The eerie cloisters around Colombo's Fort district tell the sad story of Sri Lankan banking through near three decades of civil war.
Fort's financial district was once prime real estate in a city regarded as a rival to Mumbai for south Asian mercantile primacy. Business thrived here; bustling airline offices, hotels, finance houses and freight and customs handlers; the entire ensemble anchored by the stability of imposing banking chambers.
Today, the bank buildings are decayed and dilapidated, abandoned shells like much else in the neighbourhood. Sri Lanka's notorious Tamil Tiger separatist movement laid waste to Fort in a suicide bombing campaign through the 1980s and 1990s, killing many and striking at the heart of the economy. Successive governments responded by locking Fort down, further choking commercial life from the area. Then the war, rampant inflation and a massive investment in the military degraded the island's sovereign risk rating to B+, 'speculative grade' at best, by the measures of major ratings agencies.
Some 26 years on, casual visitors must negotiate myriad military checkpoints to reach what should really be a south Asian Wall Street, except it is anything but. There are none of the soaring towers adorned with bank logos of Asia's other booming capitals. Save for the pock-marked headquarters of the central bank, much of which functions in suburban offices well away from Fort, there is little need to visit the area.
This is what civil war and racial hatred does to an economy. But there might be new life yet in Fort now that Asia's longest running civil war has been won by the government in Columbo, even if it was at a very high human cost.
After an 18-month campaign, government soldiers have all but eliminated the once-rampant Tigers. The island's north-east, where the Tigers once controlled a third of the island in what was effectively a separate state, seems about to be re-absorbed into the Sri Lankan mainstream. Now, if the warring races can reconcile, a reunified Sri Lanka is in the offing for the first time in almost two generations, with the prospect of $5bn in redevelopment. It has all prompted a spring in the step of Sri Lankan bankers, as local architects dust off plans to refurbish Fort and its grand banking chambers.
Business quickly signalled its confidence in the future; Columbo's long-sluggish stock market jumped by 6% and the rupee firmed 4% in response to the news that Tigers leader Velupillai Prabhakaran had been killed in battle.
Emerging from within
Call it German reunification, Sri Lanka-style. "There are bridges, roads and schools to be built," says Amitha Gooneratne, managing director of the country's biggest privately owned bank, Commercial Bank of Sri Lanka. It has just opened its 171st branch. Mr Gooneratne had pushed ComBank into Bangladesh in recent years, seeking new markets by buying Crédit Agricole's retail operation in Dhaka. But he now sees excellent prospects at home. "We definitely want to expand our reach in the north-east," he says. "It can become our emerging market within our shores."
At HSBC Sri Lanka, country head Nick Nicolaou sees the German parallel that many make with Sri Lanka, but has reservations. "The difference is that West Germany had a lot of money and could provide that to the east, whereas the government here does not have these relative resources."
At fast-rising Pan Asia Bank, new chief executive Kumarli Fernando is also enthusiastic about the future of her country. A member of the prominent Fernando family of Dilmah Tea fame, she likens the prospect of peace to the advent of e-mail and the internet. Far from the island's two main ethnic communities remaining as suspicious in peace as they have hated in war, Ms Fernando believes that just six months after the peace is secured, "it will be like e-mail... We, as Sri Lankans all over the island, will unite and be wondering how we coped without it."
Resourceful populace
Sri Lanka's Tamil community were the island's business mainstay before the war, skills now very much needed in an economy run down by massive defence spending. Hatton National Bank's chief financial officer, Nihal Kekulawala, notes the "extremely high" savings rates at his branches located in predominantly Tamil regions. "[Tamils] are great savers and loan repayers," he says, "much higher than the national average. That tells us there is great potential there."
At Nations Trust Bank, a mid-sized privately owned retail bank that rose from the 1980s ashes of Hong Kong-owned Overseas Trust Bank, chief executive Zulfiqar Zavahir says he "would not hesitate to participate" in the national reconstruction plans put forward by victorious authorities. "We have a lot of optimism about the future," says Mr Zavahir.
Untapped opportunities
"As soon as it opens up, we will be there," says ComBank's Mr Gooneratne. "The light at the end of the tunnel is to get one-third of the economy that has not contributed back into the fold. There is a lot of wealth there. The east has traditionally been the granary of the country, the breadbasket - there's a lot of rice paddy production. And a lot of the fisheries that have not been counted will come in from the north as well."
HSBC is already a significant development lender. "We are standing ready to assist," says Mr Nicolaou. "We are the major provider of commercially funded infrastructure finance in this country. Over the past 18 months, we have provided $1.5bn of funds either directly to the government or by way of project financing."
HSBC has backed a big power project, a fisheries harbour and a network of new roads and bridges. Some of it is direct sovereign lending, while other projects are backed by official export credits from abroad. With regards to retail banking, Mr Nicolaou says HSBC is looking at opening branches in a few strategic locations in the north-east. "Are we going to open 100 branches?" he asks. "No way. There is no question, though, that there is lots of money in the north and east."
Successful precedent
Mr Nicolaou cites the 2002-06 ceasefire period, when business rose exponentially, as an indicator of what may be in the offing with a reunified Sri Lanka. "It shows what can happen here."
Mr Gooneratne also points to this ceasefire period. Back then, a United National Party (UNP) government signed a Norwegian-sponsored ceasefire with the Tigers, and re-opened trade links between the north-east and the struggling south. The then UNP prime minister, Ranil Wickremesinghe, combined the treaty with economic reforms. This, allied with the return of expatriate Tamils and Sinhalese, prompted a property boom.
The long-stagnant economy took off, registering almost 8% growth, the best performance in years. "That brought in a lot of hope and economic activity," recalls Mr Gooneratne. In 2005, though, president Mahinda Rajapakse was elected. He tore up the Norwegian ceasefire and decided to take on the Tigers with renewed vigour. "The economy came to a standstill," says Mr Gooneratne, "but we hope that when the fighting ceases there will be a very positive contribution from the north-east".
Colombo's business and banking communities - traditionally big backers of the UNP, President Rajapakse's main opposition - know that an end to the long-running civil conflict could open up many opportunities.
HSBC's Mr Nicolaou cautions of possible difficulties with the peace dividend, though, because almost 200,000 troops - feted as heroes in the south - will have to be demobbed or stood down. He says they would have been better absorbed into the economy two to three years ago when it was booming. This may be likely to happen now as Sri Lanka and its international markets stutter.
"The downturn in the garment industry has very little to do with Sri Lanka," says Mr Nicolaou. "It is the sudden lack of demand from its export markets in the West." Sri Lanka's economy is sputtering along at 2% to 3% growth this year.
Previous expansion
ComBank has targeted the north before, and already has branches in towns surrounding the disputed Tamil region. "We have been waiting and waiting and waiting," says Mr Gooneratne. "At the height of the civil war, we got permission to set up a satellite link and we introduced electronic banking to the north." That connected Jaffna, a once-thriving port that would be Sri Lanka's second city were it not for the mass wartime migration of Tamils abroad.
During the ceasefire, ComBank opened two more branches around Jaffna and even had plans to open a branch in Killinochchi, the Tiger 'capital' that recently fell to government forces but which even had its own 'central bank' (the Bank of Tamil Eelam) boasting reserves of $100m at one point. "We looked at a site there and spoke to the Liberation Tigers of Tamil Eelam [also known as the Tamil Tigers, the most powerful Tamil group in Sri Lanka] so we were positive," recalls Mr Gooneratne. Banking in 'enemy' territory may have proved controversial back home in Colombo but Mr Gooneratne says ComBank took the view that "[the Tamils] have been part of our country and at some point we knew they would come back".
Mr Gooneratne says ComBank would be "very interested" in financing infrastructure projects in any rebuilding of the war-ravaged Tamil regions. He believes that necessary reconstruction finance will come from multilateral agencies such as the World Bank, the IMF and the Asian Development Bank, and national aid programmes where there is a big Sri Lankan and, specifically, Tamil diaspora, such as Canada, the UK, Norway and Australia.
Funding controversy
The Sri Lankan government is negotiating a $1.9bn loan from the IMF that has become a political football in Sri Lanka. With less than two months of import cover, the country desperately needs the financing. The IMF wants to link the money to political and economic reform, whereas the Rajapakse government, domestically emboldened by its military advances in the north-east and likely to sweep the polls at elections later this year, has said it will refuse to accept "odious" terms as a point of national honour.
Tamil sympathisers, meanwhile, have described the loan as the IMF effectively financing a war. Indeed, about 20% of Colombo's budget is spent on defence. Colombo needs the money desperately but has rejected any strings to the IMF funding.
The US has also entered the IMF fray, delaying loan negotiations and pressing Colombo to limit the suffering on 100,000 Tamil refugees trapped in the 'Tiger zone' as the military presses for annihilation of the Tamil Tigers. Matters were not helped when Colombo refused an entry visa to Sweden's foreign minister Carl Bildt, who had wanted to view the war zone with visiting EU colleagues from the UK and France. A diplomat in Sri Lanka said Colombo miscalculated that the IMF was "essentially a European domain".
Mr Nicolaou says he thought it implausible for Sri Lanka not to have some conditions placed on any multilateral agency lending but the global financial crisis has given him pause for thought. "The recent past has all been about stabilising economies so the chances of getting money on low or no conditions is very possible in this environment."
He adds that any funds will likely be applied to particular redevelopment projects rather than a general injection of funds into the wider system. He expects IMF funding to enter the system by the end of the year, with development subsidised in the interim by remittances from a more confident diaspora. "All of that totally depends on how the peace is managed."
