Financial Reality

Aug 10, 2009 (LBO) – Sri Lankan commercial banks which seem to enjoy wide interest margins on the surface have low profitability, amid high taxation and rising bad loans, a senior banker has warned. “Capital providers would probably not think of banks as a prime sector to invest in this market” Nihal Fonseka, chief executive of DFCC Bank said at a monthly seminar at the Central Bank’s centre for banking studies.

“Now you will see in every country there is a reasonable risk premium available to investors but not in Sri Lanka, since 2006 this has been the situation.”

Fonseka is a senior commercial banker, who started his career at HSBC.

Low Profitability

Though there was an opinion that banks are charging high interest margins and making unconscionable profits, profits of commercial banks were low.

Fonseka said since 2006 return to equity investors at commercial banks have been below the yield on government securities.

In most other competing countries, the risk free rate is below the bank return rate, Fonseka said.

Sri Lankan banks were charged an effective tax rate between 50 to 65 percent, one the highest in the world. Analysts have warned earlier that h