgement and professionalism.
A distinction must be drawn between the government investment for returns on the stock market and its desire to control banks. It is in its desire to control that it is replacing independent directors. The government’s role as ‘player’ and regulator is leading to conflicts of interest. The Regulators responsibility is to approve or disapprove a director nominee on the basis of whether he is fit and proper. Sadly it looks like the process and behaviour of the regulator is neither fit nor proper.
The government is riddled with internal contradictions. It is suspicious and disparaging of foreigners but wants foreign investors. It has largely alienated the international community but wants to cultivate relationships behind closed doors. It wants economic growth and prosperity but is constantly interfering with market mechanism and depending on the judgement of a few bureaucrats. It has undermined the private distribution of goods and services with increasing government distribution. Now, the creeping nationalisation of banks will eventually lead to directed lending and politicised management. It will drive away desirable private investment. The role of the non-state sector is dangerously shrinking.
(The writer was Director/CEO of the National Development Bank until he became a Member of Parliament in April 2010.)
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Last Updated May 31 2016 | 09:44 pm