Against a backdrop of GDP contractions, cautious growth projections, and a landscape reshaped by financial burdens and regulatory shifts, Shanka Abeywardene, Chief Financial Officer of SDB bank, sheds light on the bank’s adaptive strategies, commitment to stakeholders and its unique role in fostering economic recovery.
How has SDB bank’s strategy adapted to the recent economic shocks?
Starting in late 2018, a series of economic shocks severely affected our economy, including political turmoil, the Easter bombings, and the COVID-19 pandemic. These challenges began with a decrease in foreign exchange inflows, primarily due to declining tourism and remittances. Consequently, we struggled with foreign debt servicing, ultimately leading to a sovereign default and closing off access to international financial markets. These issues were exacerbated by fiscal indiscipline and tax cuts in 2019, which further impacted government revenue.
From a banking perspective, these crises exposed us to three significant risks: liquidity, foreign exchange, and credit. The foreign exchange crisis resulted in a dollar shortage, causing difficulties in meeting import LC obligations and shortages of essential goods like fuel. As inflation rose, driven by the rapid depreciation of the Sri Lankan Rupee against the USD by approximately 45%, interest rates surged. Despite these formidable challenges, the banking sector demonstrated relative resilience. However, industry-wide non-performing assets increased to 13.5%, remaining a persistent concern.
At SDB bank, we managed to avoid direct impacts from the foreign exchange crisis due to our focus on local currency transactions. Nevertheless, we faced indirect consequences, including heightened costs related to foreign debt and dol[1]lar-based vendor payments. Our strategy revolved around conserving liquidity and capital reserves while supporting local communities and promoting financial inclusion. Many of our clients belong to middle and lower-income segments that were hit hardest by the crisis.
We prioritized our customers’ resilience by absorbing a significant portion of the interest rate increase instead of passing it on to them. As we look ahead, we’ve re-evaluated the post-crisis economic landscape to identify growth opportunities, particularly in serving mid-market enterprises, cooperative sectors, and SMEs. We’ve adjusted our strategy accordingly to align with this focus.
What is your outlook for the banking sector?
In the past year, the GDP contracted by 8%, and we anticipate a further 3% decline in 2023. The GDP growth forecast for 2024 remains modest at 1.3%, leaving the GDP below its 2016 level. Sluggish credit growth is expected due to factors such as heightened taxation, rising utility bills, and soaring petrol prices, which have a significant impact on disposable income.
Reviving the economy requires an infusion of equity, but this is constrained by limited government spending. This situation presents challenges, particularly for smaller banks, with the potential for non-performing assets to increase and profits to remain subdued. Additionally, new regulations, like the customer charter, place added financial burdens on the sector.
In the upcoming months, banks will focus on streamlining their operations, embracing technology, and improving efficiencies. Bank mergers may become necessary to navigate a more competitive landscape in the face of a smaller economy. Despite signs of economic turnaround, slow growth and challenging returns on equity indicate a cautious period ahead for the banking sector.
How does the bank assure stakeholder interests in a volatile market?
Traditionally, stakeholders were primarily seen as shareholders. However, our perspective differs significantly. At our organization, our clients occupy the central position of stakeholders, and their resilience stands as our paramount concern. In an environment marked by market contraction, our strategic approach revolves around capitalizing on our expertise in SMEs and cooperatives. We’ve forged mutually advantageous partnerships with major corporations, facilitating the connection between small-scale suppliers and larger buyers. This dynamic ensures the stability of supply chains and pricing structures, offering our clients a dependable foundation in these uncertain times. Essentially, we’re not only creating market access but also enhancing opportunities for our valued customers.
Beyond our clients, shareholders who share our unwavering commitment to rural development reap the rewards of this approach. Our third indispensable stakeholder group comprises our dedicated staff, who confront various challenges, including the issue of brain drain. To address this, we’re streamlining our processes and harnessing technology to elevate staff engagement. This initiative aims to cultivate a more gratifying work environment that harmonizes with the core mission of our organization. In doing so, we aim to ensure that all stakeholders, whether clients, shareholders, or staff, flourish within our ecosystem.
What is your unique approach to unlocking opportunities for clients?
SDB bank distinguishes itself through our unique talent pool, strong mid-market customer base and strong connections within the cooperative sector. We strategically collaborate with cooperatives to navigate intricate regulatory landscapes, providing them with vital support including capacity building, skill enhancement, and access to financing for grassroots empowerment.
Our key partnerships with development-focused organizations and like-minded institutions function as bridges, connecting grassroots communities to best practices, sustainability initiatives, and technological expertise spanning various sectors such as freshwater fisheries, prawn farming, dairy, and more. We wholeheartedly commit to promoting sustainable business practices, ensuring that our customers are well-equipped to confront an increasingly volatile operating environment, particularly in the face of climate change.
Furthermore, our dedication extends to contributing to our nation’s comprehensive development goals, with a specific focus on enhancing the livelihoods of the 41% of the population employed in sectors that fall under our purview. At SDB bank, we’re not just a financial institution; we’re a catalyst for positive change and progress in our communities and country.
What is your value proposition for affluent customers?
We have established a platform that connects high-net-worth individuals (HNIs) with transformative development projects in Sri Lanka. Both local and foreign HNIs, motivated by their desire for financial returns and meaningful societal impact, discover a distinctive opportunity within our HNI proposition.
SDB bank aspires to be a catalyst for local economic development, focusing on micro, small, and medium-sized enterprises (MSMEs) and utilizing the cooperative sector in our development initiatives. This vision encompasses a commitment to promoting financial inclusion, supporting women entrepreneurs, and fostering savings habits in local communities. Our work has garnered support from investors like FMO and BIO, prestigious Dutch and Belgian development institutions. Moreover, other stakeholders with a shared interest in economic development can engage with our City branch team located at Union Place to collaborate on initiatives.
SDB bank is driven by a belief that banks are responsible for playing a significant role in promoting sustainability and inclusive growth.
Banks can prioritize lending and investment in environmentally friendly projects and initiatives. This includes funding renewable energy projects, green infrastructure, and sustainable agriculture. By providing financial support to sustainable ventures, banks contribute to reducing environmental impact and promoting long-term sustainability. Banks can also expand access to financial services for local communities. This involves offering affordable and accessible banking products such as microloans, savings accounts and insurance to individuals and small businesses in rural and low-income areas. Inclusive finance helps reduce income inequality and fosters economic growth in these communities.
The banking sector also has an obligation to incorporate environmental, social, and governance (ESG) criteria into their investment decisions. Through investing in enterprises with robust ESG practices and steering clear of those involved in detrimental activities, banks can foster responsible corporate behaviour and advocate for sustainability. We also believe that banks can offer tailored financial products and services to MSMEs, the backbone of economies. Providing access to capital, business advice, and resources can help SMEs grow, create jobs, contribute to economic development and engage in impact investing, where they allocate funds to projects and businesses that generate positive social and environmental outcomes alongside financial returns. Impact investing aligns financial interests with societal and environmental goals.
In this context, our HNI proposition facilitates investment in sustainable ventures that not only enhance livelihoods but also prioritize sustainable impact and fair returns. Unlike traditional HNI models, our focus lies in fostering sustainable impact, equitable returns, and the formation of a community dedicated to positive change. We bridge the gap for individuals eager to contribute to impactful philanthropic endeavours in broad-based, sustainable economic development, offering a unique and compelling opportunity for all involved. Recognizing the importance of banks focusing on broad-based economic development, inclusive finance, and sustainability, we are committed to driving positive change in our community and beyond.