In 2007, a report by the IMF described Sri Lanka’s financial system as “remarkably resilient” amid a major program of financial sector reform. “Even in the face of natural disasters, continued civil strife, high fiscal deficits, a widening current account deficit, and accelerating inflation,” the IMF said, “the banking system’s financial performance has improved on the back of robust economic growth”.

Five years on, the sector is continuing to win favourable international recognition. Fitch Ratings rated the outlook for 19 out of 20 Sri Lankan banks in 2012 as “stable” or better – underpinned by both post-war growth in the domestic economy, which has improved their earnings prospects, and the government’s capacity to support the banking system.

Rajendra Theagarajah, managing director of Hatton National Bank, one of Sri Lanka’s largest privately-owned lenders, has seen a surge of international interest in the country’s financial sector. “If I look at my top 30 shareholders, 10 years ago I didn’t have a single foreign fund – but today, 15 of them are institutional investors from abroad,” he says. “Investors putting $1bn into India today are asking to put five per cent into Sri Lanka.”

Indeed, some of global banking’s biggest brands have recognised Sri Lanka’s potential. HSBC and Standard Chartered, both headquartered in the UK, operate in the country. So does Citigroup, the US lender.

Theagarajah says that the single biggest barrier to doing business – the security threat – was removed after the civil war ended in 2009. “Now we are away from that, we only see an upside,” he adds. “The excitement really started in mid-2010, and in 2011 we started to see credit growing at levels which have not been seen in the past decade.”

Nihal Fonseka, chief executive of DFCC Bank, believes Sri Lankan lenders are targeting investment from the UK in particular, given London’s privileged role as a global financial sector. “There is no anti-foreign sentiment. Because we’re islanders, we have this cohabitation and integration that is not present in China or India,” he says.

And it is not just the banking industry that is optimistic about the future. Sri Lanka Insurance, the country’s largest insurer, is on track to double its turnover over four years, according to its chief executive.

Meanwhile, Romani de Silva, deputy chairman of the leasing and finance provider Alliance Finance, sees vast potential for small and medium enterprises, particularly in high growth areas outside Sri Lanka’s western province. “In the financing industry I think that’s going to be the biggest growth industry for the next few years,” he says. “The SME space has a very good margin and offers a good niche for players like us to operate.”

There are challenges, of course. Fitch is concerned about the Sri Lankan banking system’s ability to manage a sustained level of above-average loan expansion; and, as credit grows rapidly, it says that banks’ capital ratios could come under pressure. Continuing global economic turbulence might also have a detrimental knock-on effect. But if the sector can successfully implement certain structural changes – for instance, improvements to risk management – the agency reckons that its outlook and ratings can get better still.

Corporate Profile

“Our mission is to be the insurer to the nation. We’re celebrating our 50 year anniversary this year as a strong company with huge goodwill.”

Mohan de Alwis
Chief Executive of Sri Lanka Insurance

When Mohan De Alwis was brought in as chief executive of Sri Lanka Insurance in May 2010, one of the key challenges he faced, as he puts it, was to dispel the “perception of government-owned commercial enterprises as white elephants and a drain on the funds of the country”.

De Alwis has strong business credentials: prior to joining Sri Lanka’s largest insurer, he was the vice chairman of the county’s Free Trade Zone Manufacturers’ Association. “We need to run government-owned business models as profitable commercial enterprises,” he says. “I was picked for the role because of my ability to bring in a lot of private sector culture and thinking.”

Things have gone to plan. Following three stagnant years, the company’s turnover grew 12 per cent in 2010, to £66.8m, and another 22 per cent in 2011, to £91.1m. It boasts a high-grade “AA” rating from Fitch, upgraded from a negative to stable outlook last year.

De Alwis projects more rapid growth in 2012, the insurer’s 50th year. “We’re targeting 20 per cent top-line growth, covering both life and general insurance, and I’m happy to say that we are on track to meet that target,” he says.

The company has explored tie-ups and associations to enhance its longer term returns, partnering with a string of publically-owned banks and several large leasing companies to advance its banking insurance and motor insurance divisions.

It has also joined forces with a telecommunications company in an effort to tap into Sri Lanka’s potential life insurance market. Penetration is currently low, at around 11 per cent. “We have been able to access their database, use their infrastructure and their call centres,” he explains. “We provide them with the training and the product knowledge and they promote our insurance via telemarketing. With these processes coming into place we are seeing huge growth.”

Sri Lanka Insurance aims to launch an Initial Public Offering (IPO) by 2016 – with international investors “very welcome.” De Alwis says the company is “looking for financiers and insurance companies of international repute”.

He travelled to the UK in May, partly to discuss new lines of insurance in the petroleum industry. Though Sri Lanka produces no oil at present, its potential reserves have attracted interest from investors across the globe. “It’s something we need to talk about because if it turns out that we have reserves, there’s going to be a huge area for coverage,” he says. “Initial indications are positive.”

Why they got it right

“What we’ve built in terms of understanding, engagement of communities and risk management capacities over the past decade puts us very much ahead of the curve.”

Rajendra Theagarajah
Hatton National Bank

The first decade of the 21st century was probably the worst period for Hatton National Bank in 40 years, says Rajendra Theagarajah, the bank’s managing director. And yet the Asian Banker ranked Hatton’s stock as the best performing of 130 small banks’ from Australia to Turkey between 2005-2009 after it grew at an annual rate of more than 55 per cent. “We achieved that by sticking to the core business, what we understand best,” Theagarajah adds. This is a strong national retail bank which does good quality wholesale banking.

“We give equal priority to all our customers, from tuk-tuks to Sri Lankan airlines. That’s been our business philosophy for 3 generations now.”

Romani de Silva
Alliance Finance

Alliance Finance grew by 85 per cent last year – outperforming an industry that grew by a still impressive 42 per cent. And as a business conceived more than 50 years ago, de Silva says the company has a duty to play an active role in the development of Sri Lanka. “We’re looking at enabling the creation of wealth outside the western province and the capital,” he says, highlighting Alliance’s operations in the north and east. “We want to create financial inclusiveness.”