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Financial disintermediation, need of the hour

Sri Lanka is too dependent on banks and financial institutions and it is of much importance to acknowledge the importance of the capital market. Banks and financial institutions are limiting both corporate and investors. What we need is a financial disintermediation, which would permit investors to access the capital market directly for cheaper funding.

These sentiments were expressed by First Capital Holdings PLC, Senior Manager – Corporate Finance, Mahesh Amarasinghe.

Bringing down interest rates should be a priority, since Sri Lanka has probably one of the highest real interest rates in the world.

“For a business operating in Sri Lanka, the cost of capital is significantly higher than any where else in the world. We as an organization, have been advocating for better access to capital and we suggest that that banks and finance companies be incentivized to lend for investment, rather than consumption, because when interest rates are brought down, people use credit for consumption purposes and not contribute to the growth of the economy.

On the other hand, financial disintermediation means that Issuers or Borrowers – the companies that are seeking funds to grow should look beyond traditional sources of funds such as banking and financial institutions and find opportunities to directly access investors to directly get involved and lend to projects.

“This is what a vibrant capital market could do to grow business.”

“This is where Corporate Finance has a significant role to play as a full service investment bank operating in both debt and equity markets. We understand the changing economic and industry trends and provide both Issuers and Investors with new opportunities for businesses at attractive rates.

He commenting that the problem is that most lending entities too have traditional mind-sets on how they approach lending.

“For example, despite the prevalence and growth of IT, digital, and data-related companies, many banks are still reluctant to lend to them, as they have less understanding about the business, how it runs and how it could make profits.”

“In addition, we as Sri Lankans, have very little financial literacy so it makes life harder for entities looking for funding to pitch their proposals in an attractive manner.”

“Our teams are able to study and understand the financial position of corporates and structure customized solutions that are on their terms such as what rates they would wish to borrow at, if they are fixed or floating, matching cash flow and growth requirements of companies.”

On the other hand, investors are finding it difficult to place their funds due to caps on interest rates. “Traditionally, Sri Lankans are used to a financial landscape where people make deposits to banks and banks keep a margin and lend to businesses they perceive to be risk-free, but not really contributing to the economy.”

He said that the teams at First Capital would advise a client how the investor looks at the company and we advise on how to improve.

“When we see liquidity decreasing, our advise is to get the funding now, as we see trends of lack of liquidity in the market, while and these are part of the services we offer.”

Corporate Finance creates a more robust capital market structure that actually provide investors the opportunity of going directly into businesses and earn higher interest rates in addition to the security that is behind this type of instrument. “If you put a Fixed Deposit it’s just between you and the bank of the institution, whereas this would have a trustee, regulator if listed, a security to back the funds.”

We are a sponsor for SMEs to list them in the Empower Board. Specific license.

He also opined that listing or unlisted debt, there is a cost benefit to the issuer. So we advise them accordingly. Although unlisted costs less, sometimes it is better for a company’s brand or name if they are a listed with a publicized IPO.”

“IPOs are an ideal way for an investor who had not invested in this type of product earlier, because it is highly regulated with the CSE and SEC monitoring, a rating agency and a trustee and many other participants securing the process.”

Also for someone subscribing to a debt IPO, there is a set exit mechanism, because they could trade it on the secondary market.

“However, with the previously offered tax benefits no longer applicable, there is a significant benefit for corporates to do an unlisted issue, but to do so, there must be qualified investors who are experienced and understand the risks of the product.”

He said that they would look into it and would judge as to how these projects must be structured for the company to make the best of it. “Or we also would offer finding investment opportunities for investors who are looking for opportunities in the Securities Market for private placements or public offerings.”

Amarasinghe and his team recently closed a Rs. 5 billion Debenture for LOLC in a market where the company is over exposed.

Amarasinghe counts over 18 years of significant experience in Treasury and Securities Management through business operations and expertise gained as a Primary Dealer in and a Secondary Dealer of a range of fixed income securities.

He has extensive exposure in front and back-office operations and in customer relations in financial services.