Editorial - Look at better ways to consolidate

7 March 2014 09:27 pm Views - 1438

The Government these days is trying to consolidate the country’s banking and financial sector.
The Central Bank has released a master plan for this with very tight timelimits. Consolidation as far as the country’s banking and financial sectors are concerned is not a new concept. The bankers, policy makers and various other stakeholders have been talking about the need for consolidation if we are to have a sustainable banking and financial sector. So the need for consolidation is beyond argument. Bigger banks and finance companies often better serve the economy. But the question is why the rush?


Banks and large finance companies have been given time to identify small finance companies of their choice until March and the Central Bank plans to conclude the consolidation process by next year. The Central Bank said if there were any small finance companies, which had not been acquired by next year, they will be permitted to merge with an entity of their choice.
Even though the Central Bank reiterates that the process is not forced, these tight timelimits suggest otherwise. Instead of the anticipated positive outcomes, a coerced consolidation process could bring in a lot of negatives that could threaten sustainability of some finance companies which currently have no concerns.


If the government is bringing in consolidation to dump the insolvent small finance companies and replace them with well-run ones, then the entire process is flawed. One bad apple can turn the entire basket of apples rotten.
On the one hand, no explanation has been given by the Central Bank as to why it issued so many finance company licences during the past couple of years. There would have been no need for consolidation, if the country had not seen so many finance companies mushrooming. Given the high penetration levels of local banks, the need for an expanded finance company sector did not arise. However, it appears that the Central Bank thought otherwise for reasons they are yet to explain.


On the other hand, the consolidation process proposed by the Central Bank is killing the entrepreneur spirit and business ownership. For example, there are a few very well run finance companies operating in certain parts of the country. Most of these family-run companies have investment grade ratings from reputed international credit rating agencies as a testament to their stability. However, with the consolidation process taking place, the owners of these companies have to either sell their well-run company to a bigger finance company or acquire a smaller finance company injecting more capital. If they are happy with what they have and if they are managing a good business without threatening the financial system of the country, how justifiable is it to force them to do things that will ultimately result in the owners losing their businesses?
Therefore we urge the authorities to revisit the consolidation process that has been proposed to make it more business-friendly and meaningful.