It said in a report that after the collapse of two finance firms last year, the Central Bank has taken steps to strengthen the corporate governance practices of RFCs, such as board composition, board committees and related-party transactions.

"In addition, we believe that restrictions should be imposed on single-shareholder limits and multiple ownership of RFCs by a single individual/group," RAM Ratings said in a report on the island's RFCs.

"In this regard, the requirement to list all RFCs by 2011 is viewed positively as it would dilute their shareholding structures and improve transparency."

The agency said it anticipates RFCs will place more emphasis on risk management and corporate governance in future, mainly in view of the loss of public confidence following the recent financial scandals.

The island's financial sector was rocked by the collapse of an unlisted credit card company owned by the Ceylinco group, which caused a run on group firms and put many group firms in trouble, requiring central bank intervention.

Senior Ceylinco group executives have been remanded on fraud charges.

An unlisted deposit taking institution called Sakvithi also collapsed and its owner fled abroad to avoid arrest

RAM Ratings said that finance companies are now improving risk management and corporate governance practices to regain public confidence which was eroded after the collapse of two firms.

Deposit withdrawals and resultant liquidity crunch, combined with legal action against failed finance-company directors, have propelled the principles of risk management, corporate governance and transparency to new heights, RAM Ratings Lanka said.

"Players that embrace the trinity of risk, governance and transparency will thrive amid the evolving RFC landscape," it said.

The Central Bank, the rating agency noted, has already directed industry players to beef up their corporate-governance practices and proposed other guidelines to improve the industry’s disclosure practices.

Registered finance companies represent an important component of Sri Lanka’s financial sector although making up only 3.7 percent of the entire financial system’s assets as at end-December 2008, the rating agency said.

But the RFCs, together with their branches, are crucial to the development of small, medium-sized and even micro enterprises as they are primarily engaged in vehicle financing.

RFCs are also involved in real-estate development and housing with their loans and other assets funded largely through public deposits.

RAM Ratings said that the much-publicised collapse of two finance companies in 2008 had focused the spotlight on deposit-taking financial institutions.

As the public rapidly lost confidence in the financial system, many depositors had scrambled to safeguard their money amid rumours of lengthy queues at many deposit-taking institutions.

"As a result of sudden and substantial withdrawals, many of these entities faced liquidity pressures while the segment which was hit hardest was the RFC sector," RAM Ratings said.

"However, well-rated and/or prudently managed RFCs had been able to withstand the pressures better than others. Moreover, the timely intervention of the Central Bank and a spate of ownership and stewardship changes have helped stabilise the industry."

RAM Ratings said public reaction to the financial scandals has been very strong, with an outcry against opaque disclosures and weak risk management.

"Against this backdrop, the importance of adequate corporate governance has come to light; emphasis should be placed on the risk-management processes implemented by these organizations," RAM Ratings said.

"Furthermore, consideration should be given to the magnitude of related-party transactions and the adequacy of internal control systems, among others."

The rating agency noted that the level of importance placed on risk management also varies significantly among industry players.

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