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While the post-war capital market has not picked up as it should, a comprehensive forum in Colombo organised by UTO Edu Consult attempted to explore the current situation in this regard and identify measures to address prevailing issues.
The Capital Market Conference (CAPM) 2014 held under the theme ‘Time to Consolidate’ which featured Securities and Exchange Commission Chairman Dr. Nalaka Godahewa as Chief Guest and former Bank of Ceylon Chairman Razik Zarook as keynote speaker presented to the fully packed audience a 360-degree view of the ever-changing financial industry.
Capital markets, where it was and where it should be
Affirming that Sri Lanka has the fundamentals in place, the SEC Chief shared in brief the history and provided a snapshot of the current status of the capital market sphere.
Though small in size, the Colombo stock market has had a long and an eventful history of over 115 years that dates back to the era when the island was still a British Crown Colony. By the early ’90s the CSE was one of the most technologically-advanced modern stock exchanges in the region. Godahewa noted that in fact CSE was the first South Asian exchange to introduce scrip less trading system in 1991. However due to the war the market did not reach its full potential for about 20 years while the rest of region moved forward.
“When Sri Lanka’s GDP reaches US$ 100 billion within the next few years, the stock market is also expected to follow suit. In most of the regional countries the market capitalisation is as high as 70% of the GDP. Using conservative estimates we can expect the market value to reach at least US$ 50 billion within about four years from now,” Godahewa said. Sri Lanka currently has 289 listed companies.
Adding that the local capital market with market capitalisation of approximately US$ 20 billion belongs to a particular subset of Emerging Markets called Frontier Markets, he stated the investment case in the local equity market is a “compelling one”.
“For the period 2008 to 2013 the Colombo Bourse returned figures of an average of 32% year on year. When compared to the overall Emerging market Index which returned 12 % and the Frontier Market index which returned only 4% for the corresponding period. This is not only attractive but admirable,” he said.
Developments in SEC activities
Towards the end of 2013 the SEC introduced a number of measures which were steps to bridge certain regulatory gaps that were in existence for several years. The aim was to ensure that the industry will kick off 2014 with a sound regulatory framework in which a strong foundation can be built on.
In November 2012, a 10 point, three year action plan was launched for the development of the capital market with the focus of bringing stability and setting a strong foundation for future developments. The progress of each project was made mandatory to be reported and information is made available in the public domain for anyone interest to analyse.
Having identified the SME sector as an area where the capital market can be developed, Godahewa shared that the SEC is currently studying models adopted by several other countries while seeking indigenous solutions for our requirements.
Pointing out that for 2014 there are a number of IPOs in the pipeline, the Chief observed there is high interest amongst companies to consider listing as a way forward. However, the SEC anticipates potential de-listing as well since companies with small market capitalisation may find it difficult to continue with the mandatory minimum public float rule introduced recently.
“We have been making significant progress, yet it’s a long journey ahead before our capital market becomes a significant contributor to the national economy. Our next target should be reaching a market capitalisation of 50% of the GDP. I sincerely hope that all stakeholders will continue to work together to reach that goal sooner than later,” expressed Godahewa.
Godahewa noted that with the proposed financial sector consolidation there is a likelihood that number of finance companies in the country may shrink. Since some of these companies are already listed it will have an impact on the number of public companies. Nevertheless he noted that such mergers will not significantly affect the market capitalisation in the short run, and in the long run it should work positively for the market as the merged companies are expected to be stronger and more stable.
Is SL too peaceful and tranquil to attract investments?
Opining Sri Lanka has prematurely puts its signature on documents of agencies such as the Asian Development Bank (ADB), Bank of Ceylon Forman Chairman Razik Zarook noted those countries that didn’t do so have now become Switzerlands since investors chose those markets to put their money.
“When you have very good risk managers, investors will be more than happy to come and value money here. On the other hand it is the weight of the risks and the weight of the profits. Sometimes I feel that Sri Lanka is too tranquil and peaceful now to attract capital. If we were in a war situation, people see opportunities,” expressed Zarook.
Twenty years ago during the height of the war a Singapore company invested over US$ 100 million in Sri Lanka where they brought shares of John Keells Holdings for Rs. 35. When prices shot up to Rs. 120 the shares were sold with a clean profit of 250-300%.
“This was at the height of the war. An opportunity they grabbed with excellent risk management and insight into the opportunity. Now we have peace and tranquillity and where are they? They have moved out of Sri Lanka waving goodbye. They don’t have a single cent of investment here and where are they now? They are in Africa, looking at that market where they see great potential,” asserted Zarook.
Recalling the popular statement made by Dr. Sarath Amunugama at the Commonwealth Business Forum where he said “Sri Lanka is not the only girl in a bikini on the beach,” Zarook said: “Even if our bikini becomes itsy bitsy teenie weenie and is yellow polka dotted, I don’t think the investors will have a chance of looking at us. For this we have to encourage our own people to develop the capital market and to have the resilience and the regulatory mechanism that will allow us to absorb shocks of capital outflows.”
He cautioned that the greatest danger of inviting inflow of capital is that equally capital outflow can create economic chaos, particularly in the developing country due to the existence of asymmetry information in the market.
Listing on the CSE
To increase aware on the needs and benefits of listing a panel discussion moderated by Colombo Stock Brokers Association Chairman Dihan Dedigama touched on a number of areas in this regard.
With the Colombo Stock Exchange CEO Rajeeva Bandaranaike himself convincing companies to go public, he noted that the key reasons for listing, other than to raise capital, is to discover the value of company shares, and to serve as an exit mechanism for venture capitalists, PE and angel investors. Furthermore it allows attracting and retaining the best talent and this he said is an incentive companies can make note of. He shared that it enables companies to enhance their corporate and brand image since they are fall on the public domain on being listed.
Sharing on the experience of going public, Amana Bank CFO Ali Wahid said with the listing process comes few challenges, all of which can be tackled with assistance. He noted that the all necessary information is presented in the CSE. While the process would require assistance, he said that efficient financial advisors are there to help in terms of capacity enhancement and meeting all the listing requirements.
In terms of the outlook for 2014 for listing SEC Consultant Rohan Senewiratne shared that a joint committee consisting of senior officials of SEC and CSE has been established to drive new listing. Having started work in September 2013, the committee has already approached over 70 entities that have the potential to be listed. He also drew attention to the 50% tax reduction offer for companies listed before 31 March 2014 being extended to finance, banks, insurance, and manufacturing sectors till a later date.
“In the pipeline there are 70 companies that could be listed and we have lined up 37 equity IPOs that will be coming in stages over the next three years. I am sure there are whole lot of debt IPOs inline as well so the outlook looks very interesting and good,” noted Senewiratne.
Attracting foreign investment
Exploring the area of issuance of dollar bonds in Sri Lanka, a panel discussion for which Adl Capital Sabri Cader was moderator had experts in the industry presenting their view on the topic of attracting foreign investments.
DFCC Bank Senior Vice President Group Corporate Banking and Resource Mobilisation Manohari Gunawardhena noted while it is increasing difficult for institutions to raise the amounts required for the type of investments envisaged by the Government, when looking at the country’s savings as a percentage of GDP and the growth targets, about 5% is missing.
“Due to the missing 5% in savings banks are facing difficulties in funding such high value projects and it is inevitable for banks to look outside for funding,” Gunawardhena said.
In that context she noted that for local banks there are three factors that come up against when accessing international markets, that is Sri Lanka being at a sovereign rating that is below investment grade, the size of the issue, and the size of the balance sheet that can only be achieved through financial consolidation.
Looking at how this scenario can be managed from a global economy, NDB Chief Financial Officer Faizan Ozman said there being many currencies to trade with, today a country cannot survive without trading with another due to comparative costs and various economies of scale.
“When there are different currencies, the foreign exchange risks crops up. Therefore it is important for a company or a bank to manage this since not looking at this aspect will have a severe impact on the P&L and will lead to capital erosion,” he said
Ozman noted this can be managed by futures. While this option is not available for all currencies, forward contracts are the best way to address the issue as natural hedging allows the inflow and outflow of currencies to be matched.
Touching on the advantages of accessing future funding, LOLC Group Head of Treasury Rohan Perera shared that in the last eight years the experience of LOLC is that it increased external funding up to 50% of its exposure into the debt market.
Noting there are constraints on liquidity in local markets, he said: “Early year and a half ago we saw the CBSL restrict the liquidity. At that time if curtailed to the local market there was limitation in borrowing. This is because identifying the course for local funding is critical. Our experience with lending institutions is that one cannot stop the growth of portfolio. This is why we have taken the task of going to external funding. We are looking at the Middle East market because this is the right opportunity for investors to tap our door and look at Sri Lanka.”
Sharing from an outside view on the challenge faced when investing in Sri Lanka, Serendib Stock Brokers CEO/Director Naushervan Beg said Sri Lanka is not competitive enough. The reason he said is that the country compares itself to the significantly larger regional economics that have long established markets and larger investment banks.
“Given the size of the liquidity, their product base available in the market, and the prize discovery mechanism, there is a concentration of investors. From Sri Lanka’s perspective we don’t look at that. That said investors need diversification. And with that they also look at value. Sri Lanka is small economy and it falls off the radar from lot of these foreign investors. To address this for the local financial services industry there needs to be a strong selling pitch from that perspective,” opined Beg.
Introducing new asset classes
Shedding light on the appetite for new asset classes in the industry, LOLC Securities CEO Sriyan Gurusinghe noted that although Sri Lanka has been attempting for years to introduce new asset classes, it has made only little success. He attributed the failure to the technical issues the capital market has been facing on this for over a period of time.
“Sri Lanka has been trading only in traditional equity market since 1986 and that has been a major drawback as far as capital markets are concerned. The good thing however is that when it comes to derivatives the SCE is keen on introducing equity derivatives. Needed is only a platform to take this forward. Introducing new asset classes will help to take Sri Lanka to the next level because it will allow investors to choose items to trade with rather than investing in traditional equity and markets which has only one direction,” said Gurusinghe, at a panel discussion moderated by Calamander Group Singapore Director Mafaz Ishq.
With new products coming under the asset classes of equity, securities, fixed income and money markets, Comtrust Asset Management General Manager P. Asokan pointed out that in addition to this the SEC in the unit trust code of 2011 permitted the establishment of Exchange Traded Funds (ETF). However, although some companies were planning to establish Gold ETFs it was delayed probably due to practical difficulties and the decline in gold prices.
Amana Bank Head of New Product Gold Unit Fazly Marikar noted there are three factors on asset class when looking from investor side. The factors are low interest rates, lack of performance in equity markets, and inflation rates that give the feel of low purchasing power. “When such factors prevail investors will look for alternatives. Investors will look for instruments based on commodities and asset based securities. Those are two areas where we see broad potential,” said Marikar.
Managing risk in a dynamic environment
With risk becoming a buzz word in the financial industry, a top panel moderated by Adl Capital Associate Director Azad Zaheed looked at how the role of risk and compliance has grown over the years.
Presenting views from a the perspective of rating agencies, RAM Ratings Chief Executive Officer Adrian Perera said the main issue in Sri Lanka is that the corporate sector has got used to borrowing short term and lending long term, borrow floating and lend in fixed interest rates. Blaming the CFO for being the “biggest culprit in the whole game,” Perera opined to convince them to do otherwise will be time consuming.
“The corporate sector needs to understand that they should not borrow short term and lend long term. Convincing the CFOs in this regard is a slow process. There is a requirement for some amount of training for the CFOs, and this they don’t want to accept. Don’t invest in long term projects with short term money and floating rates,” he cautioned.
Exploring the role of risk officers in the current context, Sampath Bank Group Chief Risk Officer Anoja Karunaratne pointed out that now the prominence given to risk is much higher than before and the role of CROs over the years have got enhanced. With the financial industry undergoing many changes, the importance of the role is more pronounced, greatly in banking and financial institutions simply because it deals with public funds and has the obligation to ensure that those funds are looked after.
“I would say that the role of a CRO is to create cultural risk awareness and bring risk consideration in all the decisions and strategies that we make. It is not only credit, liquidity and market risk, it extends to everything such as reputation risk and strategic risk, which is different to asses and quantify,” said Karunaratne.
Speaking on how technical the compliance function has become over the years, Habib Bank Head of Compliance Sri Lanka and Maldives Yasir Maqbool shared similar sentiments that compliance too was not given much importance but post 2000 the emphasis on the combined function is grater and different.
Pointing out that the obvious role in compliance is managing it with functions such as external and internal policies, he opined the development of a compliance environment should start from the top management. “In the past some global institution has had some hits for being not compliant on certain aspects related to Know Your Customer (KYC). So it is essential that every person in the organisation to believe that compliance is their responsibility,” said Maqbool.
The search for talent for the finance industry
Shedding light on the issue where Sri Lanka lost its talents to the Middle East market, Adl Capital Associate Director Azad Zaheed as moderator of a panel discussion on talent attempted to find if the brain drain is still taking place.
Executive Search Managing Director Fawaz Saleem stated the brain drain will continue to take place due to a number of reasons which include the search for greener pastures going on. “Although those who ventured out during the war times want to return, people are still moving to the gulf state for employment since those countries have a demand for Sri Lankan talents,” said Saleem. Exploring if the technological advancements could attract global level talents, Millennium IT Chief Operating Officer Hemantha Jayawardena noted the IT sector to be one of the industry that is affected badly by migration. “Sri Lanka needs to differentiate itself from the region. We cannot be in the same game as India. We have to be specialised and niche. I see many IT companies establishing in Sri Lanka and that will attract senior level professionals into the country,” Jayawardena said.
Highlighting the striking changes in the HR industry, Amana Bank Vice President Human Resources Roomy Rahim opined that in the local industry there is a desire to acquire more skills. “This is good. Gone are the days where we had baby boomers and the where learning was confined. With this there are more opportunities arising for people to move up the corporate ladder,” noted Rahim.
Speaking on the importance of soft skill development, Life Skills Training Chief Executive Munshif Hussain said social stigma is a key issue amongst the local workforce. And for this he said development should be in technical skills and not soft skills. “The best talent is in Sri Lanka. But there is laziness and that first has to be removed,” stated Hussian.
On the language barriers and its impact on finding employment, 4Sight Educonsult Founder and Lead Consultant Hussain Buhary opined the issue in Sri Lanka is that much emphasis is given to qualifications alone.
“Our mind doesn’t work like stock market prices. To get perpetual thrill into the mind set you need to give the emphasis on brain ware. For this you need to give the emphasis on education and not qualification. It is about other aspects. In Sri Lanka we don’t see many entrepreneurs because we just produce people with some technical skills and when it comes to other aspects, they have inherent fear of looking out of the box. We need to work towards changing the mindset where we will look at the world in a fearless manner,” said Buhari.
Pix by Lasantha Kumara
Top CEOs present views on future outlook of SL financial industry
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