Lanka as Finance Hotspot?

Since the 1980s, it has been fashionable to talk about Sri Lanka becoming a financial hub or - to use appropriate terminology - an international finance centre (IFC). There has, however, been little real progress in that direction. An IFC is a location where the entire gamut of financial activities takes place with the active presence of strong international financial institutions. IFCs typically have a well-developed and integrated financial system.

Kicking off a debate at an economic conclave recently, CBSL Governor Nivard Cabraal explained two possible routes to becoming a financial hub. Growth could be organic, as happened with London and Tokyo; alternatively, the hub could be engineered – as in Singapore and Dubai. Cabraal suggests the latter mode as more relevant for Sri Lanka.

One prerequisite for IFC status is that the location should be strategically located, in geographical terms. Proximity to sea routes and easy access to major international markets are desirable. Another essential criterion is that time zones of the hub overlap with those of the major markets and economies that it proposes to serve (in our context, India and the Gulf).

Sri Lanka has all these aspects in its favour. But that’s where the positives end...

An IFC needs support services, legal and regulatory frameworks that provide certainty and effectiveness; we certainly have room for improvement there. The ongoing civil strife casts aspersions on political stability. Infrastructure is poor. Although the financial sector contributes a significant 10% of GDP, we do not have critical mass of international capital flows.

Other hubs have got a head start over Sri Lanka. But have we missed the bus permanently? Probably not, provided we plan ahead...

We could probably take a leaf out of the Securities and Exchange Commission of Sri Lanka’s book. Channa de Silva, Director General, said that the commission has developed a Capital Market Master Plan for Sri Lanka, spanning ten years. The first year will see the introduction of derivative products; other plans include listing upto twenty large companies and rejuvenating the mutual fund industry.

We need to decide on the proposed hub’s end-state and develop intermediate milestones, to assess our performance and effect mid-course corrections. It would be imperative for the government to increase the pace of measured policy reforms too.

Nihal Fonseka, CEO of DFCC Bank, suggested that the private sector should have a greater share of assets and liabilities in the financial sector. He also laid emphasis on good governance and revamping the regulatory framework. The CBSL should promote larger financial institutions by encouraging consolidation among banks, he said. That would give them the courage to allow the entry of global banks.

In these deliberations, what seemed to have been forgotten is the rationale: Will becoming an IFC make us rich? Or famous? Instead of aspiring to become a financial hub, can the associated capital and energy be channeled into more critical areas? A Cost Benefit Analysis would probably throw up some interesting answers…