Banks permitted to sell up to 20% stake to multilateral financiers

• Direction issued considering benefit to banks’ capital profiles from multilateral financiers
• WB, IFC and ADB can now outright own 20% of shares of Lankan banks with voting rights
• Yet, Monetary Board wants such stakes to be trimmed to 15% within 10 years
• Maximum ownership by other shareholders remains capped at 10%
• Monetary Board retains control to grant permission for others to go up to 15%

The licensed commercial banks can now invite multilateral financial organisations to purchase up to 20 percent of shares, as the Monetary Board has decided to relax certain rules pertaining to the maximum share ownership—a move that could enhance the capital profile of banks and thus benefit the entire banking system.

In a fresh directive, the Monetary Board yesterday said the World Bank, its private sector financier, the International Finance Corporation (IFC) and Asian Development Bank, can outright own up to 20 percent of the shares of a licensed commercial bank but any other multilateral financier, who is willing to buy a sizeable chunk of the bank, requires the Monetary Board’s approval.

Such a stake will also carry voting rights but the party to the stake should reduce its shareholding to 15 percent within a period of 10 years from the date of stipulation, the Monetary Board said.

The move is amongst a slew of other regulatory measures in recent times to help support the banks’ capital, their overall robustness and soundness, as such multilateral financiers bring in new expertise to bank director boards, which improve their overall decision-making process, including how the funds should be allocated. 

Further, the presence of the calibre of the World Bank, IFC, ADB and the likes will also strengthen the development banking side of the licensed commercial banks of Sri Lanka, as they bring in the required expertise and the funds, particularly at a time when the country aims to channel more funds to develop export-oriented agriculture, small businesses, manufacturing, sustainable industries such as energy and technology-based innovation.

The presence of a multilateral financier with a sizeable shareholding will also ensure a bank to have access to funds with relative ease and will bode positively on a credit rating standpoint.
Meanwhile, there are also occasions that such financiers, who are willing to buy an equity stake in a bank, prefer to own a sizeable stake, so that they could influence the decisions on how their funds are allocated.  

However, the Monetary Board left the maximum shareholding limit by any other party, individual or otherwise, at 10 percent in a licensed commercial bank, with the option to own up to 15 percent by such a party, subject to the permission of the Monetary Board on a case-by-case basis.

In order to soften the capital impact stemming from the business impact of the coronavirus pandemic, the Monetary Board earlier granted the opportunity to banks to draw down from their capital conservation buffers and gave additional two years to comply with the minimum core capital levels to those who were yet to meet such requirements.

Sri Lanka’s banking system is generally well-capitalised, due to the implementation of enhanced minimum levels and the elevated capital adequacy levels under the Basel III regulations.