Paradigm shift in export financing urged for export sector revival
„Export finance identified as key barrier to break into new markets with new products „Banking sector asked to deploy innovative financial instruments and new forms of risk assessment
Sri Lanka’s banking sector is urged to make a paradigm shift in export financing by moving away from the outdated practices in lending and risk management to support the country’s exporters to break into new export markets while venturing into new product lines, in order to stimulate the economy.
“We have to succeed in making the transition from low value-added, low-cost labour-dependent products to move into kind of products that integrate Sri Lanka with markets of Asia and connecting to global value chains. Therefore, we need to radically rethink export refinancing.
The problem of lack of innovation, lack of forward thinking and lack of progress is not only a problem of the business sector in Sri Lanka but it is also connected to financing and banking.
The banking sector is also needed to move away from traditional banking instruments, traditional forms of collateral, traditional forms of lending and traditional forms of risk management,” Verité Research Executive Director Dr. Nishan De Mel pointed out.
He shared these remarks at the 31st Anniversary Convention of the Association of Professional Bankers of Sri Lanka, held in Colombo, last week.
In a highly competitive global market, Dr. De Mel noted that Sri Lankan exporters require a new range of financial instruments, new forms of risk assessment and insurance in export financing to sustain in the global market place, as seen in countries such as Vietnam.
“It’s not just looking at capital but working capital, which is not back against assets but against invoices. The banks shouldn’t merely asses the credit risk of borrower alone but need to assess the credit risk of his/her partners in both local value chain as well as international value chain,” he added.
However, he pointed out that unfortunately in Sri Lanka, the banking sector hasn’t evolved into these segments.
“How sophisticated are we compared to 20 years ago in identifying risk and managing risk? In Sri Lanka, when you take a lease on your vehicle or house, you have to prepay almost the deposit because banks are simply covering risk that they lend to you by borrowing from somewhere else at a low margin.
Therefore, banks have become traders in Sri Lanka, buying at one price and selling at a different price with no risk of selling. That level of risk averseness doesn’t help the economy to function,” he illustrated.
As globally such practices and systems have already evolved, Dr. De Mel recommended Sri Lanka’s banking sector to adopt and deploy such systems in the country.
“There is no innovation required locally because these products have already been developed and deployed all over the world. It’s just a matter of
Sri Lanka’s banking sector learning to adopt and deploying them in Sri Lanka,” he noted.
In particular, he drew attention to the fact that the SME exporters are struggling to survive in the competitive global market place due to the barriers to export finance.
“When his/her goods are shipped, small exporters are stuck as the person has to wait two to three months for payments. While he/she is waiting for payments he/she doesn’t have any working capital to process the other orders. In a highly competitive global market, you only succeed by getting new business through credit lines,” he said.
When Sri Lanka moved to apparel exports in late 1980s, the apparel accounted for 6 percent of global trade. However, at present, it has declined to 3 percent of the global trade with new export segments such as electronics based on global value chains gaining traction.
“Other countries have succeeded in moving to new markets by innovating and moving into new products. Sri Lanka’s inability to move into new markets is significantly connected to its inability to move into new products,” Dr. De Mel said.
He warned that if Sri Lanka’s banking sector fails to adopt global trends, there will be a knock-on effect in the overall economy.
“Stop worrying about concerns you have as a banking sector and start worrying about the concerns of the rest of the industries. If the banks are not looking at ways that the country could succeed and grow, the problem will be back to banks,” he said.
Hence, he advised the banking sector to identify opportunities in the local market as well as international markets and then to take proactive measures to lend.