Inside The banking industry in Sri Lanka

When Sri Lanka or then known as Ceylon was under the reign of the Sinhalese Kings and even the Portuguese (1505-1656) and Dutch (1656-1796), banks and banking were still alien to the Sri Lankan culture. It was only during the British colony (1802-1948) that Banking was introduced to Sri Lanka with mainly branches of foreign banks being set up.

The CBSL was established in 1950 under the MLA No.58 of 1949 which was a major milestone in Sri Lanka’s economic history. Today, the Central Bank is the governing body of commercial banks.

Banks which come under the service sector in Sri Lanka play a crucial role in its economy contributing to about 60% of the GDP and employing about 40% of the total workforce. The banking sector also holds about 55% of financial sector assets while the others are held by Insurance and Real Estate companies.

Commercial Banks have extended their services from traditional banking to other areas. Examples include, merchant and investment banking, financial and marketing consultancy services, leasing, insurance, hire-purchase, factoring, bill discounting, pawn broking, underwriting etc, etc. They have also changed from manual systems to computer based systems and now to internet based systems and with especially the new entrants to the field playing a major role in introducing or making use of state-of-art technology to deliver their products.

The non-bank financial institutions have also increased in number and sophistication with leasing and insurance companies posing a larger challenge. The threat created by finance companies has eased a little last year due to the recent financial crisis and with the collapse of some finance companies and the public losing confidence in them. This was also evident from the increase in deposits experienced by the more stable, larger banks.

In addition to stiff competition, new regulations have also come into operation both locally as well as globally requiring banks to comply with such regulations. The BASLE II is one such global regulation and locally compliance with the Sri Lanka Accounting Standards No.44 on the presentation of financial instruments and No. 45 on recognition and measurement of Financial Instruments which will be effective from January 2011 applying more stringent rules for compliance. Also,

New NPA guidelines which requires the entire portfolio to be classified as NPA when one facility has fallen into such section

CSE introduced a new set of listing rules which was intended to strengthen mandatory and regulatory supervision

Provisions of the Banking Act on Abandoned property to safe guard such properties

Directives on Corporate Governance on internal control mechanisms and reporting systems after the global financial crisis

Adoption of Sri Lanka Accounting Standard No.39 on share based payments

Introduction of GRI in its 2009 annual report

The recent global financial and economic crisis also saw Sri Lanka facing challenges in declined demand for loans, reduced exports, reduced foreign exchange earnings etc., as Sri Lankan companies were indirectly affected by the crisis.

With the recently concluded war in the country and the freedom received, a new market in the north and east has opened up with all banks and financial institutions making way to enter the market. This will further have an adverse impact on the bank if not properly looked into, as hitherto only a few banks were privy to this market with ABC plc being one such party.

Introduction to and background of ABC plc

ABC plc a local private commercial bank was born as a result of a merger between two other banks and was incorporated in 1970. This set the scene for a giant in the banking industry to be born.

Catering to the local market as well as to overseas market with both personal and corporate products and services, it has been able to attract a diversified range of clients ranging from the villager to the sophisticated businessman, from the entrepreneur to the blue chip company.

The principal activities of the bank continued to be banking and related products in personal banking, corporate banking, treasury operations, international operations, with insurance, stock broking and property development as subsidiary lines of business. Delivery channels include the extensive branch network, ATMs, internet banking, telephone and SMS banking, corporate finance and treasury divisions and overseas exchange houses.

They also enjoyed local and international recognition such as from Asia Money, Euro Money, being adjudged winner for the Best Annual Report by the local Institute of Chartered Accountants in Sri Lanka and regionally by the South Asian Federation of Accountants etc.

They have a primary listing on the Colombo Stock Exchange and a listing in a foreign country due to the Global Depository Receipts issued by the Bank.

Over the years they have consistently grown in terms of assets, profitability (Also refer 4.1) and branch network and were also responsible for acquiring the business of three other local bank branches in addition to being represented in three countries abroad through exchange houses. They have also become a group of companies consisting of four subsidiary companies, two associate companies and a joint venture company.

Figure 1

Figure 2

Source: 2009 Annual report ABC plc

With acquisitions and mergers taking place at regular intervals, the bank has been faced with dealing with diverse cultures and backgrounds of staff. In addition, with the establishment of exchange houses overseas, the cross cultural issues have become part and parcel of its management challenges.

The 4300+ employees comprise of Support staff, Trainee Banking Assistants, Banking Assistants and allied staff, Junior Executives and allied staff, Executives and allied staff, management level, senior management level and corporate management level and managing director who subsequently report to the board of directors.

Table 3

A little over a decade ago, ABC plc enjoyed the status of being the best local bank and being at number one position in the banking industry in terms of assets, profitability and having a branch network of nearly 100 branches.

However, ten years later, ABC plc with a network of almost 200 branches spanning all 9 provinces, enjoys only the second best position, with one of its major competitors, XYZ plc overtaking them (Refer 4.1).

Increased competition, greater demands from stakeholders, compliance with new legislation, all contribute to the need to consistently show improved performance (Refer 1.5).

The culture, leadership and practices of the bank

Culture

Culture derived from the Latin word “cultura” meaning to cultivate, was subsequently defined by the Oxford English Dictionary as “the training, development and refinement of mind, tastes and manners” and today known as a shared set of attitudes, values, goals and practices that characterizes an institution. The culture would dictate how things are done. The culture of the organization is something that would have been built over the years and passed down from past leaders to the present. Changing of the existing culture would require strong leadership and courage.

As an individual too, one’s culture or background and upbringing will be different. And since an organization will be made up of so many different individuals, blending of cultural differences will be important and crucial for the building of a successful organization.

The culture of an organization plays a vital part in the leadership style displayed by the organization.

Hofstede in 1983 developed four value dimensions to explain culture. The four value dimensions include individualism, power distance, uncertainty avoidance and masculinity/feminity (Deresky, 2002). Effective intercultural communication depends on the extent to which these four dimensions are recognized in the communication process.

ABC plc which was born as a result of a merger experienced a mixed culture since its inception. Being incorporated at a time where leadership, globally, was practiced in an autocratic, top-down approach, also saw ABC plc following suit either knowingly or unknowingly.

Asians firms tend to be more bureaucratic, hierarchical, have central decision-making and are policy driven, where position, authority and seniority are main considerations (Crawford and Lok, 2003). This also signifies the ascription dimension as advocated by Trompenaars, (2002), where age, seniority, status is valued at high degree.

The culture of the country would also influence the practices in a local firm. Sri Lanka with a history of a hierarchical system has seen this influence being passed on to the business sector as well. For example, in a Sri Lankan home the father is considered the highest authority/leader and this has flowed to the business where the owner/boss is construed as having such authority.

Initially, even as a single branch, the hierarchy was established with the Manager “telling” and the subordinates “acting” on such instructions. Eventually this approach was practiced at all branches leading to the establishment of a bureaucratic structure. Interestingly, Fredrick R Kappel, one time CEO of AT & T defined “inbred management” as people who were so entrenched in habitual practices of handling the organization and incapable of change, innovation or even maintaining organizational health.

Hierarchy

With the expansion of the branch network, the hierarchy began to grow with many levels between the management and the operative levels taking place.

Additionally, various management levels are also present such as the regional management to overlook branch network, various committees and approval structures comprising members from various categories of staff, specialized departments such as corporate credit, risk management, accounts, engineering etc., which have a bearing on branches and where interlinks are needed for approval processes. Example, if a fixed asset needs to be purchased, the branch request will need the concurrence of the regional management, then the approval of the respective department such as procurement and accounts/finance, procurement committee and may be board, if it is a costly item. This would then be sent for calling of tenders and evaluation by a separate committee and then the purchase of equipment finally taking place. Sometimes, this process could take as long as 6-12 months and could lead to inefficiencies due to the long process.

Leadership in Action

The then leaders of ABC plc practiced what they saw their bosses do as they did not know anything better and would they have been allowed to do anything different given the culture which existed, even if they had known a better way is questionable. Also globally as well, most of the motivational leadership began to be practiced only after the 90’s.

Although this autocratic leadership style (Refer 2.5.1) seemed effective at the inception and during the early 70’s and 80’s as evident from the growth and rewards achieved, it seems that the bank has not kept pace with the current trends and changing world economies and globalization in order to move forward.

Therefore, whilst the leadership role played by the leader will determine the survival and success of the business, it will also function as the driving force to motivation and employee performance. This is also referred to as the climate of the organization where the leader’s action would directly contribute to creating a positive climate for employees to work or vice versa (Charan, 2006).

Climate/Practice

ABC being in existence for over half a century, the cultures and practices are strongly inbuilt into the system. Employees are scared to share their fears and mistakes due to the consequences it might befall them. This is a drawback as others cannot learn from the mistakes already made and this cannot be used as a tool for lessons to be learned. Also such an environment does not foster a good climate within the organization.

Communication is seen to take place only along the formal channels and along the hierarchy. Facility approvals also follow suit, which is dealt with at committee levels which has to follow the protocol and pass through many levels to arrive at the committee, consuming much time, since these are done manually and the management also being geographically disbursed.

Dissemination of important information is not seen. Lack of knowledgeable leaders (Hogan, Curphy, and Hogan 1994) together with them being unaware of what is happening as well as not having access to necessary information (cluelessness-story of Enron:you can be a leading company today and collapse overnight) can be detrimental to the organization.

No management succession planning is seen to be present, since outside recruitment to top levels have been regularly taking place during the recent past. This has also brought in frustration and dissatisfaction among employees.

Burns and Kiley, 2007 in their study done in 2006 states that 50% of senior executives recruited failed within 2 years. Recruitment policies and type of recruitment will play a crucial role in identifying future talent for the organization. Outside recruitment takes place at entry level and for specialized positions when it cannot be filled internally. A few Management Trainees are taken in periodically to infuse fresh blood into the management positions and gain new thinking but a high turnover is experienced.

Promotion from one grade to another has been formalized with minimum eligibility requirements and also provides for grading within a category. However, this is more concentrated on experience rather than on performance, although employees are encouraged to qualify themselves in banking with incentives being provided for having completed banking examinations.

Training is provided on ad-hoc basis to address issues at hand.

Therefore, bringing about change to make the environment conducive for learning and development will prove the effectiveness of its leadership.

The purpose and interest in topic

The facts at 1.1 and 1.2 above has led the directors of ABC plc to investigate the reasons for being overtaken and what needs to be done to overcome and regain the top position once again in keeping with their vision of being the acknowledged leader and chosen partner in providing financial solutions through inspired people and accomplishing same through its mission of combining entrepreneurial spirit with empowered people and leading edge technology to constantly exceed stakeholder expectations.

In order to remedy this situation, the researcher has been engaged as a consultant at ABC plc and the researcher hopes to make suitable recommendations on completion of this study to help the Bank regain its lost position in the ensuing foreseeable future.

As a preliminary to the study, an initial investigation was carried out to obtain the general feeling as to why and what went wrong. This has led to a revelation of lack of effective leadership having a bearing on the performance of the bank.

Therefore, this research is aimed at testing such assumption in establishing whether a relationship exists between effective leadership and performance of the bank and to provide direction to achieve its objectives at 1.6.

The management problem

The declining market leadership as described above is the main concern of the Bank.

Despite increased profitability when compared to previous years, the bank’s main competitor is still outperforming and continuing to be the market leader in the banking industry and winning many of the coveted awards and this is a major concern of the management keeping in mind its vision to be the market leader.

As such, in order to improve its performance and achieve its vision of being the market leader, the bank has embarked on a study to ascertain what has gone wrong and what needs to be done in order to reclaim its position, based on the objectives at 1.6 below.

Objectives

The problem at 1.5 has led the management to refocus on achieving its vision of seeking to be the acknowledged leader through empowered people.

Therefore, the objectives of this research, based on the SMART principle (Saunders et al, 2007) are:

To identify the various leadership theories and their influence on the leadership in the banking industry

To critically evaluate the extent to which leadership is used to improve organizational performance or

To identify the specific methods that need to be employed by ABC plc to improve/develop their leaders