Ranjith Fernando, former head of National Development Bank said finance companies served an important function in the economy by catering to customers who would otherwise not have got bank financing.
Risk Reward
They also paid higher interest rates to people who were willing to take the risk.
"It depends on the risk appetite the person has," Fernando told a seminar organized by Consultants 21, an organization connected to Nihal Sri Amarasekera, a public interest activist.
"People who are not happy with the 8 percent or 6 percent return on deposit in a commercial bank who want to more, and who are prepared not to go to a Bank of Ceylon or HSBC, but go to a finance company because they pay 12 or 15 percent.
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When inflation was high there was a greater tendency to go for higher interest rates, he said.
The finance companies in turn financed customers who were not served by banks at a rate higher than a bank loan.
"So within the financial sector the risk return tr