Critically examine the changes brought by the open economic policy in the framework of asset’s structure and the customer service of the commercial bank in Sri Lanka since 1977.

The history of Sri Lanka is a very interesting one. It is full of invasions, battles, failures and victories. The war heroes, political leaders, and much more people sacrificed their time, wealth and also their lives to make this country a better one. That is why we still celebrate the Independence Day, which was gained in 1948, in a grand way. The first political party which ruled Sri Lanka after the independence is United National Party, won the first election and ruled the country from 1947 -1956, 1965-1970 Then the Sri Lanka Federal Party ruled the country from 1956-1965, 1970-1977 But due to the continuous downfall of the economy, the 1977 reform was amended.

The 1977 reform made a huge change in the Sri Lankan history. It made the Sri Lankan economy, politics, and the society upside down. From 1970-1977, Sri Lanka had a very rigid and closed economy. Therefore, a number of losses we had were far greater than the benefits we earned. As having an agricultural based economy, we had to depend on international forces i.e. IMF, World Bank to borrow loans for investments. Moreover, our export earnings were not enough to cover import expenditure and it made a huge trade deficit within the country. These reasons also made Sri Lanka to borrow loans from other countries. Even though we got higher places from literacy and less mortality rates among other Asian countries, we could not get better places in savings rates, GDP, GNP and in other economic aspects. Moreover, due to the economic degradation, there was a higher rate of unemployment and people had to go through many difficulties. These were for the main reasons of introducing the new economic reforms in 1977.

The main aim of the liberalization was focused on uplifting the downfallen economy. The government planned to improve the economy through an export-led scheme rather than an import substitution. Therefore, the government mainly wanted to improve the private institutions because the government realized that government institutions could not help as much as the privet sectors in the process.

The encouragement of the privet institutions was created through reducing the taxes. This made an obvious rise in investment. Also, direct taxations were used to allocate resources rather than mobilizing resources for public investments and for income distribution. As a result, there were establishments of projects like Mahaweli scheme, which could be able to bring Sri Lanka’s economy to a better place.

In the process of enhancing the economy, the financial sector played an important role. There are many financial sector came along with the liberalization such as Licensed Commercial Banks, Registered Finance Companies, Primary Dealers, Leasing Establishments, Employees Provident/Trust Funds and Insurance Companies and much more. Due to having a vast area in the sector, these institutions were able to spread their service throughout the world, which is still taking place at the present day.

The increase in the financial institutions led to increasing the competition among the banks. For instance, in 1960 there were only 2 domestic commercial banks and when it comes to 2010, there were 12 domestic commercial banks. In 1960, there were only 6 foreign banks, but in 2010, the number has increased up to 12 which obviously contributed to increasing the competition.

What is a commercial bank?

Commercial bank is a financial institution, which provides various types of banking facilities to the customers such as loans, accepting deposits, creating saving accounts, creating fixed accounts etc. The specialty in commercial banks is, they create money using the client’s deposits. For this, the central bank intervenes and fixes a interest rate (official reserved ratio). Thus, when the commercial banks issue money, an amount of money is kept by the bank. This is mainly how the commercial banks create demand deposits. When it comes to present, there are many commercial banks in Sri Lanka such as Hatton National Bank, Commercial Bank,

peoples bank and etc.The above graph shows how commercial banks have increased their branches, and how they have expanded their assets, deposits, investments over the time. The truth about the expansion of commercial banks is, with the new reforms in 1977, private sector banks were opened with minimum capital requirements. Moreover, with this, the establishments of the branches of the existing privet banks were allowed with the permission of the Central Bank. Due to having many branches all over the country, people could do transactions without much trouble.

Moreover, the government also wanted to promote the commercial banks. Thus, the people had many benefits such as borrowing loans in easy terms without paying much interest. By then, the government tempted people to go for commercial banks. So, when we look at the above graph, we can see that the initial steps taken by the government were successful.

As I have mentioned earlier, the commercial banks have been surpassing the most of other financial institutions. When it comes to deposits, the commercial banks have been earning a greater profit when it is compared to early 1980s.

For example, in 1975, the real depositor per branch was about Rs.3.6 million and when it comes to 2010, it has increased to Rs.31.6 billion which is an increase of more than 10 times as compared to 1965. Thus, it is evident that the commercial banks have been developing gradually since past few years.

Along with the liberalization, the market-based interest rate created a positive influence on savers, which led to increasing the domestic savings. Moreover, this created the competition among the banks. However, we cannot always say there were positive effects after the liberalization because, during the period of 2000-2007, there was a gradual reduction in lending and deposits rate by the commercial banks. During considered period, the interest rate spread declined at a slower rate. This could be a result of slow adjustments in lending rates, high operational costs, and low-quality lending portfolios. However, the financial reforms have forced banks to adopt rigid risk control procedures; to cut down unnecessary expenditure and more reactive to the market changes. This is a proof that the methods, which were used to control the interest rate, were successful.

With the economic liberalization, lots of fluctuations took place in the economy. In 1989, there was a change in the political party, UNP came to power and which also changed the path of the former political party was using. With the electing of the new political party, the government wanted to use the privet sector as the ‘engine of growth’ along with the more liberalization and the government’s fiscal policy was used to reduce the budget deficit. Besides, there was a massive privatization process of the government institutions in order to ameliorate the economy. With these newly implemented plans, the economy of Sri Lanka showed the lights of a bit ray of hope.

Any kind of an increase in the M2b is an expansion in the commercial bank services in the financial sector. Thus, along with the liberalization, broad money has been increasing. The Graph I represents the latest statistics of M2b in the year 2015.

M2 = Currency held by the public+Demand/ checkable Deposits+Saving Deposits+Short time fixed Deposits

 

Graph II

Source: Various issues of CBSL annual reports.

Fig. 2. Monetary aggregates

It is obvious that the Broad Money in the commercial bank has been significantly increasing. The Graph II shows that the commercial banks in Sri Lanka have been expanding for years.

This means, there is more chance to do deposits in the market and there is an expansion in the money supply in the country.

However, these changes did not happen within a single night. There also have been downfalls in the commercial banks. There have been macroeconomic causes, microeconomic causes and financial causes. However, there have been instances where banks have fallen down. For example, during the 1960s and 1970s, there has been a bank crisis where the government had to step in to save some affected banks.

The above graph represents the way that the asset structure has expanded during the period 2001-2005. In 2000, it was Rs million 799,450 worthy assets and in 2005, it has significantly improved to Rs. Million 1,461,533. This happened maybe because of the position, which commercial banks have within the country. If the government ever demoted the commercial banks from the beginning, there won’t be such an improvement by today.

It is crystal clear that the commercial bank assets and liability structures such as deposits, loans, treasury bills, short-term funds and much more have been drastically increasing. Even though the commercial banks had to go through many difficulties, we can conclude that they have been gaining the pioneering position in Sri Lanka since the liberalization.

As I have pointed out earlier, since the liberalization, commercial banks have been expanding their customer services. Earlier, the commercial banks only provided bank-related services such as loans, deposits and etc. However, today, the customer services provided by the commercial banks are numerous.

With the liberalization, there was free entry/exit for the financial institutions. With the policies in 1977, the banking sector followed many activities like credit expansion, increasing loans. All these services are done by the banks to attract customers, to provide them more facilities in the banking system. It is a known fact that earlier, two or three decades ago, only a limited number of people could get the benefits from the banking system. This happened because the banking system was not spread enough to meet the needs of the rustics. People were not exposed to the industrialized world because only metropolitans gained the opportunities. Furthermore, there were no many financial services as they are today. For example, by then, in the time of the independence, there were only services like mobilizing savings, loans, deposits, and transfer payments.

The current IT system was not in practice in early 1970; before the liberalization. It was in 1986 that the new trends on the industry started first with introducing an automated teller machine, in its city office of HSBC bank. Before that, there were no credit cards or debit cards in use. And there were no internet banking transactions, telebanking or ATM transactions. At first, the services like internet banking, ATM transactions were only practiced in developed countries. But, with the globalization, all these high technical facilities were invented in Sri Lanka also. Along with this, the employment and the education level of the people in Sri Lanka also leveled up. The staffs of the financial institutions have been well trained to handle these modern IT systems locally and also internationally. Therefore, when it comes to present, the services offered by commercial banks are outnumbered. The banking operations were also changed from manual systems to hi-tech operating systems. For example, loans, financial advice, legal advice, trustee services, administrative services, remittances, foreign currency exchange, access to electronics cards, the ability to have checks and etc. Systematically banking operations were moved from a branch bank system to a single bank system. Different banking services which started to use internet and telephone came into the operation.

Therefore, it is obvious that since the liberalization, the services of the commercial banks have been increasing and at present, they have gained a higher position in Sri Lanka. For example, the Commercial Bank in Sri Lanka has got selected to the Top 1000 Banks in the world by the Bankers Magazine.

People’s Bank for example, provides different kind of services, which are different from other banks. Any citizen who is above 18 can open a normal fixed deposit in the bank with minimum 5,000/-. Moreover, there are term deposits for senior citizens, for minors, for special senior citizens. These groups have the privilege for accessing number of benefits. This is also a bank which holds Customer Accounts over 17 million, which has around 501 ATMs, Total Assets Base over 1Tn and also People’s bank has earned profit as Rs 14.99 Bn (after tax). Along with the mentioned services, People’s bank also provide facilities such as credit card facilities (Gold Card, Classic Card), Treasury Services, Overseas Customer Services, etc.

If we take the Commercial Bank for example, along with the main services provided by the bank such as account opening, cash cheque payment, remittance issues, there are other advanced services such as answering the client’s calls promptly, helping customers to manage their accounts, responding to written enquiries promptly, resolving customers’ complaints promptly and fairly and etc. Moreover, the bank has further expanded their services such as awarding scholarships to undergraduates, donating equipment, and other necessary facilities for war heroes and other community projects. Therefore, it’s evident that privet banks provide much more services than preliminary banking services.

When we look at the commercial banks with the liberalization, it is evident that the government has given them the leading role of the country in order to save the fallen economy. Though it is a long journey, at present, the commercial banks have taken a pioneering position within the country. As the commercial banks have expanded their branches, they have increased the number of services they provide to the customers. Therefore, we can come to a conclusion that with the new reforms in 1977, there have been positive changes in the asset’s structure and attractive, new customer services in the commercial banks.