Although the in-coming government is expected to formulate a new policy to encourage Mergers & Acquisition activity early next year, the new initiative is likely to be more laissez-faire than its 2014 predecessor, Oxford Business Group (OBG) said in a recent report titled ‘Sri Lanka’s banks eye market-driven consolidation’.

Accordingly, the report says the coming year looks set to bring further consolidation to Sri Lanka’s financial sector, with market forces expected to drive the trend, in lieu of the government-led policy of the previous administration.

“Many industry players agree that while consolidation is needed, the sector will be better served if market forces dictate the process. In particular, market-driven consolidation could help avoid accumulation of weak assets amongst non-banking institutions forced to merge. However, others in the industry see a place for guided consolidation, especially if the interests of stakeholders are not being protected by the market,” the report by the global publishing, research and consultancy firm said.

It added that after presidential elections early this year, state pressure for lenders to consolidate was largely replaced by market momentum – an approach favoured by many analysts – with the victory of the United National Party in the August parliamentary elections expected to reinforce this more hands-off approach.

“Signs that market forces are already at work are in evidence, with DFCC Bank and DFCC Vardhana Bank announcing plans in May to combine their operations. The news came just one week after the lenders called off the planned merger with NDB,” the report noted.

Last year saw the industry regulator, the Central Bank of Sri Lanka (CBSL), take steps to bolster the sector’s operating environment by promoting consolidation amongst the country’s banks and non-banking financial institutions (NBFIs).

Unveiled in January 2014, the central bank’s blueprint for consolidation required larger lenders to identify potential partners – with a particular focus on smaller NBFIs – and initiate mergers and acquisitions (M&A), setting deadlines for each step of the process. The CBSL had targeted a sector of around 20 NBFIs upon completion, roughly one-third of the 58 operating when the master plan was published.

The roadmap also outlined higher minimum capital requirements for commercial and specialised banks, with a focus on the adoption of risk management best practices.

“Progress thus far has been fair, with seven NBFIs completing some form of consolidation as of the end of last year; however, most of the benchmarks set out in the plan have yet to be achieved,” the report said.

In mid-July this year, OBG announced that it will publish a Sri Lanka 2016 report which will be a vital guide to the many facets of the country, including its macroeconomics, infrastructure, banking and other sectoral developments. The launch report is to be produced in partnership with the Board of Investment Sri Lanka.