Internet Banking

Many commercial transactions that earlier necessitated a visit to the bank can now be completed at the click of a mouse. Internet Banking has thus simplified people's lives by bringing banking into their homes and offices. If automated teller machines (ATMs) brought banking to the neighbourhood, internet banking brought banking home!

However, internet banking is not an unmitigated solution to all banking problems, far from it. Some of its drawbacks are:

1. There are security issues when transacting over the internet. Anyone who gets hold of your password can perform all of the transactions that you can.
2. Not all transactions can be done over the internet - deposits and withdrawals of cash, for instance.
3. The range of services is necessarily limited because human intervention is missing; often, investment decisions are better taken in consultation with a a banker.
4. By taking over some of the activities that used to be done by humans, it deprives people of employment - a critical factor, as people in the West are realizing.
5. The 'human touch', which forms such an important element of our social lives, is completely lacking in in internet banking.

Due to these drawbacks, internet banking will never completely replace conventional banking. However, it is safe to conclude that internet banking is here to stay.

Cost Management: Thoughts from Titan

1. The emphasis of cost management should be on rationalizing costs, not on cutting them indiscriminately. We need to question each major outflow and ask, “What returns will I get from this expenditure/ investment? Can the money be used more productively? Can the desired results be obtained at a lower cost?”

2. A greater focus on costs can be achieved by cross-functional teams (CFTs) – consisting of enthusiastic influencers. Such teams work best when the members are empowered and motivated. One way of accomplishing this is by factoring the results of cost management into participants’ Key Result Areas.

3. Demonstrate organisational commitment to cost management. For example, Titan’s Managing Director recently launched “WOW” (War on Waste) and conducts monthly progress reviews with CFTs. During the initial meetings, participants brainstormed and generated initiatives with potential to save costs. These are then discussed and the initiatives with maximum saving potential are selected. Later, responsibilities and timelines are assigned, and results are reviewed on a periodic basis.

4. Cost reduction is not ‘Finance’s baby’; it is an organisational priority. Nevertheless, Finance professionals must be involved in operations to be able to enhance cost consciousness. This can be achieved by focusing attention on costs, analyzing cost data and sharing relevant information with CFTs.

5. Accountants can also help focus attention on costs by interpreting them intelligently. Examples from Titan’s watch manufacturing plant in Hosur:
(a) The Machine Hour Rate of Precitramme equipment was high because it was not fully utilized. The fixed costs were spread over a lower number of hours. This pushed up the cost and retail price of Titan Edge (“the slimmest watch in the universe”), thus suppressing demand for the watch. After we adopted a ‘variable cost MHR’ for costing and pricing decisions, the watch became an overnight success.
(b) In-house vs outsourced decisions: Similarly, the Manufacturing team used to outsource certain watch components because the in-house manufacturing cost appeared higher. However, when one looked only at relevant costs, it made sense to utilize existing machinery to manufacture those components in-house. Our cash outflow was thus reduced.

6. Even ‘Overheads’ need to yield some benefit: Before Tanishq’s business picked up, diamond-setting capacity (a labour-intensive process) was surplus, classified as ‘employee cost’ or overheads. Hence, the cost of stone-setting was not factored into the price of jewellery. We were losing a big opportunity. Later, realizing our lapse, we rectified prices and also looked at cheaper mechanized processes. This improved our gross margins on studded jewellery significantly.

7. Constantly review your assets and, when times are good, clean up your Balance Sheet… Release cash by liquidating non-moving/ slow-moving items. Tanishq’s retail businesses achieved this by constantly reviewing its current assets. Slow-moving jewellery designs were redeployed to other Tanishq showrooms. We also had road shows, exhibitions and ‘Best Deals’ counters - wherein jewellery was sold at attractive discounts. Many of Tanishq’s promotions were a resounding success. When all else failed, we even melted jewellery!

8. Identify the core problem and explore every opportunity to solve it: Initially, Tanishq used to buy gold bullion - 80% of our material cost - on spot basis, resulting in outflow of scarce funds and exposure to price risk... In the early 2000s, Titan was a cash-strapped company. We gradually started buying gold on credit from foreign banks (lower interest, open price) and operating on the forward market. These mechanisms reduced the company’s net capital employed and interest cost, boosted Return on Capital Employed, and helped hedge the gold price risk.

9. Contrary to popular logic, paying creditors late is not good business: When Tanishq approached diamond merchants to negotiate prices, we realised that we had been short-sighted by delaying their payments. The suppliers’ interest cost (higher than ours) had been loaded onto their normal prices, based on our longest-delayed payment… By agreeing to pay suppliers in time, we got significantly lower purchase prices, which helped us to further improve our margins.

10. When Excise Duty was introduced on branded jewellery, it came as a big burden in a low-margin business. We were already at a disadvantage vis-à-vis the local jewelers. To mitigate this risk, Tanishq established a manufacturing unit in an excise free area (Uttaranchal).

11. Advertising: Some Marketing people lack business acumen but they do have an important role to perform. Tanishq faced a three-fold problem:
(a) The proportion of money spent on producing advertising was excessive, relative to mass media spends
(b) Product ranges were launched without proper cost benefit analyses and
(c) Service providers’ rates had not been adequately negotiated down.
We needed to encourage the Marketing department to spend on advertising that reaches the customer rather than on production costs.
We also used Public Relations and press releases judiciously; these are a lower-cost and more credible medium than advertising.

12. People drive businesses... But when salaries are undifferentiated, good performers have no motivation to give off their best and they will seek more remunerative opportunities. Titan faced such a situation that also resulted in a costly attrition problem. So, the company revamped salaries, paid rates closer to best-in-market and demanded superior performance. Titan also introduced a package wherein 30% of earnings (even higher for retail staff) was linked to performance. This improved morale, efficiency and output.

13. This was preceded by an attractive VRS package that eliminated ‘deadwood’/ redundant employees, who had been a drag on the organisation.

14. Challenge employees to justify their existence, to measure cost savings relative to their salaries. For instance, I once negotiated with a credit card ‘acquirer’ (who placed electronic data capturing machines at our stores) for a reduction of 0.10% (10 percentage points) in their commissions. This resulted in savings for Tanishq that were more than my annual earnings.

15. One radical rule introduced in Tanishq was that domestic air travel could only be on discounted tickets, which were available for nearly 50% less than normal prices. This is a small item, but it resulted in lowering costs and better planning of activities. The most significant benefit was that people became aware that such cost-saving opportunities exist.

16. For greater involvement across the organisation, invite ideas from employees and announce rewards for suggestions that are successfully implemented. When ideas and winners are recognized (intranet, public felicitation), it could motivate others to come forward.

Planning For a Heart Attack

A century ago, the average life expectancy of a human being was 46 years. The primary causes of death were pneumonia, tuberculosis and enteritis. Until as recently as fifty years ago, most people who suffered a heart attack died of it.

How times have changed! The current life expectancy statistic stand at 76 years, which means people are living thirty years more than they used to. They die of lifestyle-related causes: heart disease (29%), cancer (23%) and stroke (7%). The world’s largest-selling medicine is Lipitor, a drug that lowers cholesterol - another lifestyle-induced ailment. Our lifestyles are killing us softly…

We are surviving longer only due to the progress of medical sciences. Today, there is a high probability that the victim of a heart attack will survive. Statisticians point out that a male who has just survived his first heart attack stands a 75% chance of living at least five years more. A heart transplant recipient can expect to live ten years after the transplant. A person diagnosed with cancer has a 50% probability of surviving another five years, minimum.

But there’s a flip side to these advances in modern medicine, cautions Ashok Sardana, MD – Continental Group International, UAE. He ought to know. As a certified financial advisor from the Chartered Insurance Institute of London, Sardana has been advising clients on a range of financial services for over 27 years. Speaking on ‘Modern Medicine and Its Impact on Financial Planning’ recently, he said the high probability of a person’s surviving a debilitating illness raises questions about his subsequent earning capacity.

In the past, medical insurance and life insurance were adequate as bail-out policies. Medical insurance paid the hospital bills. Life insurance - subject to all those terms and conditions – provided an assured sum of money on maturity (survival) or to dependents on death.

For most of us, who have not been born with silver spoons in our mouths, our ability to earn an income is our most important asset. The problem is: What happens if you suffer an attack that diminishes your earning capacity before your life insurance policy matures? Would you be unable to afford the lifestyle that you have been accustomed to? How would you afford expenses like home renovation or travel or whatever?

‘Critical illness protection’ provides insurance by paying a guaranteed lump sum amount. The insured person becomes eligible to apply for the amount upon first being diagnosed with any of the specified illnesses or being prescribed certain surgical procedures. These typically include heart attack, stroke, cancer and bypass surgery.

Premium is based on age, gender and physical condition of the insured: Typically, a male aged 35 would pay a monthly premium of US$ 140 per month for an assured lump sum of US$ 100,000. A 45-year-old man would pay US$ 230 for US$ 100,000. A woman would pay a premium of approximately 83% of that, reflecting the lower incidence of critical illnesses among the fairer gender.

'Cloning' Credit Cards

Advancements in technology, especially in the financial services industry, and the ease with which cross-border flows of financial transactions can take place have made it easier for criminals - including terrorists - to take advantage of liberalized financial markets and innovative technologies.

Recently, LTTE terrorists successfully perpetrated a massive credit card fraud in London, costing the British public - according to reports - about GBP 100 million by skimming credit cards belonging to the British public. Skimming has been a common technique used to raise funds for terrorists in Algeria, Kashmir and Chechnya, and now it is clear that it is being extensively practiced in the Western world too.

The modus operandi in this case was said to be the ‘cloning’ of credit cards skimmed at petrol sheds in various parts of England by the LTTE to fund its terrorist activities in Sri Lanka. It has been reported that about 200 independently owned petrol stations are under investigation, where LTTE terrorists operating under the guise of petrol shed staff have been involved.

The investigations have also apparently revealed that the credit cards cloned in Britain have been used to obtain funds in Thailand, and some other far-off parts of the world. In that context, it is important to note that such criminal activities could very well be happening in our own countries too, and we may be inadvertently funding terrorism ourselves.

Today, combating terrorism cannot be considered the sole responsibility of single governments or single sets of soldiers who fight at the front at the risk of their lives. We must all get involved in an international effort if we are to defeat this menace.

(Excerpts from keynote address by Ajith Nivard Cabraal, CBSL Governor, at a workshop in Colombo on May 7th 2007)

Terrorists: A Step Ahead

Money laundering refers to the conversion of proceeds derived from any unlawful activity (tainted cash or property) into legitimate assets by bringing them into the mainstream. While a precise quantification of the funds laundered is difficult, IMF estimates a figure exceeding US$ 1.35 trillion (3% of the world’s GDP).

Typically, the process of laundering money takes place in three distinct phases: Firstly, placement - when the ill-gotten gains are deposited with financial institutions. Then, layering through multiple transactions is how the origin of the deposit is disguised. Finally, integration is the utilisation of disguised funds to purchase clean, legitimate assets.

Describing the phenomenon, H A Karunaratna, Director – Financial Intelligence Unit (FIU) of CBSL, spoke of the vital role played by central banks in maintaining financial system stability. Addressing a seminar on ‘Anti – Money Laundering and Combating the Financing of Terrorism’ last week, he pointed out that the banking system is vulnerable because of its ability to transfer funds rapidly.

Indicating how acts of terrorism do not require massive sums of money, Karunaratna recalled how Al-Qaeda caused massive destruction to the US economy in 2001. “Their cost was limited to flying lessons and a box of cutters with six blades”, he said.

In Sri Lanka, there are three pieces of legislation that seek to prevent money laundering and the financing of terrorism: The Convention on the Suppression of Terrorist Financing Act, 2005 (CSTFA), The Prevention of Money Laundering Act, 2006 (PMLA) and The Financial Transactions Reporting Act, 2006 (FTRA). These were enacted in response to a worldwide clamour for a clampdown. But “terrorists are always one step ahead of regulators,” contends Karunaratna.

Joan de Zilva, Consultant – FIU of CBSL, said that the definition of ‘unlawful activities’ that constitute an offence under the PMLA encompasses the entire gamut of crime. She said that Section 31 of FTRA places an obligation on the financial system to file suspicious transaction reports and to exercise customer due diligence. This overrides all restrictions on disclosure imposed by any other law.

On methods adopted for money laundering, de Zilva described alternate remittance systems like hawala as “a potent source of terrorist financing”. International trade transactions, cash smuggling and trade in precious metals and gemstones are also adopted. Referring to occasional misuse of charities, de Zilva said, “Some NGOs put on a humanitarian face and come to countries where natural disasters have struck. Sri Lanka received Rs 40 billion in the aftermath of the tsunami, 80% of which was brought in by NGOs - and banks swept aside due diligence.”

Buwaneka Aluwihare, Deputy Solicitor General, described money laundering and terrorist financing as ‘victimless crimes’ where no one rushes to the law enforcement agencies to file complaints.

To safeguard the banking system, banks need to know their customers, said R M P Ratnayaka, Sri Lanka Banks Association. In that context, “’Customers’ refers not only to account-holders but also to those who transact casually”, he clarified.

Islamic Banking Explained

Islamic banking (IB) is derived from and governed by Shari’ah principles of Islamic law. These principles prohibit the levying of interest, involvement in unlawful activities, hoarding for profit and other transactions that result in injustice and exploitation.

The concept was explained at a seminar on Islamic Banking and Finance conducted by the First Global Group (FGG) last weekend. Muhammed Ikram Thowfeek, Chairman of FGG Sri Lanka, said, “Islamic banks are not charitable institutions, they are just concerned about protecting society while providing a return to their shareholders.” Indicating that it is a matter of form over substance, he provided the example of two supermarkets retailing chicken, where the one selling halal food would be preferred.

The asset base of the Islamic financial system is estimated at US$ 500 million, small vis-à-vis the conventional system that has had a head-start of over 250 years. However, it has been growing at 15% annually, faster the conventional system. ”We are not attempting to replace conventional banking,” clarifies Sheikh Essam Ishaq, Shari’ah Advisor at Discover Islam, Bahrain, “but provide a vibrant, practical alternative.”

Investor demand for Islamic banking products is high - certainly in the GCC, but elsewhere too. Standard & Poor’s has predicted that, to satisfy this appetite, global demand for Islamic finance will surge to US$ 4 trillion within five years.

The establishment of the Dubai Islamic Bank in 1975 is widely acknowledged as the genesis of Islamic banking. However, it was then perceived as “an eccentric manoeuvre from an eccentric place,” said Ishaq. IB survived the passage of time. Countries like UK, Thailand and Singapore have modified their banking legislation to permit Islamic banking. The Government of Thailand even has a 38% stake in an Islamic bank.

Speakers at the seminar were practitioners in the field and included Dr Mohammed Burhan Arbouna, Shari’ah Board Member of the United International Bank in Bahrain. While attempting to structure products in a Shari’ah-compliant manner, some firms have hoodwinked customers by merely changing the nomenclature from ‘interest’ to ‘profit’. For an existing bank to introduce IB, Dr Arbouna recommends a “firewall for money, accounting and employees”.

Because IB deals with real assets and services, all transactions should be backed by assets. ‘Sukuk’ is the Arabic word for asset-backed bonds, the global market for which is more than US$ 25 billion. Since you are not permitted to sell what is not yours, short-selling is disallowed.

Explaining the concept of ‘murabaha’ – a method of financing, Dr Arbouna explained how it differs from classical lending. The bank buys the asset from the seller and sells it to the buyer at cost plus a disclosed profit margin, with deferred payment terms. Any penalty paid by a defaulting buyer does not swell the coffers of the bank, but is donated to a charitable institution instead.

Six of the world’s top ten global banks are into Islamic finance. HSBC Amanah, for instance, is the global Islamic banking division of the HSBC Group.

How Malaysia Became A Dominant Force…

Speaking at the opening ceremony, Nazirah Hussain, Malaysian High Commissioner, described the strategic measures that her country had taken to become a regional hub of Islamic banking and finance. Malaysia’s aim is to be an investment gateway specializing in Islamic fund and wealth management, and a takaful (insurance) centre.

To accelerate growth, an executive committee comprising of government officials, regulators and industry leaders are working to create a more efficient delivery system.

The Immigration Department has accorded an “executive green lane” to the Malaysian Islamic Financial Centre (MIFC). This will help expedite applications by expatriates for long-term employment passes and, in turn, facilitate movement of expertise in Islamic finance.

Islamic banking, takaful and capital markets have been liberalized to allow the entry of new players. Fund managers of foreign Islamic funds also enjoy tax benefits. Islamic financial institutions are allowed 100% foreign equity ownership. Exemptions on stamp duty and taxation have been granted for foreign currency assets…

As a consequence, total Islamic banking assets have grown to 133 billion Malaysian ringgit (US$ 38 billion), accounting for over 12% of domestic banking assets. Takaful assets have increased to 7 billion ringgit and represent 6% of the insurance market.

Malaysia pioneered sukuk. More than two thirds of sukuk in the global market was issued in Malaysia. Outstanding Islamic private securities constitute 50% of the domestic corporate bond market.

While acknowledging that most Malaysians are Muslims, there could probably be a lesson there for Sri Lanka.

…And a Prescription for Sri Lanka

In conversation with Sunday Times FT, Thowfeek trashes the notion that Islamic finance is the exclusive domain of the Muslim community or that it promotes Islamic culture. He believes that IB can help Sri Lanka follow other Asian and Western economies in tapping the Middle East’s abundant liquidity.

Sri Lanka needs finance for its infrastructure and revenue-generating projects and Thowfeek believes that this can be met through Islamic financing.

After modifications to the Banking Act in March 2005, there is adequate flexibility for conventional banks to start Islamic banking windows and introduce some products. However, attempts to promote Islamic financing and deposit products have been feeble. These have been operated through financial institutions like Amana Investments and Ceylinco Profit Sharing.

What the country probably needs is a full-fledged Islamic bank… To enable that, Thowfeek places the onus squarely on the regulators. They have to perform a due diligence and play a proactive role – as regulatory institutions in other countries have done, he insists.

Although there are no authentic statistics on the IB market in Sri Lanka, Thowfeek guesstimates the figure at LKR 70 – 100 billion. The country has potential to become an IB hub for the entire Asian region, he says. Only if CBSL expresses interest and initiates action can Sri Lanka stand a realistic chance of competing with and overtaking other players. Government organisations, monetary authorities and the private sector must necessarily band together with Islamic banking institutions to make that happen.

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…

For A Few Rupees More

This adventure began when my uncle bestowed a 100-dollar bill on me. I have never been the kind of person who accepts unsolicited gifts; it makes me feel obligated, as if I have to do something in return. So, I flashed Uncle Guy my million-dollar smile in consideration for his kindness. Quid pro quo and all that jazz, if you get my drift… Not a bad deal for stretching my facial muscles… although I surmised that the mystic Mona Lisa could have outdone me.

For my friendly neighbourhood grocer man, however, my hundred-dollar note was the modern-day equivalent of cowry shells. He wanted it because he knew that it was valuable, but he was unwilling to accept it because he was not sure exactly how much it was worth… The trishaw driver, echoing the grocer’s sentiments, snarled, “Gimme rupees.”

Confronted with an existential dilemma of Shakespearean proportions (to exchange or not to exchange?), I began to realize why the barter system was flawed. Valour got the better of discretion and I decided to exchange the 100 dollars for something else. Hard currencies might have their merits, but I prefer something tender any day – especially if prefixed with the adjective ‘legal’.

The quest for rupees began in right earnest. All those evenings spent under my mother’s watchful eye must have paid off. “Do you homework”, she used to say, “before you go out to play.” That advice must have crawled unnoticed into my subconscious mind. So, I did my homework: According to the financial columns of that morning’s newspaper, the banks should give me Rs 109.19 for every dollar.

Dollar signs flashing in my eyes, like a character out of cartoon strip, I sauntered into Hatton National Bank. The chap behind the glass window peered into his computer screen and offered me Rs 107.30 per dollar, the rate provided by ‘Head Office’. That didn’t seem adequate somehow… When queried why this was less than the newspaper rate, he explained “Some banks pay ten or twenty cents less or more.”

Next stop: Commercial Bank. The lad behind counter referred to his register and quoted Rs 107.62. That was better, we were making progress, albeit slowly! “But this is yesterday’s rate”, the lad interrupts, “We will be getting a fresh rate from Head Office by 11:30 AM.” This Head Office phenomenon seemed to be ubiquitous…

The display board at Bank of Ceylon proclaimed Rs 107.85, but man-behind-counter has different ideas. He quotes Rs 107.55 and refuses to budge.
"The board indicates yesterday’s rate.”
“Why are you displaying yesterday’s rate? How is it relevant?”
“It is not relevant today. I am going to change it now. Today’s buying rate is Rs 107.55 and the selling rate is Rs 110.30.”
“I want to sell. Will you give me Rs 110.30 for a dollar?”
“No, I’m buying, so I will apply the buying rate.”
Stalemate!

Hopefully, People’s Bank would be more people-friendly… They were, offering Rs 108.29 per dollar. That was still short of what the newspaper led me to expect, but better than any other bank.
“If you have traveller’s cheques, I would have given you Rs 108.91.”
“I’m not a traveler; so, I don’t have traveller’s cheques.”
“Can I see your passport?”
“As I said, I’m not a traveller. Won’t my National Identity Card do?”
“I suppose it will have to. Where did you get this money from?” (Suspiciously)
“Gift.”
“Okay… For one or two hundred dollars, we won’t insist on a passport.”

NDB Bank stops screeches to a halt just short of the Rs 108 psychological barrier. They seem to have borrowed a leaf out of Sony’s and Bata’s book, and adopted what is popularly called ‘magic pricing’. They offer Rs 107.99.

Perhaps the foreign banks would be more generous? Standard Chartered Bank is marginally more generous, offering Rs 108. But Deutsche Bank marks a nadir, at Rs 106.30. When my stoicism slips and the hot-under-my-collar feeling results in an outburst, they whisper, conspiratorially, “Try Seylan Bank next door.”

Seylan Bank offers Rs 108, and the display board promises a better rate if you exchange more than US$ 5,000. How kind of them! The lady behind the counter says that, with that kind of money, I would probably get 50 cents more per dollar because she could get a better rate from the foreign exchange dealers.

Hey, did I have to go through all this trouble? Maybe the big branded outlets would accept dollars? Let’s try Barefoot for some colourful attire… They quote Rs 106. This rate was arrived at by taking the bank rate of five days ago (Rs 107) – and “deducting one or two rupees… We can’t give you the bank rate, can we?” Why not, I wondered… Colombo Jewellery Stores quotes Rs 109 – or “whatever is the bank rate”.

Swarna Mahal Jewellers, also guided by a five-day-old foreign currency chart from SCB, quoted Rs 107. Like a sniffer-dog detecting contraband, the salesman detects my dissatisfaction and springs to set things right. He offers a discount such that the resultant exchange rate is Rs 110 or Rs 111… Smart boy!

Nations Trust Bank seems to have got into a symbiotic relationship with the shopping arcades, with a presence deep in the recesses of ODEL and the basement of Crescat Boulevard. They offer Rs 107.87, but will also charge a fee of Rs 300.

Holiday Inn offers differential rates: Rs 108.55 for settlement of bills and Rs 104 for currency exchange.
“What happens if I dine at one of your restaurants?”
“You’ll have to exchange your dollars at Rs 104 – and then pay in rupees”
What a racket!

The specialists are the foreign currency changers – and Salaka has something akin to a reputation to protect. They offer Rs 107, no questions asked… So, I trudged back to People’s Bank, and bid my hard currency goodbye. The bundle of familiar currency notes nestled reassuringly in my wallet. Over to the better half… Hopefully, she will observe that, after all that trudging around, I need a new pair of shoes.

Bank/ Outlet : Rupees *
Colombo Jewellery Stores: 109.00
Holiday Inn - Bills: 108.55
People’s Bank: 108.29
Seylan Bank: 108.00
Standard Chartered Bank: 108.00
NDB Bank: 107.99
Nations Trust Bank: 107.87
Commercial Bank: 107.62
Bank of Ceylon: 107.55
Hatton National Bank: 107.30
Swarna Mahal Jewellers: 107.00
Salaka, Foreign Money Changers: 107.00
Deutsche Bank: 106.30
Taj Samudra, Colombo: 106.29
Barefoot: 106.00
Holiday Inn - Exchange: 104.00
(* March 21st 2007 morning)

On Dealer Financing: AS2

My objective has always been to concentrate the portfolio in the hands of two banks: That would give each bank an adequate volume of business for them to take us seriously. It would also introduce an element of competition between them – and enable us to access fine rates of interest for our franchisees. In the financing business, size does matter.

Concerns: Going… Going… Gone?

In today’s complex business environment, Petty pointed out, shareholder value is determined by a range of performances, including the organisation’s corporate social responsibilities

The next time you order a succulent cheeseburger at McDonald’s, pay close attention to the biodegradable packaging in which it is served. Recognizing the risks to the environment from its polystyrene cups and packaging, these have been phased out and replaced by materials that are eco-friendly. McDonald’s is one of innumerable firms that have literally started cleaning up their act.

Corporate Social Responsibility (CSR) and the related aspect of Sustainability are the subjects uppermost in the minds of accountants today. This represents both a challenge and an opportunity for accountants under whose purview corporate reporting has traditionally been.

Triple Bottom Line (‘3BL’) Reporting
3BL Reporting is a concept whereby the traditional reporting on financial and economic performance of organisations has been expanded to encompass two more parameters. The new parameters are social performance and environmental performance. John Petty (National Vice President, CPA Australia) explained the concept at a workshop conducted by him earlier this week. The workshop was presented by the Technical Directorate of The Institute of Chartered Accountants of Sri Lanka.

The impetus and need for 3BL emerged out of the state of affairs that prevailed at the fag end of the 20th century. It was a time when certain large corporates were behaving irresponsibly and doing unacceptable things to the ecology.

In today’s complex business environment, Petty pointed out, shareholder value is determined by a range of performances, including the organisation’s corporate social responsibilities. The 3BL commitment harmonises the traditional financial bottom line with environmental quality and social integrity issues.

• Economic viability builds on the traditional measures of success.
• Environmental quality focuses attention on aspects like pollution reduction programmes, greenhouse gas emissions, energy utilisation and air quality.
• Social integrity and community focus refer to aspects like human rights, philanthropy, providing employment opportunities to the disabled, skills training for disadvantaged persons in the community and business ethics.

Petty provided several examples of organisations that have moved beyond generating annual financial reports. Philips International, for instance, has a ‘Sustainability Report’ that has adopted a 4 Ps approach: Profit, People, Planet and Propriety. The last named, Propriety – or governance - is an extension of the 3BL approach.

Petty challenged accountants to move beyond the traditional ‘bean counters’ role. “This myopic focus on profit and loss statements and balance sheets should stop,” he urged. Pointing out that no value is added by having management pore over these statements every month, he suggested that they be generated quarterly instead.

Research shows a distinct correlation between good social and environmental performance on the one hand and financial success on the other. Benefits of 3BL implementation include reduced risk, more efficient use of resources and enhanced reputation, leading to loyalty of customers.

Eco-efficient firms are able to create greater shareholder value than their industry competitors while minimizing environmental risk and impact. Petty pointed out that, on the Dow Jones, the Sustainability Index consistently outperforms the overall index. Quoting from the book by Freeman et al, ‘Environmentalism and the New Logic of Business’, he said that there is no aspect of our world that can escape the scrutiny of environmental analysis.

Petty insists that environment and society must be an integral part of the strategic planning process. A 3BL report should typically commence with a CEO statement. This should be followed by a profile of the reporting organisation, an executive summary ad key indicators, vision and strategy, policies, organisation, and management systems.

At a panel discussion on the issue, Ravi de Silva, Consultant – Social & Environmental Management, Aitken Spence Hotels exhorted corporates to adopt a proactive and responsible approach towards the environment. “You should have a Sustainability Policy,” he said. “Review where you are and where you want to go.”

In the Sri Lankan context, De Silva recommends that organisations be a part of the community through stakeholder consultation. “Do assessments on the impact that your organisation is having on the environment,” he added. Talking of the Kandalama Eco Park that he has been involved with, he said that they do not generate any garbage, only waste that is recycled. The 1.5 million visitors to the Eco Park have helped build awareness.

Deshini Abeyewardene, Manager – Public Relations, SriLankan Airlines, said that implementation is the key to success, for which managements need to invest the initial time and money. Talking of the financial spin-offs of adopting 3BL Reporting, Ms Abeyewardene gave the example of MORI, a company that has been able to command a price premium of 40% on its products because it is perceived to be an ethical company.

Whither Equity Markets?

It has been heartening to observe the seemingly inexorable rise in the stock markets this year. With the Colombo Stock Exchange’s market capitalization having peaked at US$ 7.38 billion, the obvious question is: Where do we go from here?

Despite the feel-good effect of this milestone, one must admit that the equity culture has not yet really caught on in Sri Lanka. There seem to be factors that result in savings finding their way into real estate and bank deposits rather than into the equity market.

A vibrant and liquid capital market is imperative for the balanced growth of any economy. As business entities gradually move up the continuum from family-controlled enterprises to professionally-managed corporations, it is necessary that they have access to equity markets. However, the dearth of public issues – Initial Public Offerings (IPOs) or otherwise – suggests that not enough is being invested in equity by the general public.

The two essential ingredients for a flourishing stock market are safety and liquidity. While Sri Lanka’s financial markets have a fair degree of systemic safety, the lack of liquidity in the equity markets appears to be a significant impediment.The Colombo Stock Exchange’s market capitalization is US$ 7.38 billion and the average daily turnover is US$ 3.69 million – or merely 0.05% of market capitalization. If one was to take the Indian equity markets as a benchmark, the average daily trading is about US$ 2.34 billion, which works out to 0.32% on the market capitalization of US$ 730 billion. Hence, even taking India as an example of what is possible, there is ample scope for a six-fold increase in traded volumes on the Colombo Stock Exchange.

To develop the equity markets in this country, we need more robust institutions – mutual funds and depositories, for instance. The average person, with discretionary funds to deploy, would not invest in equity unless he is educated about and aware of the risks and rewards of equities as an asset class. There is a need for pioneering institutions (like Merrill Lynch and Franklin Templeton) to play this role.

The growth of equity markets typically has the effect of a ‘virtuous cycle’ – Economies of scale result in reduced transaction charges that intermediaries charge. This lowering of such costs would draw more people to the market. The business press and other media can also play a responsible lead role in this connection.

As markets mature, investors tend to value companies based on expected future performance, rather than on ‘historical’ measures like net asset value or dividend yield. Despite the low liquidity of most shares and the general mood of pessimism that prevails in this country, share prices are at an all-time high today. That is a good sign.

Theoretically, the market capitalization of a company is the discounted value of all future cash flows of the company. If that is the case, persons investing in equities today believe that the future is brighter than it has ever been before.

Business isn’t all about Money, Honey

“Dad, the objective of business is to make oodles of money for its shareholders, isn’t it?”

“Business is certainly about making profits, Son - but it’s not only about making profits. How profits are generated is as important as how much is generated. Business needs to be conducted responsibly.”

“How do you say that, Dad? All that you Management-types keep talking about is PAT, RoI, EVA and such three-letter acronyms that are related to money… In addition to market share and the share market, of course!”

“Not really, Son, there’s much more to it nowadays. We have finally figured out that companies cannot exist in isolation…”

“The saying ‘No man is an island’ seems to apply to companies too, Dad...”

“Responsible companies are realising that we are not just living on the earth, Son, but off the earth too. Even the simple act of cutting down a tree has some detrimental impact and takes its toll on the planet, in terms of global warming and disrupting the ecological balance.”

“I didn’t realise that, Dad.”

“…And then, Son, some companies have not been particularly responsible about disposing of waste materials that are generated during their production process. These effluents damage the environment too.”

“But, if companies stick to norms that are legislated by the government, and do not contravene environmental limits, everything should be tickety-boo, right, Dad?”

“No, Son – unfortunately, governments have been known to be laggards in this respect. They normally wake up to a problem after it has occurred, like closing the stable door after the horse has bolted. It takes a rare sense of foresight on the part of governments to pre-empt something like environmental degradation. We are always in damage-control mode when it comes to legislation on such matters.”

“So, you’re saying that it’s up to companies to take the lead, Dad…? I read that the world woke up to the ozone-layer problem in the nick of time, and has managed to stem the rot.”

“Stem the rot is a brilliant choice of words, Son… Another aspect that companies have erred in is by disregarding the communities that they operate in. An island of prosperity in an ocean of poverty is unstable. Corporate houses may have realised this a long time ago, but only now are they beginning to do something about it.”

“I see, Dad. Organisations cannot go on utilizing the earth’s resources without being conscious of the impact of their actions. They should use stuff like wind energy and solar energy instead of non-renewable energy sources…. But how will they benefit?”

“I could regale you with stories of companies that failed to heed environmental concerns and failed, Son… Like Hershey Foods, which lost a US$ 12 billion deal because it failed to heed the social and economic concerns of the town it was based in.”

“That’s twelve with nine zeroes… in dollars! Wow!”

“Then there are other tales of companies that grew in popularity and profitability… Like PPL which agreed to remove its hydro-electric dam from a river – and became the darling of environmentalists.”

“What about in our own country, Dad?”

“Take polythene bags, for instance, Son…”

“You’ve been telling us not to take polythene bags – and now you’re asking us to take polythene bags, Dad?”

“No, Son… No polythene! The government has finally thought it fit to ban polythene, but responsible companies have already started doing something about it. Some companies have adopted bio-degradable packaging. There’s a retailer who used to give a sizeable discount to those who do not ask for polythene packaging. The retailer lost a little money, of course, but the gains to the environment were significant.”

“Are there any other things, Dad, other than environmental pollution..?”

“I know of another company that has scrapped certain carcinogenic substances in favour of a healthier substitute for the welfare of its employees and customers. Another company trains and employs underprivileged sections of society."

“That is good, no, Dad?”

“It certainly is, Son. Companies must realise that they are living off society. Merely paying their taxes and expecting the government to handle everything else may be legally okay, but it is neither ethical nor does it exhibit good corporate citizenship.”

“Exhibiting citizenship? Is that like showing your National Identity Card when asked to do so?”

“No, Son – It is about companies behaving in an exemplary manner towards the environment and society that they operate in. Companies are persons too, and have to do what is right for the country and community. In fact, my job has become thrice as fulfilling – My organisation is talking of ‘Triple Bottom Line Reporting’.”

“Three bottom lines sure sound more interesting than one, Dad, but what does it mean?”

“Earlier, Son, companies used to focus on one bottom line – that is, profits. But now, they have started reporting results on three dimensions: economic, societal and environmental. Organisations like Commercial Bank and Dialog are already doing a lot in this regard.”

“What can a company do about the society, Dad?”

“They can cater to the needs of the underprivileged, Son - in terms of their educational and health needs, for example.”

“What else, Dad?”

“There is a move towards green, Son – and I’m not making a political statement here. Business should be sustainable and should make a positive contribution to the environment and the societies that they operate in. What comes from the people should go back to the people many times over.”