Regulating finance companies

Read any newspaper anywhere in the world and you will come across two words: Economic crisis. The world is facing a tumultuous period as far as the global economy is concerned.

Not even the most powerful of nations had withstood the economic storm, which has left some countries literally bankrupt. Banking systems have collapsed en masse, leaving depositors in the lurch. Some countries, including the US, have unveiled massive economic stimulus packages to rescue their economies. Some economists are openly saying the one word nobody wanted to hear: Recession.

Yet, there are signs that some banking and other top rung executives have continued to enjoy perks while their institutions were crumbling before their very eyes. One such example is AIG, whose top executives have drawn huge bonuses even as the company was being hit by the financial crisis. President Barack Obama himself has stepped into the furore, saying he would stop such practices forthwith.

Sri Lanka’s economy as a whole has braved this storm, recording a growth of 6.0 percent which can be considered excellent given the prevailing global conditions. But in a tightly knit global financial network, no country can hope to stay in a cocoon, without being affected by the events outside its shore. All possible steps must be taken to ward off the ill effects of the global economic crisis.

Sri Lanka’s economy has witnessed some dramatic events recently, which may not be directly linked to the worldwide economic crisis. But they give economic planners, lawmakers and the public ample food for thought.

Sri Lanka’s economy has always had an unseen element - the black economy, as they call it. Many persons including public figures seem to accumulate a lot of wealth which they are unable to account for. They cannot deposit this money or otherwise invest it through legal channels, lest the taxman take it away.

This paved the way for dubious individuals and companies that offered discreet services and high interest for such deposits. This was the livelihood of Sakvithi Ranasinghe and Danduvam Mudalali. They accumulated billions of rupees from innocent and not-so-innocent customers. There is no solace for their customers - they had taken a risk without going to the established banks and they have now lost all their deposits. Such black money, if invested through proper channels, would have been an impetus for development.

Another worrying aspect is that top rungers in established finance companies and similar entities have fattened their wallets AIG style using depositors’ monies. There is talk and evidence of large-scale fraud as well. The Golden Key incident is not the first time that banks and finance institutions had gone bust in this country. HPT and Pramuka come to mind immediately, not to mention totally illegal operations a la Sakvithi Ranasinghe.

The question is, have we, both the authorities and the public, learned any lessons from such debacles? There is clearly a need for more effective laws to police financial institutions and punish wrongdoers who dupe depositors and part with their monies. Amendments to the Banking Act should be considered.

In the light of the Golden Key incident, the Central Bank should investigate all finance companies that offer very high interest, including their sustainability in the long term.

A small economy such as ours could be seriously impacted if more financial institutions fall. The gist of this story is that a lot of people had had a ball with other people’s money. Thus it is vital to establish accountability and transparency at these institutions and declare the salaries/bonuses of their top executives.

There should be a process of naming and shaming individuals who had swindled depositors’ funds. This should also apply to the major defaulters of State banks, many of whom enjoy a grand lifestyle with the hard-earned money of the public.

This episode is also lesson for the established banks and the Inland Revenue - why do people choose dubious individuals and companies for their deposits? Perhaps they can explore the possibility of luring black money to the formal economy with appropriate incentives. That would be a much better option than rogue finance company heads taking it all away.

However, it all comes down to the prudence of the depositor - stability and peace of mind pay in the end, not high interest.