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New
realities, myths and fantasies of the banking Industry
By
Manoj Akmeemana – Senior Manager, Strategic Planning,
Sampath Bank PLC
The new world order of business allows totally different
industries to be converged. True, there are many concerns
that over-converged banking and commerce would drain
the general public deposits and manipulate lending.
But converging of different industries with the banking
industry should not be restricted purely because of
these moral hazardous issues and it should be the prime
duty of regulators to prevent these kinds of irregularities
from occurring.
The world renowned Retailer, Wal-Mart is already in
to industrial loans and the big banks in America are
already on alert mode while the small banks have faced
an additional challenge to deal with. The future of
the industry called banking is shaping, perhaps “Re
- incarnating” - itself with different forms of
banking. It is already happening today - Be prepared
for it!
Digitalising the world
The rapid advancement in Information Telecommunication
(ITC) has digitalized many applications and systems,
which convert text, data, sounds and images into a stream
of zeros and ones that can be combined to bits transmitted
from appliance to appliance. The Bankers are standing
right in front of the “Information Highway”
They can’t just keep standing forever, because
doing so they will be smashed with high-speed digitized
vehicles! Standing still will pave for Bill Gate’s
prediction of “Bankers are dinosaurs” to become
a prophecy!
The fear of disintermediation is only a half truth.
Although in many industries middle men loose their business,
new ways of intermediation has sprang up in this galaxy
of informational highway. Kotler named it –“Re-intermediation”
in his book – “Marketing Management”
and predicts that, “many brick and click”
competitors will become stronger contenders than the
pure click firms since; they had a larger pool of resources
to work with and well established brand names.
Bankers are adapting quickly to the challenges of the
digital economy starting from ATM to virtual banking,
process automation to innovative delivery channels and
customer convenience; being well managed by the banking
industry at large. It is observed that bankers are developing
sophisticated supply chain system to create efficiency
and cash flow option to cater new requirements of the
market. The traditional documentary credit system creates
inefficiencies and according to the World Trade Organisation
(WTO) 80% of the world trade is done using the open
account system. Today banks such as Citi group already
provide state of the art integrated Supply Management
Solution for open account transaction for world trade.
However, the threat may come with competition from telephone
companies in the future. It is reported that less than
1 Bn people have bank accounts worldwide but close to
3Bn have mobile phones! Further over 200 Mn. international
migrant workers need to send money back to their homes
and many of them do not have a bank account. The IMF
estimated that to send $ 200 back to relatives in the
migrant worker’s home country costs $15 - $26 on
average in 2005. It is believed that mobile systems
could drastically reduce this “intermediation cost”
of bankers.
It is significant to note that according to the World
Bank estimations, the current global remittance market
has a total annual worldwide value of $268Bn. See the
possibilities of business opportunities for Bankers
and of course for the telephone companies! It is too
early to predict that mobile phones might open the way
for telephone companies to compete with banks in holding
balances and running payment systems or they will have
some strategic alliances with banks to do the job. But
one thing is predictable, more and more industry convergence
will happen in the very near future, which will result
in mergers and acquisitions as well as the making of
bigger banks - much bigger banks!
Paradise of Eden
A few decades ago it was said that South Asian economies
were connected to the developed world, as a foetus to
its mothers through the placenta, and even the smallest
vibrations of the mother were felt in magnitude as rippling
effects and shocks. However, the South Asians have been
able to develop “shock- absorbers” during
the last decade to overcome these socio–economic
shocks generated by the Developed part of the world.
The Asian Development Bank, South Asian Economic Report
(SAER) says, “South Asia’s economy performed
well in the 1990s and during the past 5 years it has
done even better. The growth rate has improved steadily,
and is today among the highest in Asia. Similar improvements
have taken place in the macroeconomic fundamentals,
(lower inflation, smaller current account deficits,
and declining fiscal deficits in the last 5 years),
in the saving and investments rates, and in the integration
with global economy”.
There are many theories suggesting financial sector
development leads to economic development as well as
visa versa. However, the purpose of this article is
not to debate on these academic theories. Nevertheless,
the Financial Sector; more specifically the commercial
banking sector has played a vital role in these achievements.
In the context of under developed capital markets, a
healthy banking sector is particularly important in
channeling funds to productive investments and in promoting
economic efficiency.
Asset quality and profitability of Asian banking industry.
In this global banking and economic context, where would
Sri Lankan Bankers stand? Do we have at least the appropriate
size to capitalize Indian Markets or other Asian emerging
markets? No doubt the Sri Lankan financial industry,
especially the commercial Banking sector is one of the
fastest growing and most lucrative businesses. Even
with their Asian counterparts, Sri Lankan banks are
in good shape both in asset quality and profitability.
Even though the two state owned banks controlled a substantial
amount of banking assets, during the last decade they
have been continuously losing the market share to local
and foreign private banks. However local private banks
cannot be complaisant in their achievements due to new
economic realities before them. All four major private
banks, Commercial, HNB, Sampath and Seylan are going
to build financial conglomerates by driving their business
in to other Financial Businesses such as leasing and
factoring, bank assurance, share brokering and other
support services. However, do these strategies give
them any advantage? Even the four major private banks
are too small to enter neighboring India where a huge
potential is laying in front of their eyes. Therefore
it is not desirable to be carried away thinking that
Sri Lankan Bankers are in the paradise of Eden! Competition
has already come from its big brother and multinational
giants like HSBC – “The world’s Local
Bank”, despite the growth in total asset base of
Sri Lankan Banking sector.
It is a reality that venturing into the banking business
in the Indian market demands substantial capital and
at present there are regulatory constraints from the
Indian corner. However, these regulatory constraints
would have to soften in the near future, and the million
dollar question is not whether our banking community
will be able to digest the capital requirements essential
to enter Indian soil; but does our banking community
have the much needed mindset to go beyond the Sri Lankan
shore. Are the Sri Lankan bankers having a focused strategy
to tap the Asian growth fortune available in the region?
They have to rethink their conventional strategic approach,
focused on domestic markets and trying to be content
by becoming the best among the few!
Considering the new economic order, and possible reforms
undertaken by her neighboring big brother, the Indian
financial industry, Sri Lankan bankers should definitely
question their ability to face the new Indian invasions,
as well as digital realities in their own soil.
Acquisitions or Mergers among the remaining local banks
may give some economics of scale in the local context
but does that enough to be competitive in the regional
and global markets. Either these major local banks would
then have to consolidate with each other or form a “financial
cartel” with a new business model to pool required
capital, at least in order to step into foreign soils.
Time will tell the destiny of Sri Lankan commercial
banks in the next few years!
Despite the claim that Sri Lanka Financial sector being
strong and stable at least in the domestic context,
do they have courage and foresight to understand the
new challenges posed by the new businesses in their
own territories? The mobile operators in the island
are rapidly penetrating the market with immense success.
Most of these companies penetrate outside the western
province and are expanding their clientele rapidly.
These companies have a new breed of strategic alliances
with small boutiques in towns and in rural areas to
offer re-load facilities to their mobile customers.
These have given them the new efficient and effective
business model with the least cost and access to the
bottom of pyramid customer! Dialog has already exceeded
the 4.5 million customer base and they have ventured
into satellite TV business. Who can deny that within
the next few years’ that new business models for
banking will pop-up with convergence of the mobile industry
and the financial industry. There are indeed many opportunities
as well as challenges in front of the Sri Lankan bankers.
Creative destruction
Sri Lankan bankers should understand that globalization
of the economy is a market imperative that urge them
to have creative and aggressive strategies to be a winning
player. The banking industry of Sri Lanka should take
bold initiatives to consolidate and at least benefit
from the economics of scale by possible mergers among
local commercial banks. If local banks dwell in their
egocentric approach, it would provide short term psychological
security but definitely will become vulnerable in the
long term. Further it is important to build alliances
and partnerships locally as well as regionally to enhance
the efficiency of the banking system.
Convergence of communication industries would provide
much needed accessibility at cheaper cost. These kinds
of creative convergence are essential to penetrate the
untapped markets in the region in a dynamic manner.
It is imperative to create new business models to bring
the non-banking community in Sri Lanka as well as a
larger population in the Asian region in to the formal
banking sector. It is said that Structure follows Strategy!
Unless Sri Lankan bankers strategically focus on these
business realities, it is not possible to create successful
new business structures to capture the opportunities
available for them.
Before global realities force the Sri Lankan banking
community to change, it is prudent to change for the
success. If the banking community continues to dwell
in their comfort zones with myths, sexier leaner asset-less
and risk-less banking; it will be more likely that stronger
telephone operators in the domestic market may rob their
entire apple pie in the near future, long before global
and regional banks do!
References Bankers
Almanac.
Central Bank of Sri Lanka, Annual Reports (2007/ 2006)
Keynes, J.M., Treatise of Money (1930)
Kotler Philips (2005), Marketing Management 12th Edition,
Prentice, Hall
South Asian Economic Report 2006, Asian Development
Bank
The Economist May 2006.
The World Development Report 2006, World Bank
http://www.fiercefinance.com/
Web site of People’s Bank of China, http://www.pbc.gov.cn/english
Web site of Reserve Bank of India, http://www.rbi.org.in
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