PHD Thesis

Role of Bank Lending in Sustaining Income/Wealth Inequality in Sri Lanka
Candauda Arachchige Saliya
A thesis submitted to
Auckland University of Technology
In fulfillment of the requirements for the degree of
Doctor of Philosophy (PhD)
2009
Faculty of Business
Primary Supervisor: Prof. Keith Hooper
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Table of Contents
TABLE OF CONTENTS
LIST OF FIGURES..................................................................................................................... IX
LIST OF TABLES ....................................................................................................................... X
ATTESTATION ........................................................................................................................ XI
CONFERENCE PAPERS ........................................................................................................... XII
ACKNOWLEDGEMENTS ........................................................................................................ XIII
ABSTRACT ............................................................................................................................ XIV
CHAPTER ONE ......................................................................................................................... 1
1 INTRODUCTION ............................................................................................................. 1
1.1 RESEARCH MOTIVATION ........................................................................................................ 1

1.1.1 Preliminary search ................................................................................................ 2
1.1.2 Motivation to adopt critical approach and positioning of the researcher ............ 3
1.1.3 The knowledge gap ............................................................................................... 4
1.2 RESEARCH QUESTIONS .......................................................................................................... 4
1.3 RESEARCH METHODOLOGY .................................................................................................... 7
1.3.1 Case study research .............................................................................................. 8
1.3.2 Research design .................................................................................................... 8
1.3.3 Theoretical framework.......................................................................................... 8
1.3.4 Unit(s) of analysis.................................................................................................. 9
1.3.5 Number of cases ................................................................................................. 10
1.3.6 Data management; story building and in-depth analysis ................................... 11
1.3.7 Interpretation and theorization .......................................................................... 12
1.4 SIGNIFICANCE OF THE STUDY ................................................................................................ 13
1.5 LIMITATIONS, REMEDIES AND SOME NOTES TO THE READER........................................................ 13
1.6 CHAPTER FRAMEWORK ....................................................................................................... 15
1.7 CONCLUSION .................................................................................................................... 16
CHAPTER TWO ...................................................................................................................... 17
2 LITERATURE REVIEW .................................................................................................... 17
2.1 INTRODUCTION ................................................................................................................. 17

2.2 INEQUALITY AMONG AND WITHIN NATIONS............................................................................. 18
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2.3 GLOBAL INEQUALITY AND SRI LANKA ..................................................................................... 22

2.4 ACCESSIBILITY, AFFORDABILITY AND AVAILABILITY OF CREDIT TO SMES ......................................... 25
2.5 MARXIAN CRITICAL THEORY AND ITS APPLICATION IN CRITICAL ACCOUNTING .................................. 27
2.5.1 Marxism: a brief introduction ............................................................................. 27
2.5.2 Application of Marxian theories in critical accounting research ......................... 28
2.6 MARXIAN CRITICAL THEORY ON GLOBAL INEQUALITY AND CREDIT................................................. 32
2.7 MARXIAN INTERPRETATION OF THE ROLES OF STATES, CAPITALIST FORCES AND NATIONALISM IN
SUSTAINING INEQUALITY ............................................................................................................... 36
2.7.1 Neo-liberal capitalism ......................................................................................... 37

2.7.2 The influence from international capitalist forces on the economic-political
environment through controlling access to financial capital ............................................ 38
2.7.3 Influence of national capitalist forces in sustaining inequality within the country;
internal roadblocks. ........................................................................................................... 38
2.7.4 The theory of the petty bourgeois and the mask of nationalism ........................ 42
2.7.5 Productivity is secondary to political motives ..................................................... 42
2.8 FINANCIAL CAPITAL MOBILITY SYSTEM .................................................................................... 43
2.8.1 Coalition between financial and industrial capitalists ........................................ 44
2.8.2 Lack of state support for SMEs providing facilities including credit .................... 46
2.9 MARXIAN INTERPRETATION OF SOCIAL STRUCTURE AND CREDIT SYSTEM........................................ 46
2.10 SUMMARY AND CONCLUSIONS ......................................................................................... 48
2.10.1 Conclusions ..................................................................................................... 49
CHAPTER THREE .................................................................................................................... 53
3 RESEARCH METHODOLOGY .......................................................................................... 53
3.1 INTRODUCTION ................................................................................................................. 53

3.2 PARADIGMS, PERSPECTIVES, ASSUMPTIONS AND THEORIES......................................................... 54
3.2.1 Objectives of paradigms ...................................................................................... 55
3.2.2 Assumptions underlying paradigms .................................................................... 55
3.2.3 The positivist paradigm ....................................................................................... 56
3.2.4 The interpretive paradigm .................................................................................. 57
3.2.5 The critical paradigm .......................................................................................... 57
3.2.6 Paradigm of this research ................................................................................... 58
3.2.7 Basic beliefs ......................................................................................................... 59
3.2.8 Business/accounting research ............................................................................. 59
3.3 QUALITATIVE RESEARCH STRATEGIES/APPROACHES/TRADITIONS ................................................. 60
3.3.1 Creative and strategic researcher ....................................................................... 60
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3.4 DESIGNING THE RESEARCH METHODOLOGY ............................................................................. 61

3.4.1 Choosing a research methodology ...................................................................... 61
3.5 CASE STUDY RESEARCH DESIGN AND METHOD.......................................................................... 65
3.5.1 Why case-study methodology is preferred over other methodologies ............... 65
3.5.2 Types of case-studies .......................................................................................... 68
3.5.3 Characteristics of case study method employed in this research ....................... 69
3.6 TRIANGULATION AND DATA ANALYSIS .................................................................................... 70
3.7 CREDIBILITY, DEPENDABILITY AND CONFORMABILITY ................................................................. 71
3.8 APPLICATION OF THEORIES IN THE FIELD OF BUSINESS................................................................ 72
3.9 CONCLUSION .................................................................................................................... 73
CHAPTER FOUR ..................................................................................................................... 75
4 RESEARCH METHODS ................................................................................................... 75
4.1 INTRODUCTION ................................................................................................................. 75

4.2 ARTICULATING THE RESEARCH QUESTIONS FROM A REAL-WORLD PROBLEM ................................... 76
4.3 SELECTION OF PARTICIPANTS AND CASES ................................................................................ 77
4.3.1 Number of cases ................................................................................................. 78
4.3.2 Selection of participants ..................................................................................... 79
4.3.3 Selection of cases ................................................................................................ 79
4.4 DATA COLLECTION METHODS ............................................................................................... 82
4.4.1 Reconstruction of research participants’ own experience .................................. 83
4.4.2 Interviewing techniques ...................................................................................... 83
4.4.3 Data sources ....................................................................................................... 84
4.4.4 Data-collecting process ....................................................................................... 85
4.4.5 Saturation ........................................................................................................... 86
4.4.6 Primary data collection: when, by whom, how and to what extent ................... 86
4.4.7 Secondary data collection ................................................................................... 90
4.4.8 Record-keeping and storing data........................................................................ 93
4.5 DATA DESCRIPTION ............................................................................................................ 93
4.6 DATA ANALYSIS ................................................................................................................. 95
4.6.1 Narrative approach leads to story building ........................................................ 96
4.6.2 Theoretical propositions, rival explanations and case description ..................... 96
4.7 RELIABILITY/CREDIBILITY AND VALIDITY/CONFORMABILITY ......................................................... 97
4.7.1 Verification process to ensure reliability of data ................................................ 98
4.7.2 Ensuring external validity/generalisability ....................................................... 100
4.8 INTERPRETATION AND THEORIZATION .................................................................................. 105
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4.8.1 Inductive generalization and abductive inferencing/reasoning ........................ 106

4.8.2 Subjectivism, objectivism, constructivism and criticism .................................... 107
4.8.3 Interpretation of social injustice........................................................................ 108
4.8.4 Theoretical framework ...................................................................................... 109
CHAPTER FIVE ..................................................................................................................... 111
5 BACKGROUND: SRI LANKA ......................................................................................... 111
5.1 INTRODUCTION ............................................................................................................... 111

5.2 HISTORY ........................................................................................................................ 111
5.2.1 Currency, mortgages and money-interest in medieval times............................ 112
5.2.2 Ceylon under British rule (1796-1948)............................................................... 112
5.2.3 Voting rights and Marxist influence .................................................................. 113
5.2.4 Post-colonial administration after independence in 1948 ................................ 114
5.3 IMPACT OF INVASIONS AND TRANSFORMATION ...................................................................... 115
5.3.1 Early signs of informal methods ........................................................................ 116
5.3.2 Development of corruption ............................................................................... 117
5.3.3 Interpretation of traditional methods ............................................................... 118
5.3.4 Monetary system .............................................................................................. 119
5.4 BANK SUPERVISION REGULATORY FRAMEWORK IN SRI LANKA ................................................... 119
5.5 ACCOUNTING PROFESSION IN SRI LANKA .............................................................................. 123
CHAPTER SIX ....................................................................................................................... 127
6 CASE STUDIES; STORIES .............................................................................................. 127
6.1 INTRODUCTION ............................................................................................................... 127

6.2 BACKGROUND ................................................................................................................. 127
6.2.1 The Soft Bank .................................................................................................... 128
6.3 CASE STUDY I: TONY GROUP.............................................................................................. 136
6.3.1 Background ....................................................................................................... 136
6.3.2 The proposal ...................................................................................................... 136
6.3.3 The negotiation ................................................................................................. 138
6.3.4 The decision....................................................................................................... 140
6.3.5 The outcome: what happened to the Tony Group?........................................... 140
6.3.6 The outcome—Tony Group account at the Soft Bank ....................................... 141
6.4 CASE STUDY II; THE LAN-CAR LTD. ...................................................................................... 141
6.4.1 Background ....................................................................................................... 142
6.4.2 The proposal ...................................................................................................... 143
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6.4.3 The negotiation ................................................................................................. 144

6.4.4 The decision ...................................................................................................... 146
6.4.5 A few important events..................................................................................... 146
6.4.6 The Outcome—what happened to Lan-Car Ltd.?.............................................. 147
6.5 CASE STUDY III; SUPERCLEAN SERVICES................................................................................ 148
6.5.1 Background ....................................................................................................... 148
6.5.2 Action taken against Silva as a defaulter .......................................................... 150
6.5.3 Negotiations at the recoveries department ...................................................... 150
6.5.4 The first decision ............................................................................................... 151
6.5.5 The outcome ..................................................................................................... 152
CHAPTER SEVEN .................................................................................................................. 153
7 CASE STUDIES - ANALYSIS .......................................................................................... 153
7.1 BACKGROUND ................................................................................................................ 153

7.2 DISCUSSION AND ANALYSIS OF CASE STUDY I ........................................................................ 153
7.2.1 Why did Tony approach the Chairperson of the Soft Bank directly?................. 154
7.2.2 Why did the Soft Bank accommodate Tony informally? ................................... 154
7.2.3 What were the influencing factors? .................................................................. 159
7.2.4 How was the decision made?............................................................................ 159
7.3 DISCUSSION OF CASE STUDY II ........................................................................................... 161
7.3.1 Why did Yousef approach the Chairperson of the Soft Bank directly? .............. 161
7.3.2 Why did the Soft Bank accommodate Lan-Car Ltd. informally? ....................... 161
7.3.3 The influencing factors ...................................................................................... 163
7.4 COMBINED CONCLUSIONS FOR CASES I AND II ....................................................................... 164
7.5 DISCUSSION AND ANALYSIS: CASE III ................................................................................... 165
7.5.1 How and why did Manager–Recoveries approve facilities informally? ............ 167
7.5.2 Why did the credit officer and the Branch Manager carry out instructions of an
unauthorized officer? ...................................................................................................... 168
7.5.3 Why didn’t the new Chief Manager–Recoveries accommodate Superclean?... 168
7.5.4 Why did the Soft Bank accommodate a new service provider? ........................ 168
7.5.5 How was the decision made?............................................................................ 169
7.6 LATEST DEVELOPMENTS .................................................................................................... 171
7.7 SUMMARY OF THE ANALYSIS OF CASE STUDIES ....................................................................... 171
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Table of Contents
CHAPTER EIGHT ................................................................................................................... 173
8 THEORETICAL DISCUSSION ......................................................................................... 173
8.1 INTRODUCTION ............................................................................................................... 173

8.2 NATURE OF DECISION-MAKING ........................................................................................... 174
8.2.1 The Chairperson: Case studies I and II ............................................................... 174
8.2.2 Branch manager (BM): Case III ......................................................................... 176
8.2.3 The Credit Officer (CO) and the CM–R: Case III ................................................. 177
8.2.4 Credit-decision classification ............................................................................. 178
8.2.5 Rule-breakers are treated differently based on their access to power ............. 179
8.3 ROLE OF ACCOUNTING AS A MARXIAN GENERAL-INTELLECT ...................................................... 180
8.3.1 Addressing the research questions .................................................................... 181
8.3.2 Social power and access to credit ..................................................................... 182
8.3.3 Access to credit and social power are mutually reinforcing .............................. 183
8.3.4 Discussion of the central question..................................................................... 185
8.4 INFORMAL DECISION-MAKING MODEL .................................................................................. 188
8.5 HOW AND WHY ARE CREDIT DECISIONS MADE INFORMALLY AND DIFFERENTLY? ............................ 190
8.5.1 Petty Bourgeois ................................................................................................. 191
8.5.2 Four birds in one shot ........................................................................................ 191
8.5.3 Exploitation of minority shareholders ............................................................... 192
8.5.4 Importance of State intervention ...................................................................... 193
8.5.5 Credit mechanism is a terrible social mechanism ............................................. 194
8.5.6 Structure over ideology and institutions over individuals ................................. 195
CHAPTER NINE .................................................................................................................... 197
9 CONCLUSIONS ............................................................................................................ 197
9.1 INTRODUCTION ............................................................................................................... 197

9.2 SUMMARY OF THE THREE CASES .......................................................................................... 198
9.2.1 Post-research events ......................................................................................... 199
9.3 RESEARCH CONCLUSIONS AND CONTRIBUTION TO KNOWLEDGE ................................................. 200
9.3.1 Empirical findings .............................................................................................. 201
9.3.2 Marxian theoretical confirmations ................................................................... 203
9.3.3 Methodological derivatives ............................................................................... 206
9.3.4 Combined conclusion: Credit Mechanisms create roadblocks for economic
development and play a role in sustaining wealth inequality ......................................... 207
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Table of Contents
LIST OF REFERENCES ........................................................................................................... 209
APPENDIX 1: QUESTIONNAIRE (1) ....................................................................................... 219
APPENDIX 2: PARTICIPATION INFORMATION SHEET ........................................................... 221
APPENDIX 3: QUESTIONNAIRE (2); ANALYTICAL QUESTIONS .............................................. 225
APPENDIX 4: LINKING EXERCISE OF EVIDENCE; FROM DATA TO STORY- THE BACKGROUND

AND CASE I ......................................................................................................................... 227
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List of Figures
LIST OF FIGURES
Figure 2-1: Proportional impact of the increasing gap .......................................................... 18

Figure 2-2: The uneven development growth ....................................................................... 21
Figure 3-1: Exploring methodologies ..................................................................................... 63
Figure 3-2: Lenses of the research and application of case study approach ........................... 74
Figure 8-1: Arbitrary Decision-Making Model ...................................................................... 189
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List of Tables
LIST OF TABLES
Table 1-1: Representation of the scope criteria by the three selected cases ......................... 11
Table 2-1: Widening gap between rich and poor countries measured by GDP per capita (1990
international $) ..................................................................................................................... 20
Table 2-2: Gap is widening: average per capita national income (US$) comparison between
low-income countries and high-income countries ................................................................ 23
Table 2-3: Distribution of World GDP, 1989 and 2004 (percentage of total with quintiles of
population ranked by income) compared with Sri Lanka ...................................................... 24
Table 3-1: Characteristics of three types of case study research ........................................... 69
Table 4-1: Summary of the characteristics of the cases ......................................................... 80
Table 4-2: Five conditional criteria covered by the cases selected ........................................ 81
Table 4-3: Primary data collection techniques & timing, nature & amount of data collected
from different participants ................................................................................................... 89
Table 4-4: Secondary data and their sources and uses .......................................................... 92
Table 4-5: Number of interviewees ....................................................................................... 99
Table 4-6: An assessment of representation of Sri Lankan credit applicants in general by the
credit applicants considered ............................................................................................... 102
Table 4-7: Distribution of market share of commercial banking industry in Sri Lanka in 2004
(percentages are given in parentheses) .............................................................................. 103
Table 4-8: An assessment of representation of private banks in Sri Lankan compared to the
Soft Bank ............................................................................................................................ 104
Table 6-1: Production and financial projections of Lan-Car Ltd. .......................................... 145
Table 7-1: Summary of the description and analysis of Case Study I ................................... 159
Table 7-2: Summary of the description and analysis of Case Study II .................................. 163
Table 7-3: Summary of the description and analysis of Case Study III ................................. 169
Table 7-4: Summary of the analysis of case studies data..................................................... 172
Table 8-1: Matrix of Credit Decision-Making ....................................................................... 179
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Attestation
Attestation
I hereby declare that this submission is my own work and that, to the best of my
knowledge and belief, it contains no material previously published or written by
another person (except where explicitly defined in the acknowledgements), nor
material which to a substantial extent has been submitted for the award of any
other degree or diploma of a university or other institution of higher learning.
Saliya Candauda Arachchige
May 2009
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Acknowledgement
Conference Papers
Saliya, C. A. (2006a). Bank capitalism in Sri Lanka favours protectionism

under façade of nationalism or patriotism, as a mean to protect the
affluent class. Paper presented at the 6th Hawaii International
Conference on Business, Honolulu, Hawaii.
Saliya, C. A. (2006b). Role of bank lending in sustaining wealth/income

inequality, workshop conducted at the 6th Hawaii International
Conference on Business, Honolulu, Hawaii.
Saliya, C. A. (2008a). Enterprise financing decisions and global poverty. Paper

accepted for presentation at the 6th NTU International Conference on
Economics, Finance and Accounting, Taipei, Taiwan.
Saliya, C. A. (2008b). Enterprise financing, employment generation and

economic development. Paper accepted for presentation at the
International Conference on Entrepreneurship 2008: Towards
developing entrepreneurship societies, Langkawi, Malaysia.
Saliya, C. A. (2008c). Role of financing in sustaining global poverty. Paper

accepted for presentation at the 15th Global Finance Conference: Global
capital markets & risk management, Hangzhou, China.
Saliya, C. A. (2009a). Bank capitalists do what they want, what can Basle II
do? Paper accepted for presentation at the 5th International Finance
Conference in finance & monetary and financial economics & risk
management & entrepreneurial finance & Basel II, information
technologies and e-finance, Mediterranean integration and strategies,
Tunis, Tunisia.
Saliya, C. A. (2009b). Entrepreneurial finance; The ‘FIRI’ theory of credit

decision making. Paper accepted for presentation at the 5th International
Finance Conference in finance & monetary and financial economics &
risk management & entrepreneurial finance & Basel II, information
technologies and e-finance, Mediterranean integration and strategies,
Tunis, Tunisia.
Saliya, C. A., & Hooper, K. (2007). The Role of bank lending in sustaining
income/wealth inequality in Sri Lanka. Paper presented at the Asia
Pacific Interdisciplinary Research in Accounting Conference 2007,
Auckland, New Zealand.
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Acknowledgement
Acknowledgements
I would like to thank Professor Keith Hooper, my Primary Supervisor, who
provided guidance and critical insight throughout the six years of my study,
from the point of lodging the initial research proposal in 2003 to the completion
of this thesis. I would also like to thank Prof. K A S Wickrama for his support
in preparing for the oral examination and doing the amendments effectively.
Despite busy work schedules, the research participants and

colleagues/interviewees gave their fullest support and willingly spent their time
on this research. The anonymous reviewers, who provided me with valuable
comments on my conference papers, and the fellow attendees who
appreciated/criticized my efforts were greatly appreciated.
There are a lot of friends and relatives’ brothers and sisters who encouraged me
by just being interested in my studies, asking me about my research and
cheering me on to complete the thesis, Dr.. Theresa Marshal, Dr. Karin Olesin,
Sumane Rathnasuriya, and Sathbodhi are special among them for reading some
chapters to improve clarity and conciseness.
The support I received from Dr Andy Godfrey and Ms Eathar of the

postgraduate office in the AUT faculty of business is commendable. The Key
programmes for postgraduate centre of AUT were also very helpful. Sue
Osborne did a thorough and prompt job of proofreading this thesis. The fee paid
was well worth it.
My wife, Mali and children, Savi, Sneha and Nimna often joked about my deep
involvement in reading and writing in front of my laptop, amid the messy piles
of journal articles and books. Their support was tremendous; I was unbelievably
tolerated, encouraged and they were always at my service. Thank you!
xiii
Abstract
ABSTRACT
The purpose of this PhD thesis is to make a contribution to existing knowledge

in the field of critical accounting by studying credit mechanisms and their link
to income/wealth inequality in Sri Lankan society and the role of accounting
technology in facilitating such mechanisms.
The literature review revealed that: a) Global inequality is aggravated by the

disparity of economic development which is possible only through state
intervention; b) Unemployment is considered as a dilemma for economic
development in developing countries by most
politicians/administrators/researchers; c) In any country, around 60-70 percent
of employment is generated by small and medium sized enterprises (SMEs)
and; d) Their major problem is access to credit. This research was designed to
find out how the credit system works and why certain SMEs do not have
adequate access to credit to develop their businesses; to provide employment; to
increase the share of national income to the lower income groups; to narrow
down the gap between the rich and poor within and between countries.
A case study research approach was followed to extract data on real-life

experiences of the research participants. Reliability of data was ensured by
using various verification techniques and maximum efforts were made to
balance the two extremes of validity of the research; internal and external. The
extent of representation by the cases and the bank was tested, and judged as
high, with 12-14 characteristics common to the Sri Lankan credit culture and
banking industry respectively. Marxian critical theories were used for
theoretical guidance throughout the research.
The three case studies provide empirical evidence for the existence of the
discriminatory nature of credit decision-making where two credit applicants
were successful but a third credit applicant failed in obtaining credit. It is
xiv
Abstract
contended that the two successful applicants were powerful enough to approach
a more powerful bank Chairperson and to obtain credit outside the normal credit
rules with the support of accounting technology and using masks such as
patriotism and social responsibility. The other applicant, who was initially
accommodated with credit at the lower level, could not convince the credit
decision-makers at the higher level with expensive professionally prepared
accounting reports. This applicant was not from an influential social network
and could not reach the powerful credit decision-makers informally was rejected
through strict application of credit rules. Deep analysis of these facts supports
the Marxian claim that credit and exploitation mechanisms work towards
concentration of wealth and sustaining income inequality.
Credit decisions supply money to influential individuals and it is argued that

such economic power enhances the social powerbase of those individuals,
which in turn reinforces the propensity to make preferential credit decisions,
thereby making them richer. In contrast, a lack of money translates into
powerlessness, deprivation and exclusion from social activities for the majority
of the poor. In this process opportunities are lost to disadvantaged social groups
and this necessarily results in poor people’s economic status remaining
stagnant.
These power-driven, discriminatory decision-making systems not only restrict

the availability of financial capital for feasible projects, but also deny credit to
potential enterprises. Further, wasting resources on unfeasible projects, while
ignoring the need for nurturing potentially viable projects, are a double blow to
efforts towards employment generation and economic development and
therefore, are detrimental to the economic well-being of the general population.
These findings provide insight for policy formulators for more productive
financial capital mobility systems in Sri Lanka. It is suggested that suitable
State intervention in regulating SME financing could remove such credit-related
obstacles to economic development, and work towards a fair distribution of
economic benefits to the people in Sri Lanka and beyond.
xv
Abstract
xvii
Chapter 1: Introduction
CHAPTER ONE
1 INTRODUCTION
1.1 Research motivation

Entrepreneurship promotion and enterprise development have been commonly
identified as the main sources of employment generation by most development-
policy formulators. These policy formulators include governments and
academics as well as international development agents and experts (Bank of
England, 1999; The World Bank, 1998). Enterprises, especially small and
medium-sized enterprises (SMEs), provide a solution to
unemployment/underemployment problems and therefore, improve the
economic well-being of people. This research was initially motivated by the
researcher’s interest in finding out why developing countries like Sri Lanka do
not produce adequate successful enterprises and generate sufficient employment
opportunities so that the majority of poor people can improve their living
standards.
The preliminary investigation, which is described in the next section, into this
real-world problem shows that credit systems are playing a significant role in
providing necessary financial capital for enterprises to start, grow and achieve
economies of scale. Also, this preliminary investigation provides research
findings that criticize certain bank credit systems and methods. On the other
hand, irrespective of the status of the country and whether developed or not,
there is a widely accepted consensus on the increasing gap between rich and
poor not only within countries but also among countries because of an unequal
distribution of income and wealth to all people throughout the whole world.
Goulet (2001) explains this phenomenon as follows: “It is now apparent that
development does not deliver economic well-being to all nations and people: in
its distribution of benefits, it is not just (p. 2)”.
1
The preliminary investigation raised doubts on the following issues: Is it

common that certain credit decisions have been made without adhering to the
principles of credit evaluation but have been based on other motives of the
decision makers? Do such credit decisions work against enterprise development
and employment generation? Does this social mechanism called a credit system
act as a road-block for distributing economic benefits fairly and justly to all
people in any country? What is the role of accounting technology in credit
decision making? Therefore, the researcher decided to investigate and explore
possible explanations for the existence of such links between credit mechanisms
and income and wealth inequality in Sri Lanka.
1.1.1 Preliminary search

The preliminary literature review revealed that the contribution from SME
businesses is significant to the tune of 60 or 70 percent of both the gross
domestic product (GDP) and the employment generation of a country in general
(Bank of England, 1999). However, the Governor of the Bank of England says,
“A particular problem at this end of the scale is access to start-up or early-stage
finance for disadvantaged groups in poor-neighbourhoods (1999, p. 207)”.
It is also argued that budding entrepreneurs from different demographic groups

do not have similar opportunities in accessing finance; some groups have less
access while other groups have more access to finance capital.
The Nobel Peace Prize in 2006 was awarded to Prof. Muhammad Yunus for his
role in promoting financial services to the poor under the concept of Grameen
Banking in Bangladesh. This highest level of recognition for Prof. Yunus’s
effort in facilitating disadvantaged social groups of the society shows that there
is a need for credit facilities to be extended to the poorer levels of society and
that the banks are ignoring the potential of lower class enterprise (The
Economist, 2006).
However, questions such as: “Is discriminatory credit decision-making a

common phenomenon in Sri Lanka as well? If so, “How and why do bank
2
officers employ such decision-making methods into practice?” remain

unanswered.
There are arguments that credit systems are part and parcel of a total socio-
economic mechanism which, according to Marxism, is structured for continuous
accumulation of capital to its owners. Marxism is a socio-economic theory
which tries to uncover the way in which certain groups gain power in society
and then hold that power for their own benefit (S. Moore, 1994).
According to this theory, bankers may generally prefer to lend to people who
already have capital, so that capitalists can compete more effectively while
eliminating new entrants to the market. Also, such lending approaches could act
as road-blocks for enterprise development and aggravate unemployment
problems especially in developing countries. Moreover, this chronic
unemployment/underemployment problem could contribute towards a
disproportionate delivery of economic well-being, increasing the income/wealth
inequality in society. Therefore, the researcher’s interest was then further
focused towards the role of the credit system in the context of entrepreneurship
promotion and enterprise development and, accordingly, this thesis was entitled
‘The role of bank lending in sustaining income/wealth inequality in Sri Lanka’.
1.1.2 Motivation to adopt critical approach and positioning of the

researcher
A dramatic increase in research interest on the roles of state and economic
policies in economic development has been visible during the past decade
especially from the critical theory school under Marxism with various neo-
Marxian analyses and theories emerging. Neo-Marxism refers to theories within
the Marxist tradition with certain variations to some of the original concepts of
Marxism. These critical researchers (for example, Allahar, 2004; Goulet, 2002;
Korzeniewicz & Moran, 2003; Lapavistas, 1994, 1997, 2000, 2003; M. Moore,
1997; Passe-Smith, 2003; Saad-Filho, 2003; Seligson & Passe-Smith, 2003b;
Tinker & Gray, 2003) argue in favour of state intervention as against complete
free-trade economic policies especially in facilitating a more conducive
3
entrepreneurial environment. Based on these theories, the researcher positions

himself to investigate the research problem from the standpoint of Marxian
critical theory.
Prominent economists (for example, Alan Greenspan, Muhammad Yunus,

William Pesek) openly advocate the importance of state intervention and often
treat credit as an important tool in dealing with poverty. Yunus says that, “credit
is a human right and poverty is created by social systems” (2006, p. 27) while
Pesek suggests that, “if developing nations are to become mature economies
central banks must do their jobs” (Pesek, 2006, p. 15). These views also
influenced the researcher to be more critical in his approach because a critical
approach exposes and challenges the prevailing thoughts, systems and practices
(O'Leary, 2004) which are fundamentally mediated by historically constituted
social power relations (Kincheloe & McLaren, 2005).
1.1.3 The knowledge gap

The above preliminary search provides evidence for the importance of
enterprise financing in employment generation and improving the well-being of
people. Various development theorists (for example; Korzeniewicz & Moran,
2003; Seligson, 2003; Passe-Smith, 2003 and Abramovitz, 2003) have discussed
uneven economic development and its link to income/wealth inequality among
(as well as within) countries. The literature review discusses in detail the link
between social mechanisms such as credit systems, exploitation and accounting
technology and the disproportionate distribution of economic benefits among
the people. But, what methods are used to justify such credit decisions and
what motives and social factors drive the decision-makers in making such
decisions, are further to be researched and explained.
1.2 Research questions

In light of the above knowledge gap, the research interest was narrowed down
to investigate how and why a certain group in a society could have more access
to credit than some other demographic groups. Similarly, how and why the
4
credit decision-makers facilitate credit applications from one group but deny
credit applications from another group. These two questions are two sides of the
same coin; how and why certain bank lending processes are discriminatory in
nature.
Then, the researcher seeks to provide evidence from the literature for the
existence of the mutual relationship between such lending and the
disproportionate distribution of economic benefits among society at large.
Mutual relationships between variables could generally create a reinforcing-
mechanism. This dynamic nature of variables, which are complementary to each
other’s survival and enhancement, is called a co-integrated function. According
to Marx, credit systems transform into powerful social mechanisms for the
centralization of capital (Marx, 1867 in De Brunhoff, 2003) which in turn result
in income/wealth inequality in societies. On the other hand, income/wealth
inequality divides people into groups and, some groups are capable of enjoying
credit while some groups are not (Bates, 1973 & 1991 in Cavalluzzo et al.
1998). Therefore, the credit mechanism and increasing social/economic
inequality are two co-integrated functions which could create a mutually
reinforcing chain of proceedings.
Based on the above explanations and arguments, the researcher seeks to explore
what theoretical perspectives could be applied to explain the rationale behind
this social mechanism and, therefore, the first research question of this research
is defined as follows:
1. Do credit mechanisms and income/wealth inequality create a mutually
reinforcing cycle in Sri Lankan society?
In other words, this research attempts to explore the nature of providing

finances to SMEs in Sri Lanka and to explain how certain credit decisions are
made and whether such credit decisions contribute to the creation of a mutually
reinforcing cycle and what is the impact of such credit decisions on the
inequality in the society. To facilitate the critical analysis and theoretical
5
explanation of this research question the investigating process proceeds in three

stages:
• First, it seeks to explore the nature of credit decisions made in Sri Lanka
by studying a few cases.
• Second, it focuses on how and what methods were used by decision-

makers to make those credit decisions.
• Third, it attempts to explain the decision-making procedures applied and

if applicable, to expose the motives behind such bank credit decision-
makers.
The other research questions for this investigation are formulated from the
literature reviews carried out in this research. The following research questions
were derived from the preliminary investigation especially from the comments
made by the Governor of the Bank of England (1999) discussed in section 1.1.1
of this chapter:
2. Are credit decisions made in favour of influential businesspeople?
3. Are certain demographic groups at a disadvantage in obtaining credit?
4. As a result of favourable credit decisions, could influential groups of

people get richer and more influential?
5. Are “ability to obtain credit” and “becoming more influential” mutually

reinforcing?
Such multiple research questions could provide useful insights about where to
look for relevant evidence, especially when the researcher’s approach is critical
and, when structural changes are expected towards more a fair and just financial
capital mobility system as the end goal (Lincoln & Guba, 2003). Therefore,
such research questions could provide a strong foundation to theorize the
research findings more effectively and meaningfully.
6
1.3 Research methodology

An extensive literature review was done to frame the methodological
philosophy behind this research. Significant overlapping and commonality are
inevitable among the research strategies and methods used in social research
today (Hammersley & Gomm, 2000).
The main data-collection techniques used in this research were conducting

interviews and obtaining answers to questionnaires. Further interviews and
cross-questioning were necessary for revalidation of data descriptions and in the
story-building exercise.
In a multiple case study approach within a single inquiry, a considerable depth

of investigation could be achieved towards a cogent conclusion by broad and
deep analyzing of data of several cases comparatively and cohesively whereas
in a single case study research, the amount of data collected and thick
descriptions may be vital to develop more convincing arguments.
Propositional knowing is instrumentally valuable when the critical approach is

followed by the researcher. Many researchers (for example; Hooper, 2001;
Lincoln & Guba, 2003) advise that stating some theoretical statements when
designing research will move the researcher in the right direction. According to
Hooper (2001), these initial theoretical statements facilitate the researcher in
building explanations and eventually, to compare the findings with the
theoretical statement. The theoretical framework developed for this research is
based on critical theories.
The conclusions, which are critical and subjective, are composed primarily by
abductive inferencing (something might be the reason) supported by inductive
reasoning based on empirical evidence. From the literature, some secondary
data analysis on inequality and development measures was also necessary to
support certain arguments.
7
1.3.1 Case study research

As case study research is often used in social research today, the soundness of
the researchers’ arguments is refined and ensured by investigating the cases in
considerable depth rather than the number of cases studied and/or quantity of
data collected on each case.
The case study research method is more appropriate in this research because, a
study of individual elite political identity can be used as a lens to examine larger
political processes, as identities are aggregated in political power and culture in
which they are embedded (Hite, 1996). Most research on practical issues are
case studies and some are reconstructed from evidence gathered by the research
participants’ personal experiences because they are relevant, interesting,
politically ‘hot’ or even misunderstood (O'Leary, 2005). Also “case studies can
take us to places where most of us would not have an opportunity to go”
(Donmoyer, 2000. p. 61). This research is in a field where access to data is
restricted and the researcher’s personal experience was used to develop one case
out of the three cases discussed.
1.3.2 Research design

The whole methodological process of this research consists of several
components. The preceding sections described the research objectives, the
research questions and the arguments on which the research questions are
formulated. The following sections briefly deal with other components of the
model namely: the theoretical framework; unit of analysis; field, site and the
number of cases; case selection; data collection; and data management including
in-depth analysis and theorization.
1.3.3 Theoretical framework

According to Lincoln and Guba (2003), the application of critical theories (for
example: Marxism; neo-Marxism; feminism; constructivism; critical sociology;
Freudian or Foucaudian theory, etc.) in researching real-life problems is more
appropriate when the research is about an anticipation of social transformation,
8
particularly towards more equity and justice. Therefore, Marxian critical theory
is considered as more appropriate to interpret and theorize the research findings
in this research. Wolcott (1994) advises that “if a theory (or theories) works
well as a starting place, to use it and, to let theories to guide the researcher” (p.
13). Accordingly, this selection of a critical theory at the beginning helped the
researcher to maintain focus especially in the data collection and analysis
stages.
1.3.4 Unit(s) of analysis

In the investigation process of this case study research, the subunits of analysis
of the cases were identified as the incidents and events which have taken place,
leading up to decision-making (Hooper, 2001). In the process of theorization
these subunits of analysis collectively explain a macro-level holistic unit of
analysis; the credit mechanism which significantly possesses the power of
controlling financial capital in Sri Lanka. Cases were selected from different
perspectives to represent this credit mechanism.
1.3.4.1 Data collection and case selection
Case study is a main method. Within it different sub-methods are used:

interviews, observations, document analysis and record analysis, work
samples and so on. ...are part of what is called the multi-method
approach...If they converge (agree) then we can be reasonably confident
that we are getting a true picture (Gillham, 2000. p. 13).
The multi-method data collection approach employed in this research consisted

of interviews, questionnaires followed by further interviews for revalidating and
story building complemented with document and record analysis. Direct
observations connecting with personal experience (Wolcott, 1994) and daily
diary narrations (Hyers, Swim, & Mallett, 2006) of the researcher were
reconstructed using the same interview questions and questionnaires as were
used with other research participants.
Initially nine senior bank officers (with more than 20 years of experience) were
interviewed several times over the phone to gather basic information about
9
lending instances where they were involved and/or were aware of the decision-
making process. Among the cases reported by the participants, two participants
reported three cases comprehensively. Data was available for another case by
reconstructing the researcher’s own personal experience, through interviews of
other participants and, also by document and record analyses.
1.3.5 Number of cases

After considering the boundaries, access to fields, sites and data it was decided
to select at least two cases which could represent the five scope criteria (see
below) concurrently and/or separately. However, an additional case was also
considered because it is politically interesting and linked to the economic
policies of Sri Lanka. Also, providing evidence from multiple cases is often
considered more compelling, and the overall study is therefore regarded as
being more robust (Herriott & Firestone, 1983). Further, several case studies in
one inquiry is advisable when the inquiry is about relationships between
variables, rather than generalization to a population (Woodside & Wilson,
2003). Therefore, it is concluded that a maximum of three cases would be
selected out of the cases presented by the participants on the grounds explained
below.
The scope of this inquiry is based on five criteria: credit decision-making

processes (formal and informal); size of the enterprise and entrepreneurship
(small and medium); outcome of credit decisions (granted and denied/not
granted); hierarchical level of the decision-makers (high and medium); and type
of credit applicant (influential/capable and not influential). The following table
(Table 1-1) summarizes the five scope criteria for the three selected cases.
10
Table 1-1: Representation of the scope criteria by the three selected cases
Case I Case II Case III

Scope criteria
Decision-making process Informal Informal Formal/informal

Size of the enterprise Medium Medium Small
Outcome of the decision Granted Granted Not granted
Decision-maker Chairperson Chairperson Middle-management
Credit applicant’s status Influential Influential Not influential
All three credit applications which have been considered for this inquiry, are
typical in nature in the Sri Lankan context and therefore represent the general
credit culture in Sri Lanka.
Apart from the primary data collected through interviews and questionnaires,
document and record analyses were done for all three cases with relevant
archival records such as legislation and enactments, circulars issued by the
subject bank and the regulatory authorities, annual reports, rating reports
published by rating agencies such as Capital Intelligence and FITCH, research
reports published by stock brokers, newspaper and magazine articles and
management reports.
1.3.6 Data management; story building and in-depth analysis

The method used for data analysis within the framework of this case study
research approach is story building through narrative analysis. The literature
provides secondary data to elaborate the uneven distribution of economic
benefits among and within countries (see Kegley Jr. & Wittkopf, 1989;
Maddison, 1983, 2002, 2003; The World Bank, 1998, 2003a, 2003b).
11
Narrative analysis (Riessman, 1993) or the narrative mode of knowing, also

referred to as the paradigmatic mode of knowing (Bruner, 1990) is the primary
analytical strategy employed in this data analysis because: first, as Llewellyn
(1999) claims that, narrating is a mode of thinking and persuading that is as
legitimate as calculating (p. 220); secondly, as Czarniawska (2004) points out,
“narrative” in Latin probably comes from gnarus (knowing) (p. 7).
Qualitative researchers are story tellers (Wolcott, 1994). Therefore, the three
cases were constructed and reported as stories. According to Polkinghorne
(1987 cited in (Czarniawska, 2004) plot is the basic means that brings all the
events and incidents into one meaningful whole. In this staging process, first,
main characters are introduced and then the story is presented following a
sequential and/or a logical order, whenever appropriate. And then these stories
were further investigated with considerable depth by cross-questioning the
research participants and examining post-event developments.
Therefore, the data collection, analyses and interpretations are done through
continuous interaction with the research participants. It was a reiterative process
with a focus on story building, in-depth analysis and interpretation.
1.3.7 Interpretation and theorization

The literature review was structured to cover Marxian critical theories and their
application in accounting. The analytical interpretation and theorization of
research findings were based on Marxian critical analysis of social interaction
and social life described and analyzed from the case stories.
In theorizing the findings of this research, the researcher attempts to convey a

message to the policy formulators of developing countries on the importance of
credit mechanisms in financing SMEs as a solution for unemployment, if they
want to guide their countries to prosperity and improve the well-being of the
people.
12
1.4 Significance of the study

The significance of this study is two-fold: first it critically analyses and
documents the prevailing credit culture and systems practised by a particular Sri
Lankan bank. Second, the research findings may help the policy formulators of
developing countries to understand micro-influences within the credit system
and make necessary reforms if they want to develop their economies and to
distribute the benefits to all people fairly and justly.
A substantially prolonged debate is apparent among many economic, social and

political theorists, psychologists, anthropologists and other various scholars (for
example, Abramovitz, 1986; Firebaugh, 1999; Khan, 1979 Korzeniewicz &
Moran, 1997; Kuznets, 2003; Maddison, 1983;) on the rising inequality of
world income distribution and the widening of internal gaps between rich and
poor people (Lewis, 1966; Ranis, 1972; Rostow, 1990). The experts have
developed and been redeveloping various theories to explain the situation and
explore the crux of the matter with a view to finding a solution to this problem.
Access to productive knowledge, access to capital markets, population stress,
lack of natural resources, quality of human capital, culture, religion, ethics,
quality of institutions and policies, lack of leadership and vision, power-hungry
leaders or nations, imperialism or colonization, globalization, bureaucracy,
corruption (Gray, Owen, & Adams, 1996), familial cronyism, lack of corporate
governance and others are most popular among the numerous causes proposed.
In this light, it would be timely to investigate particular bank-lending practices
on development/underdevelopment of a country.
1.5 Limitations, remedies and some notes to the reader

The following issues were identified as the major barriers to the research study,
analysis and theorization. First, to evaluate the effectiveness of the credit
decisions observed in these case studies, availability of post-event information
was limited to published data and to the responses of the research participants,
as the researcher left the bank in 2003.
13
Secondly, all the cases belong to one private bank in Sri Lanka; however,
according to Hooper (2001), it does not affect representativeness because
“explanations are sought and the validity of the explanations or theory derived
depends on the logic of the analysis not on how typical the cases may be” (p. 1).
On the other hand, Gluckman (1961) argues that “clearly one good case study
can illuminate the working of a social system in a way that a series of
morphological statements cannot achieve” (p. 9 cited in Mitchell, 2000). Also,
according to Chua, case studies conducted in the real-life-world of actors are
preferred to distant large scale sampling or mathematical modeling of human
intention” (Chua, 1986. p. 615).
Thirdly, organizing and getting comprehensive responses to questionnaires, and

prompting participants’ memories, etc. were challenges. Fourth, because the
cases are from Sri Lanka, where socio-cultural and political backgrounds are
different from that of developed countries, the reader might be unfamiliar with
some of the situations, however, every attempt was made to make the case
studies easy to read and understand and, also a full chapter has been dedicated
to describe the background of Sri Lanka.
Then, anonymity was necessary to protect the real case and its real participants,
therefore, the names used in these cases are fictitious and therefore, some
important background information had to be suppressed which made the story-
building challenging.
Finally, effective organizing of the description, analysis and interpretation of

three case studies and integrating them into a cogent conclusion were
challenges. Traditionally, the cases are analysed case by case. However, it
seems more effective to consider similar cases together when the research is
done using multiple-case methods. Every attempt was made to avoid confusion
by providing cross-references and drawing attention to the relevant events of the
case in the analysis chapter. However, this issue would not be a critical one
because they are presented as simple stories.
14
The researcher was unable to find related research in Sri Lanka, although this
likely increased the originality of this research topic, it also prevented the
researcher building on, and comparing this research findings with previous
research findings regarding this research topic.
1.6 Chapter framework

This thesis consists of nine chapters. The rest of the thesis is organized through
the next eight chapters as follows:
Chapter two reviews the literature; the first part this chapter discusses about
global inequality and its integration to credit mechanism and, it attempts to
justify briefly why Marxian theories are appropriate and convincing in
explaining the research findings of this research. Then it portrays the need for
theoretical analysis of the research problem under study, and explains why the
literature review focused on critical theories, especially Marxism, from an
accounting perspective.
Chapter three illustrates the methodology applied in this research. The first two
sections of the methodology chapter were dedicated to elaborate the strength of
the critical theory perspective, with a literature review on the historical
evolution of theoretical and methodological thought and paradigms. Then, it
proceeds with justifying the appropriateness of qualitative research
methodology, and the application of the case study research approach in this
research. Chapter four describes the application of specific research methods
and techniques used in this research.
Chapter five provides a brief description of Sri Lanka and its socio-economic
and political background drawing special attention to money, credit, power and
the culture of informal methods. Chapter six presents the three case study
stories. Chapter seven analyses those case studies and discusses the mutual
relationships with continuous validation and reliability checks with the research
participants and peer scholars. Chapter eight interprets the research outcome
from theoretical perspectives and Chapter nine draws conclusions.
15
1.7 Conclusion
This thesis seeks to explore the nature of particular credit decisions made in Sri
Lanka by studying three cases. According to Marxian analysis, money means
power and success depends mostly on power. Similarly, lack of money deprives
the majority of the poor from social activities even if they have the necessary
skills and abilities. Bankers, commonly known as the guardians of public funds,
have indirect possession of money. Especially in a country like Sri Lanka the
bankers enjoy much power through their lending decisions irrespective of the
extent of their authority for decision-making.
In the final analysis, this thesis seeks to analyze the credit mechanism in Sri
Lanka and examine the role played collectively by the social-cultural and
economic-political factors in credit decision-making. It also seeks to explore
possible links (positive or negative) between such credit decisions and the
increasing inequality in Sri Lankan society (The Central Bank of Sri Lanka,
2008). Therefore, the research findings might be helpful in restructuring the
financial capital mobility system towards economic development and for just
income/wealth distribution in Sri Lanka, and beyond.
16
Chapter 2: Literature Review
CHAPTER TWO
2 LITERATURE REVIEW
2.1 Introduction
This chapter, firstly, presents and reviews the available literature on long-term
income/wealth inequality trends both between and within countries. Then it
applies Marxian critical theory and a Marxian explanation of historical
development to explain these long-term income/wealth inequality trends by
linking social power and access to financial capital to income/wealth. Finally,
this chapter extends Marxian interpretations of linkages between social power,
access to financial capital and income and wealth to explain the ineffectiveness
of credit mechanisms in developing countries in relation to SMEs.
Marxism has earned vast acceptance as one of the grand theories which tell the
story of social history (George, 2003) and, according to Tinker, “Marxist value
theory provides a rich vein of research analysis and practical engagements”
(1999, p. 643). Neo-Marxism is a critical theory developed upon the core
principles of traditional Marxism which is widely called classical Marxism.
Therefore, in this thesis the term ‘Marxian’ is used to represent both the
classical and neo-Marxism.
These Marxian critical interpretations provide the basic theoretical framework

for interpreting and theorising the findings of this research.
This chapter consists of ten sections. In the next two sections (2.2 and 2.3) there
is a discussion of potential mechanisms inherent in the vertical inequitable
relationships both among countries and within Sri Lanka. Then it critically
reviews the accessibility, affordability and availability of credit to SMEs. Then
(in 2.5) there is a brief introduction to Marxism and a review of literature on the
application of Marxian concepts to show why critical Marxist lenses are useful
in critical accounting research. In the sixth place, it reviews the Marxian
17
critiques on global inequality and associated links to credit. The chapter

proceeds to illustrate the influences of national capitalist forces in the
weakening of state power and sustaining inequality within a country. The next
section (2.8) elaborates the role of the financial capital mobility system with a
view of explaining the coalition between financial and industrial capitalists
followed by how the credit system impacts on unequal income distribution.
Then there is an outline of the Marxian interpretation of social structure and
credit system. Finally it summarizes the chapter contents and provides
conclusions.
2.2 Inequality among and within nations

To frame the theoretical foundations for this research it is important to examine
how world economic inequality and credit mechanisms are co-integrated
through different levels. Wealth generation and capital accumulation in the
world’s economy exist at different levels—from the international to the
national, from local to institutional and finally to the individual, and there is a
vertical relationship across these levels (see Baumol, 1986; Korzeniewicz &
Moran, 2003; Seligson & Passe-Smith, 2003b). That is, the existence of inter-
country economic inequality creates intra-country inequalities which finally
result in sector/industry inequalities (Wickrama & Mulford, 1996).
Reciprocally, sectorial inequalities reinforce intra-country inequalities which,
in turn, contribute to maintain inter-country inequalities (Wickrama & Mulford,
1996). This discussion exposes the knowledge gap in this field with regard to
how and why credit mechanisms facilitate this world system.
According to Maddison (2003), inter-country inequality of world economic

growth has been evident since the year 1000. Gross national product, per capita
GNP and their growth rates are the traditional measures used to assess the
progress of economic development. The proportional share of poorer countries
has been drastically reduced while the richer nations have been able to maintain
their share and therefore the gap between rich and poor countries is widening
significantly every year (Maddison, 2003) as shown in Figure 2.1 below.
18
A: Rich countries; Western Europe, Australia, Canada, New Zealand, USA and Japan
B: Poor countries; Eastern Europe, Former USSR, Latin America, Africa and Asia (excluding
Japan)
Compiled by the author (Source: Maddison, 1983 & 2002)
Figure 2-1: Proportional impact of the increasing gap between rich and
poor countries
As shown in Table 2.1 below, this widening gap continued and recorded close
to $20,000 GDP in 2001 with rich countries enjoying $22,832 of GDP per
capita while poor countries recorded only $3,339 of GDP per capita (Maddison,
2002). In fact, in 1950, rich countries had a GDP per capita nearly 5.2 times of
that of poor countries. These rich countries had increased their GDP per capita
from $5,663 in 1950 to $22,832 in 2001: 6.8 times of that of poor countries
(Maddison, 2002). Maddison (2002) argues that the gap continues to widen, in
absolute terms, if those countries continue with their present economic growth
rates. He predicts that the gap will be nearly $25,000 by the year 2015.
19
Table 2.1 below elaborates the gradual increase in this gap. It provides data for
each group of countries separately compared to the average world GDP per
capita income.
Table 2-1: Widening gap between rich and poor countries measured by
GDP per capita (1990 international $)
Year 1950 1962 1973 1990 2001 2015

Group of countries Projected
Western Europe 4,594 7,512 11,534 15,988 19,196 24,226
Australia, Canada, NZ & US 9,288 11,537 16,172 22,356 27,892 36,400
Japan 1,926 4,778 11,439 18,789 20,722 23,472
"West" (Group A) Average 5,663 8,466 13,141 18,798 22,832 29,156
Eastern Europe 2,120 3,250 4,985 5,437 5,875 8,886
Former USSR 2,834 4,130 6,058 6,871 4,634 6,450
Latin America 2,554 3,268 4,531 5,055 5,815 7,163
Asia (Excl. Japan) 635 837 1,231 2,117 3,219 5,487
Africa 852 1,038 1,365 1,385 1,410 1,620
"Rest" (Group B) Average 1,091 1,478 2,073 2,707 3,339 5,101
World Average 2,114 2,921 4,104 5,154 6,043 8,100
Source: Maddison, 2002
Further evidence has been provided by the World Bank for the continuation of
this widening gap between rich and poor due to the differential growth rates of
their economies (see The World Bank, 1998, 2004). Sri Lanka is no exception
when compared to other countries. Sri Lanka would have to grow for 445 years
to close the gap with rich countries at an annual growth rate of 2.9% (average
growth rate between 1960 and 1998), while the Dominican Republic; the
poorest, would need 923 years (Seligson & Passe-Smith, 2003b).
20
This disparity in economic growth (wealth generation) between rich and poor
countries is depicted in Figure 2.2 (below) to show that growth rates of both the
rich and poor countries gradually lowered until the 1980s and thereafter
stagnate at around 2.5 percent for the rich and about 0.3 percent for the poor
countries.
4.5
4
3.5
GDP Growth %
3
World
2.5
Rich
2
Poor
1.5
1
0.5
0
1960-2004 1960-1969 1970-1979 1980-1989 1990-1998 1999-2004
Ye ar
Figure 2-2: The uneven development growth between the rich and poor
countries
Source: Compiled by the author
World system theory, a neo-Marxian approach, argues that peripheral

developing countries are nested in world system under rigid influence of core
developed countries (Schuurman, 1993). Most developing countries are trapped
in the production of primary agricultural and mineral goods of which prices are
largely determined by developed countries (Wickrama & Mulford, 1996).
Within this system the peripheral countries are not able to escape, instead their
resources and labour are exploited by the core countries resulting inter-country
inequalities between core and peripheral countries. Furthermore, dependent
economies (e.g., plantation) in peripheral countries are inherently inequality-
generative because of the disarticulation among economic sectors as well as
disparities between urban and rural sectors (see Wickrama & Mulford, 1996;
Wimberley, 1990).
21
2.3 Global inequality and Sri Lanka

Although as country Sri Lanka has improved its position compared to other
countries in the region, the poor segment of the population has not benefited
proportionately. According to the Central Bank of Sri Lanka (CBSL), 40.73
percent of the Gross National Income (GNI) is shared among the top 10 percent
(the affluent class of the society) while the low-income 40 percent of the
population shared only 11.83 percent of the total national product (The Central
Bank of Sri Lanka, 2004). However, the corresponding averages for the whole
world are worse. More than 65 percent of the world GNI is consumed by the
richest 10 percent of the world’s population. Professor Muhammad Yunus
ascribed this disparity to credit systems and stressed this point in his Nobel
Lecture (2007):
Ninety four percent of the world income goes to 40 percent of the

population while sixty percent of people live on only 6 percent of world
income. Half of the world population lives on two dollars a day. Over one
billion people live on less than a dollar a day. This is no formula for peace
(p. 1).
The comparative figures in 1996/7 for Sri Lanka show that the gap is widening.
In 1996/7 the poorest 40 percent of the population had 12.83 percent (11.83% in
2004) of the national income while the richest 10 percent enjoyed 37.28 percent
as against 40.73 percent of the national income in 2004. Table 2.2 below shows
the pace of this widening gap between per capita income of the poor and the
rich countries. The per capita national income of wealthy countries was 23
times that of the per capita national income of the poor countries in 1950. After
undergoing development dilemmas for more than 50 years, this gap had
increased to 62 times by 2001.
22
Table 2-2: Gap is widening: average per capita national income (US$)
comparison between low-income countries and high-income countries
Year High-Income Low-Income Absolute Gap (A)/(B)

Countries (A)$ Countries (B)$
(A)-(B)$ Times
1950 3,841 164 3,677 23
1980 9,648 245 9,403 39
2001 26,710 430 26,280 62
A: The rich countries B: The poor countries
Source: (The World Bank, 1998, 2004)
Some studies conclude that there has been little or no change in inter-country
inequality in recent decades (Berry, Francois, & Christian, 1983; Peacock,
Greg, & Charles, 1988) whereas other studies conclude that national incomes
have continued to diverge (Jackman, 1982; Maddison, 1983, 2002).
Table 2.3 shows that 82.7 percent of the world income is shared by 20 percent
of the world population while the poorest 20 percent enjoyed only 1.4 percent of
world income in 1989. The disparity has been aggravated during the last 15
years, decreasing the share of world income to 1.2 percent to the poorest 20
percent of world population and the richest 20 percent had increased their share
to 83.1 percent by 2004.
23
Table 2-3: Distribution of World GDP, 1989 and 2004 (percentage of total
with quintiles of population ranked by income) compared with Sri Lanka
World Sri Lanka
1989 2004 1989 2004

Population quintiles
The Richest 20% 82.7% 83.1% 56.7% 55.1%
The Second Richest 20% 11.7% 11.9% 19.5% 19.9%
The Third 20% 2.3% 2.2% 12.5% 13.1%
The Fourth 20% 1.9% 1.6% 7.8% 8.3%
The Poorest 20% 1.4% 1.2% 3.54% 3.6%
Source: (The Central Bank of Sri Lanka, 2008; United Nations Development
Program (UNDP), 1999, 2008)
The reduction or stagnation of the GDP share to the poorest quintile does not
necessarily mean that poor people are getting poorer in absolute terms.
However, it is evident that the disparity in distribution of income among the
population of the world, as well as in Sri Lanka, is being sustained. A banking
system is an essential facility for the survival of the world economic and social
system. Social structures are erflected through systems and mechanisms such as
the banking system and credit mechanisms. Moreover, banking facilities in
developing countries were originally established to fulfill the financial and
credit needs of planters, mine owners and businessmen in those countries
(Wickrama & Mulford, 1996). Even today, in developing countries banking
systems basically serve the upper class of society and provide a significant
support to the sustained inequality in the society as a whole. This preferential
and potentially discriminatory nature of banking services in developing
countries, especially in providing debt capital for SMEs, is discussed in the next
section, citing relevant literature.
24
2.4 Accessibility, affordability and availability of credit to SMEs

The section 1.1.1 of Chapter one outlined problems of accessing finance for
disadvantaged group in the poor segment of the society. Many researchers (for
example; Bank of England, 1999; Dunn & Cheatham, 1993; Ivy, 1997) are of
the view that the lack of financial capital is the main reason for most SME
failures. More importantly, these researchers argue that access to credit is
limited to certain groups of society. Cavalluzzo et al. quote Bates (1973 &
1991) and explain this theory as follows:
In order to facilitate that growth, those businesses often turn to

institutional sources for credit. It is a concern, therefore, that a growing
body of evidence suggests that owners of small businesses from some
demographic groups may have less access to institutional financing
(Bates, 1973; 1991; Cavalluzzo & Cavalluzzo, 1998) (2002, p. 641).
This theory suggests that some demographic groups are discriminated against in
the provision of credit because they lack certain qualities or/and factors which
are the prerequisites for obtaining credit. Many researchers who attended the
“Workshop on the Challenges in SME Financing” held in Sydney in 1999 have
discussed pertinent international experiences principally from Australia, the
UK, the USA and New Zealand. They argued that there were not adequate
finance providers for SMEs. Most of the research papers presented in this
workshop were critical of the inability of small or budding enterprises to obtain
finance. They criticized banks’ dominating role in providing finance to SMEs
because there are very few lenders who facilitate them (Whincop, 2001).
Further, instead of microenterprise development, Powell (2008), after studying

encouraging success stories from nations in Asia (China, India), Europe
(Ireland) and even Africa (Botswana), concludes that encouraging small-
business entrepreneurs is the best way to achieve and maintain general
affluence.
In 1976 Professor Muhammad Yunus instituted the “Grameen Movement”

which was considered a revolutionary step to address the low per-capita-income
25
issue in Bangladesh. Yunus, who won the Nobel Peace Prize in 2006 for this
concept and its implementation in Bangladesh, says,
One can reasonably state that people are poor today because of the failure
of the financial institutions to support them in the past. Like the right to
food, clothing, shelter, education and health, credit should also be
recognized as a fundamental human right (Yunus, 2007, p. 2)
The Economist criticized this programme by questioning “whether this form of

lending has led to peace, the presumptive reasoning behind the award [Nobel
Peace], is just as big an unanswered question” (The Economist, 2006, p. 71).
After implementing this micro-finance scheme for nearly 40 years Bangladesh
is still one of the poorest countries in the world.
Further, Shaw (2004) reveals from her study in Sri Lanka on two such micro-
financing programmes in the rural Hambantota area that post-credit incomes are
unlikely to increase because of financial, infrastructural and socio-cultural
barriers. She concludes her case study research outcome by stating that:
Microenterprise development programs need to be complemented by

investment in social and physical infrastructure; they are no substitute for
it. In arid rural areas, where microenterprises face severe market and
infrastructure constraints, microenterprise development is unlikely to
facilitate poverty exit (Shaw, 2004, p. 1262)
When the project is larger the owners could have access to MOP if they are
adequately financed. Microfinance is too little and does not constitute capital.
Researchers in this field have also challenged that some bankers lack
fundamental knowledge about credit evaluation and posed questions/statements
such as:
• Do bankers always know best? (Dunn, Cheatham, & Cheatham,

1991, p. 1);
• Are the banks doing enough for small business? (Chadwick,

1982, p. 1); and
26
• 30 percent of bank loan officers do not understand appropriate

financing (Dunn & Cheatham, 1993, p. 3).
Credit systems which are under the control of a privileged class provide
evidence in support of Goulet’s claim that “an economy that distributes its
benefits in ways which exclude many is unjust and inequitable” (Goulet, 2002,
p. 3).
2.5 Marxian critical theory and its application in critical accounting

Neimark (1990) refers to Marx’s notation that the role of philosophy is not to
describe the world but to change it and suggests that “the aspirations of critical
accountants should be no less” (p. 111). According to Therborn (1996) Marxism
became the theoretical perspective for a generation of radicals who found it the
best way to understand social and economic injustice. Therefore, the privileged
position of Marxism as a mode of analysis and interpretation of the capitalist
system and its consequences became dominant and legitimate (Cooper, 1997;
Jameson, 1984 cited in Cooper, 1997) but Cooper further advises to abandon
“the traditional Marxian version of revolution and socialism” (1997, p. 27).
Referring to the criticisms on development agents such as the World Bank;
Annisette (2004) suggests that brave attempts are necessary “to draw accounting
scholarship into an arena where critical accounting voices need desperately to
be heard” (p. 321).
Literature relating to critical accounting and Marxist critical research, which are
more focused on money, exploitation, class conflict and consciousness, the role
of credit, social relations and their dynamic links to income/wealth equality,
reviewed in detail from a critical accounting perspective to develop the
theoretical framework to interpret the findings of this research.
2.5.1 Marxism: a brief introduction

Marxism is an economic and political philosophy developed by Karl Marx
(1818-83), along with Friedrich Engels (1820-95). According to Marxism,
throughout the course of human history, a profound struggle has developed
27
between the “haves” and the “have-nots”. Marx (1891) suggests that the
capitalists allow the masses access to the means of production and the workers
are paid a wage which is just enough for the worker to survive and to have
family and children for replacements. According to Marx (1891), neither
capitalist nor labourer is conscious of this exploitation and, therefore, workers
think they are paid fairly and “the capitalists think that they are rewarded, not
because of their exploitation of the workers but for their cleverness, their capital
investment, their manipulation of the market, and so on” (George, 2003, p. 25).
Therefore for Marxists there has been exploitation of the masses by a dominant
group of people, throughout history, creating a conflict called “class struggle”
between two classes; the bourgeoisie (the capitalist class that owns the means of
production) and the proletariat (the working class, which is at the mercy of the
capitalists) and this class struggle has been the main agency of historical change
of world systems.
The capitalist class, which owns the means of social production controls society
and constructs values and social relationships in their own interests (Marx &
Engels, 1848). In this process the credit system including bank loans plays a
decisive role in the battle of competition, and is finally transformed into a
powerful social mechanism for the centralization of capital (Marx, 1867 cited in
De Brunhoff, 2003).
2.5.2 Application of Marxian theories in critical accounting research

This section aims to describe how and why certain Marxist concepts have been
utilized in critical accounting research. With regard to the Marxist concept of
exploitation, Hooper and Kearins (2008) refer to the wealth confiscation from
Maori in New Zealand through ledger accounts and argue that administrations
wanted to be seen as demonstrating sympathy for Maori, while maintaining in
fact “a figurative distance” to enable the mechanism of exploitation. According
to Marx, the main purpose of the capitalist is to extract the greatest possible
surplus value and consequently to exploit labour-power to the greatest possible
extent (Marx, 1847 cited in Caute, 1967). This concept of extreme extraction of
28
value from a group of people in a society, termed as exploitation in Marxism,

provides a powerful tool for scholars to explain other unfair extractions as well.
Hooper and Kearins (2008) suggest that “accounting acts as a key technology in
achieving a redistribution of assets” (2008, p. 1262) which means it could
facilitate exploitation “particularly where accounts can be shown to reveal a
poor return on assets” (p. 1262). They further point out that accounting can
function as a macro-pricing mechanism and also is “deeply-embedded” in
serving the masters means the owners of assets (capital) in accumulating wealth.
Hence, the accounting function plays a significant role in the exploitation of
wealth in a capitalist society in sustaining income/wealth inequality.
Harney (2005) argues that “the crisis of measurement brought on by the

growing dominance of what Marx named ‘general intellect’ is a profound
challenge not only to management but specifically to its recording-machine,
accounting” (p. 579). According to Marx, the ‘general intellect’ (knowledge as
the main productive force) fully coincides with capital (Marx, 1974 cited in
Virno, 2001). General intellect is a crucial factor in production. Marx describes
it as a combination of technological expertise (which includes accounting) and
social intellect or general social knowledge. This concept insists the increasing
importance of intellectual systems in social organization. Virno (2001) explains
that the general intellect includes formal and informal knowledge, imagination,
ethical tendencies, mentalities and “language games” as well. “Thoughts and
discourses function in themselves as productive ‘machines’ in contemporary
labour and do not need to take on a mechanical body or an electronic soul”
(Virno, 2001, p. 1). This Marxist theory influences critical accounting
researchers to examine accounting as part and parcel of general intellect and
provides an important lens to investigate accounting and social phenomena in a
radical point of view.
James (2008) uses the Marxist concept of alienation to study the accounting
academics’ labour market in Australia. According to Marx, capitalism is an
alienating force that separates workers from products, the process of production,
the true nature of the worker and also from other people and, under late
29
capitalism, their own integrity (Marx, 1975; Blumberg, 1989 cited in James,
2008). Further, according to James (2008), in the contemporary context,
capitalism promotes separation of the worker from the whole environment. This
alienation is apparent in the newly commodified fields as well such as care
services, education, the leisure industry and even religion, etc, and now
popularly termed as “commodification of every-day life” (Dominelli &
Hoogvelt, 1996; Tinker, 1999). This reasoning process based on Marxist
concept of alienation provides a good lens to investigate into techniques and
means of protecting and/or strengthening one group of people at the cost of
another group in a society.
Catchpowle, Cooper and Wright (2004) attempt to view the state, capital and
accounting from a holistic perspective seeing the social relations and argue that
accounting has been a central part of capitalism. According to them, “what is
crucial to remember is that, in the process of accumulation…capitalism [is]
characteristically uneven” (p. 1047). Also Chiapello (2007) suggests that
“capitalism and a certain kind of double-entry bookkeeping practice that was
able to highlight the circuit of capital were inextricably linked” (p. 263) and
therefore, show that the notion of capitalism itself is rooted in accounting
notions. However, according to Bryer, the true involvement of accounting to
capitalism is not double-entry bookkeeping (DEB) but the capacity to calculate
rate of return on capital (2000a, b cited in Chiapello, 2007). Meanwhile
Carruthers and Espeland assert that the relationship between accounting and
capitalism is not merely technical but a rhetorical bond and a justification (1991
cited in Chiapello, 2007). Chiapello further insists that “even when badly kept
and useless as a decision aid, accounting contributes to the legitimacy of
practices originally considered illegitimate” (2007, p. 264). She also argues that
not only the capitalist system but also the concept of capitalism itself is an
outcome of influence of accounting ideas on economic and sociological
thinking and therefore, “the concept of capitalism is indissociable from
representation of economic life shaped by an accounting outlook” (2007, p.
264).
30
Armstrong (2008) refers to “the capitalist social relations of production” and

“social structure” and asserts that the economic power is wielded through the
medium of accounting. The idea of capital accumulation also developed
through DEB especially with the introduction of capital account, profit and loss
account and the balance sheet in the 15th century (Sombart, 1992 cited in
Chiapello, 2007). However, according to Webber, “the important fact is always
that a calculation of capital in terms of money is made, whether by modern
book-keeping methods or in any other way, however primitive and crude”
(Webber, 1992, p. 18 cited in Chiapello, 2007). More relevant to this research
Yamey suggests that the DEB system “was able to record affairs of the most
unscrupulous money-lender or crooked businessman” (Yamey, 2005, p. 81).
Bishop and Boden (2008) utilize a broadly Marxist approach to explore regimes
relating to disability in the transition from feudal to capitalist societies and to
show how such a transformation placed new emphasis on the maximization of
the surplus value of labour utilizing accounting technologies. According to
Tinker “labor and value are synonyms for each other…for Marx, the phrase,
‘the value of labor’ is meaningless” (1999, p. 658). Therefore, this Marxist lens
provides valuable insight in studying utilizing accounting technologies to
maximize wealth by way of unpaid labour; surplus value (Caute, 1967).
With reference to Sri Lanka, Wickramasinghe and Hopper (2003) use the
Marxist concept of modes of production (MOP) to analyze and interpret the
cultural political economy of management accounting controls of a textile Mill
in a traditional Sinhalese village in Sri Lanka. Wickramasinghe and Hopper
(2003) disagree with many Marxist writers who argued that production relations
constitute the base for legal and political superstructures. They argue that those
approaches are too economically deterministic and “neglect[s] free will,
individual autonomy, and the effect of factors, such as religion, culture and
ethnicity” (2003, p. 3). They point out how contradictions between capitalist
MOP and traditional culture in Sri Lanka “were inflamed by a coalition of
workers and local managers against foreign owners, who fled when financial
irregularities are discovered” (Wickramasinghe & Hopper, 2003, p. 1).
31
Alawattage and Wickramasinghe (2008) rely on a theoretical framework drawn

from Marxist discourses on hegemony to explain “the emergence and
sustenance of political hegemony as the dominant mode of control in Third
World enterprises” and argue that “the role of accounting has assumed within
political hegemonies of the Third World” (p. 293). The above study is on
plantation industry in Sri Lanka and Alawattage and Wickramasinghe (2008)
interpret some findings (as follows) using Marxian critical lenses:
• Managers can exercise a relative autonomy in decision-making and

control.
• This situation is an essential condition for accounting to perform
towards capital accumulation.
• Like many other industries in the Third World, plantation labour control
mobilizes extra-economic social relations.
According to Lincoln and Guba (2003), the application of critical theories (for
example, Marxism, neo-Marxism, feminism, constructivism, critical sociology,
and Freudian or Foucaudian theory) in researching real-life problems is more
appropriate when the research is about an anticipation of social transformation,
particularly towards more equity and justice. More specifically to critical
accounting research, prominent scholars argue that Marxist critical theory
provides strong lenses for critical accounting scholars. For example, Tinker
(1999) promotes using Volume I of Marx’s Capital to underpin and guide
critical accounting; Dominelli and Hoogvelt (1996) emphasise identifying the
problem is a major intellectual responsibility and exposing the roots of
exploitation is a precondition for liberation; Dillard and Tinker (1996) insist that
bringing structural contradictions into consciousness and to develop them to the
highest level of instability is one purpose of critical accounting research.
2.6 Marxian critical theory on global inequality and credit

Many Marxian critical theorists (for example, Abramovitz, 1986; Korzeniewicz
& Moran, 2003; M. Moore, 1997) argue that though development theories
32
(classical, modern, post-modern and neo-liberal theories in explaining

inequality) provide extensive analyses on inequality they do not provide a
comprehensive framework to unfold the total picture of inequality and its
causes. According to Moore, “these explanations are generally
unconvincing...[and] have a poor track record in prediction” (1997, p. 3). Moore
further suggests that:
In the Marxian framework, capitalism is the defining dimension of

contemporary societal organization, subsuming such lower-scale concepts
such as modernization, markets, or globalization...when look at published
research this ceases to be Marxist versus non-Marxist issue (1997, p. 4).
According to modernization theory, the Third World countries were advised to

adopt, mimic, imitate and import development patterns of the West (M. Moore,
1997). Also for their financial crisis and development initiatives, borrowing
from Western financial institutions such as the World Bank, the International
Monetary Fund (IMF) was prescribed as the overriding way out (Hite, 1996).
Meanwhile, development that was basically conceived in terms of economic

growth, industrialization and liberal democracy did not bring marked change to
the problems of the Third World countries (Schuurman, 1993). The
establishment of infrastructures, the importation of machinery as well as
adaptation of Western technology did not bring significant change (Sklair,
1991). Eurocentric development praxis that did not take the internal situation of
developing countries into account became a source of multiple problems, rather
than the solution to them (Hite, 1996).
Credit--money that the Third World countries borrowed--for development

projects made them sink into a debt crisis (Hassan, Hagen, & Haj, 2005). Also,
the imported technology made them dependent on foreign expertise, therefore,
the situation inversely served the purpose of the developed nations (Foster,
2002). Development particularly served the economic and political motives of
the United States (Michael, 1995). Politically, the United States used
development discourse and practices to halt the expansion of communism from
33
the east. Economically, it generated a double income to the developed countries;

first, from the sale of its manufactured goods to the Third World countries;
second, from the interest of the money they lent to them to purchase those
goods (Hassan et al., 2005). The penetration of financial and industrial capital,
when they are possessed and disbursed in an arbitrary manner, not being helpful
to improve the condition of the developing countries, instead aggravated the
situation (Foster, 2002). These arguments are primarily based on cultural-
Marxist discourses on hegemony which concerns the construction of consent
and the exercise of leadership and social relations by the dominant group over
the subordinate group (Gramci, 1971 cited in Alawattage & Wickramasinghe,
2008; Gramsci, 1971).
In 1976 Professor Muhammad Yunus introduced the “Grameen Movement”

which was considered as a revolutionary step to address the low per capita
income issue in Bangladesh. Grameen Bank (rural bank) is a financial
institution that exists for one purpose, that is to turn into deed Yunus’s
philosophy that the poorest of the poor are the most deserving in the land; that,
given a decent break, they can lift themselves out of the mire of poverty and
fend for themselves (Yunus, 2007). The break that Grameen Bank offers is a
collateral-free loan. Yunus, who won the Nobel Peace Prize in 2006 for this
concept and its implementation in Bangladesh, says,
One can reasonably state that people are poor today because of the failure
of the financial institutions to support them in the past. Like the right to
food, clothing, shelter, education and health, credit should also be
recognized as a fundamental human right (Yunus, 2007, p. 2)
By 2003, the Grameen Bank had 1042 branches, 11,000 employees, disbursed
US$20 billion to 1.6 million borrowers (Grameen Communications, 2003),
however, a deeper question is how helpful such tiny loans really are? The
average size of the loan is less than US$200. In fact, after restructuring the
Grameen programme in 2001, savings (deposits) now exceed loans. The
Economist criticized this programme by posing the question “whether this form
of lending has led to peace, the presumptive reasoning behind the award [Nobel
34
Peace], is just as big an unanswered question” (The Economist, 2006, p. 71).

Further, Shaw (2004) reveals from her study in Sri Lanka on two such micro-
financing programmes in rural Hambantota area that post-credit incomes are
unlikely to increase because of financial, infrastructural and socio-cultural
barriers. This outcome partially agrees with Marx’s interpretation of credit with
regard to lenders towards centralizing capital but works against the borrower
because terms and conditions are exploitive. She concludes her case study
research outcome saying that:
Microenterprise development programs need to be complemented by

investment in social and physical infrastructure; they are no substitute for
it. In arid rural areas, where microenterprises face severe market and
infrastructure constraints, microenterprise development is unlikely to
facilitate poverty exit (Shaw, 2004, p. 1262).
According to Marxist writers (for example; M. Moor, 1997; Saad-Filho, 2003,

Isbister, 2003; Korzeniewicsz & Moran, 2003) State interventions play a
significant role in allocating resources and providing such infrastructure
facilities for enterprises to start and grow.
Further, instead of microenterprise development, after studying encouraging

success stories from nations in Asia (China, India), Europe (Ireland) and even
Africa (Botswana), Powell (2008) concludes that encouraging small-business
entrepreneurs is the best way to achieve and maintain general affluence. When
the project is larger the owners could have access to MOP if they are adequately
financed. In other words, according to Marx, entrepreneurs must own adequate
capital for them to have comfortable access to MOP and perform. Microfinance
is too little and does not constitute capital in the Marxian sense.
De Soto (2005) suggests that developing countries already have the assets they
need to eliminate poverty in their hands. If this is the case, a news paper article
asks a compelling question: “Why are these assets ‘dead’ and not being used to
help stimulate economic growth and generate employment?” (The Sunday
Island, 2006, p. 3). De Soto argues that the legal property system is the “hidden
35
architecture” of a successful economy. If this hidden economic architecture is

not in place, the economic activity takes place outside of the legal system or in
what economists call the “informal sector”. It has been estimated that the
informal sector in Sri Lanka comprises about one-third of all economic activity
(The Island, 1999).
2.7 Marxian interpretation of the roles of states, capitalist forces

and nationalism in sustaining inequality
However, the Marxian perspective is that state intervention is part and parcel of
capitalist development, though the promotion of capitalism did not mention that
explicitly. Isbister (2003) says; “it is a serious misunderstanding of capitalism to
think that it consists of a private sector alone or that stands in opposition to
government” (p. 38). In fact, capitalists, while opposing certain government
policies, widely depend on the governments. According to Moore, the
Smithian/neo-liberal arguments about governments as an obstacle to capitalism
in the contemporary Third World are analogues and he stressed that “states and
capital prefer to co-operate with one another” (1997, p. 28).
According to Marx, the government is an extension of the ruling capitalist class:

“The executive of the modern State is a committee for managing the common
affairs of the whole bourgeoisie” (1977, p. 35). Social scientists and liberal
economists now argue that, the State should level out the increasing inequality
in capitalist society and should compensate for the lapses and injustices
generated by private actions and provide public goods (Isbister, 2001).
Agencies including the International Monetary Fund (IMF), The World Bank,
European Central Bank, World Trade Organization (WTO), General Agreement
on Tariffs and Trade (GATT) and the United Nations (UN) promote structural
programmes such as privatization, deregulation, tight fiscal and monetary
policies, and liberalization of capital flows, import laws and others primarily to
dilute state power so that the capitalist class can become the super power. These
international institutions were founded for the purpose of re-establishing the
36
international market capitalist system and permitting it to grow to new heights

(Isbister, 2003). Also, there seems to be a contradiction between the advices of
these agencies and practices in the developed markets, as Saad-Filho points out:
…developed markets arise only through state intervention. The state

establishes the institutional and regulatory framework for market
transactions, including property rights and law enforcement. It regulates
the provision of infrastructure, ensures that a healthy, trained and pliant
workforce is available, and controls social conflict. The state establishes
and regulates professional qualifications and the accounting
conventions… (2003, p. 9).
2.7.1 Neo-liberal capitalism

Neo-liberal capitalism has not been helpful reducing the wealth gap between
nations, however the promoters of neo-liberal economic policies admit that
there has been some decline in within-country wealth inequality. They point out
that there is a general theoretical and empirical consensus that until the 1950s,
the development of capitalism was characterized by growing disparities in the
distribution of income between the poor and rich nations (Korzeniewicz &
Moran, 2003).
There is a similarity between today’s neo-liberal policy promoters and early

years’ colonial rulers of powerful nations in justifying their exploitation under
the facade of civilization, human rights, environmental protection, sustainable
growth and poverty elimination, etc. It is worth to note that, Saad-Filho asserts
that “Today’s evangelists pay lip-service to human rights and the elimination of
poverty, but their faith lies elsewhere, in the sacred tablets of copyright law and
in the charter of the International Monetary Fund (2003, p. 1). Lenin observed
this situation as the final stage of capitalism where bankers and industrialists set
the ground rules in distributing the benefits between capital and labour (Lenin,
1939).
The external pressures, including privatization and import liberalization,

eventually create more opportunities for accumulation of wealth to the group of
37
influential capitalists, making them more socially powerful. Hence, the issue of
income/wealth inequality in a country cannot be separated from that of the
widening gap between rich and poor countries through globalization of business
and through propaganda for privatization to weaken State power especially in
developing countries.
2.7.2 The influence from international capitalist forces on the economic-

political environment through controlling access to financial capital
Korzeniewicz and Moran (2003) refer to Lenin and Luxemburg and say that, “A
long-standing Marxist interpretation portrays inequality as a structural
component of capitalist accumulation in a world-economy (Lenin, 1939;
Luxemburg, 1951)” (p. 185). These structural forces exist at different levels
with a vertical relationship that can be observed across these levels. For
example:
Dependency studies argued that the very existence of a capitalist

international economy, as embodied in global trade, entailed a continual
transfer of surplus from poor (or satellite) to wealthy (or core) areas (e.g.,
Cardoso 1974, 1977; Cardoso & Faletto 1969; Dos Santos 1970; Frank
1966, 1967, and 1978) (Korzeniewicz & Moran, 2003, p. 185).
The ultimate result of these influences from international capitalist forces is a

continuous widening of the gap between rich and poor nations further
increasing inter-country inequality. The major tool used for this purpose is the
heavily conditional hold of financial capital controlling the access to it by the
poor countries. Despite the huge differences among development studies
scholars, they all agree on one fact: that economic development in the
developing countries can continue to be hindered by continuous structural road-
blocks including access to credit.
2.7.3 Influence of national capitalist forces in sustaining inequality within

the country; internal roadblocks.
“Wealth and poverty are generated by the same process” (Tinker, 1999, p.
661)
38
Most debate on the internal gap between rich and poor people in developing
countries started with a seminal presidential address of Simon Kuznets titled
“Economic Growth and Income Inequality” in 1954. He argues using limited
data from Germany, the United Kingdom and the United States that there has
been a trend toward equalization in the distribution of income. Therefore, there
could be increasing inequality in the early phase of industrialization but that is
followed by declines in the later phases of development (Kuznets, 2003). Then
he opened the debate over the relevance of these findings for the developing
countries by examining data from India, Sri Lanka (then Ceylon) and Puerto
Rico (Seligson & Passe-Smith, 2003a).
The data showed that income distribution in these underdeveloped countries is

more unequal than in developed countries. The share of the lower three quintiles
were 28 percent in India, 34 percent in Sri Lanka and 24 percent in Puerto Rico
compared to 34 percent in the United States and 36 percent in the United
Kingdom. The shares of the top quintile were 55 percent in India, 50 percent in
Sri Lanka and 56 percent in Puerto Rico compared with 44 percent in the United
States and 45 percent in the United Kingdom (Kuznets, 2003).
However, Kuznets’s assumptions, inferences and even “facts” such as “share of

the lowest decile could not fall far short of 6 or 7 percent” (2003, p. 69) and
“the fact remains that the lower limit of the proportional share in the income
structure is higher when the country-wide per capita income is low than when it
is high” (p. 69) have been proven false by history. For example, the share of the
national income enjoyed by the lower three quintiles in Sri Lanka has been
continuously reducing since then and in 2003 it was reported as 24.9 percent
(30.9 percent in 1973) and the lowest decile was always below the limit of two
percent and reduced further to 1.1 percent in 2003 (The Central Bank of Sri
Lanka, 2008).
Goulet (2002) criticizes the 1971 Nobel Prize winning economist Kuznets’s
hypothesis, which suggests that, in the early stages of economic growth, income
39
distribution will worsen and in the later stages it will improve, by pointing out
that “the reversing point” is yet to come. Also, according to Torado (1997),
Theorists who argue for the inevitability of the Kuznets process –

especially political leaders in countries with large and growing
inequalities – more often than not are simply searching for a convenient
conceptual smokescreen behind which to mask their goals of economic
aggrandizement or to cover policy failures (pp. 161-2).
It is very common that the political leaders of newly elected governments in Sri
Lanka demand that the public “tighten the belts” in the short run; until they
recover from the disasters caused by the previous government, and promise to
deliver election-promises in the long run. But it is apparent nothing happens
other than defeating incumbent at the next election and the current opposition
coming to power on the same old grounds and promises, and same scenario
repeats endlessly.
Evidence suggests that there may be country-specific characteristics that

influence within-country income inequality independent of external
international factors. According to Goulet (2002), there could be numerous
other obstacles to a just economy which also exist. In addition to those
operating in the international arenas, others serve as internal roadblocks to
development. Among the internal roadblocks, one counts the vested interests
and disproportionate political power of privileged groups. The findings of this
research provide evidence to show how this vested interest and disproportionate
power (political or social) of privileged groups contribute to social power
which, in turn, influences decision-making in the banking sector.
Some postmodernists believe that the “vision” of the poor is impaired and
should be improved by the vision of rich capitalists. For example, Udayakumar
(1995) suggests mutual co-operation between the rich and poor for a “mediated,
sustainable and co-operative path; and a bleak future awaits both of them if they
take unmediated selfish and confrontational path” (p. 348). He oversimplifies
the process by suggesting “The rich and the poor are like a blind person and a
40
paralyzed person undertaking a journey together through life. The former needs
the latter’s vision, and the latter requires the former’s sustenance” (p.348).
However, this is in line with his preaching as “Imagining and dreaming are far
important and difficult than predicting” (Udayakumar, 1995, p. 340). What is
apparently happening is that the persons with power make use of the powerless
poor to achieve the mission of the former. He uses this approach to show that
powerless poor people do not possess the necessary skills and capital to prosper
by themselves, therefore they must rely on the powerful rich class if they want
to come out of poverty. He also asserts that the rich class, though they are
visionary and capable, needs workers’ support to accumulate wealth. This is
what Marx pointed out in his surplus-value concept that the capitalist system
makes use of labour without adequate compensation and therefore the workers
will never get out of poverty trap.
Goulet (2002) says that equity is a straightforward notion: just and impartial
treatment for all. An economy that distributes its benefits in ways which
exclude many, is unjust and inequitable. Goulet further justifies his claim by
quoting from Harvard University’s Bryan Hehir as follows:
…first that we accept the common destination of the goods of creation and
recognize that the resources of the earth are to be used for the good of all,
second, that we adopt an option for the poor, similar to the ‘difference
principle’ of John Rawls which favours those proposals for change that
best serve the least well-off in the world; and third, that we establish
institutions that seek to build a just international order...(Hehir, 1998,
p.11).
The question remains whether these institutions, which are established to build a
just international order, are genuine in their intention or are just paying lip-
service by promoting globalization with neo-liberal economic policies, which
most of the scholars from the Third World reject, saying that globalization is
nowadays’ colonialism or imperialism (Goulet, 2002).
41
2.7.4 The theory of the petty bourgeois and the mask of nationalism
According to Marx’s class analysis there is a dependent class in between the
capitalist class (bourgeois) and the working class (proletariat) called petty-
bourgeois (Tucker, 1978). According to the class-bound nationalism (Allahar,
2004) the “petty-bourgeois nationalism” may be the best fit theory for the Sri
Lankan traditional capitalists, because the petty bourgeois is more traditionally
in favour of protectionism. They are unable to compete internationally and their
scale of operations is limited to the domestic market. Therefore, they use masks
such as nationalism and patriotism to promote and protect their specific spheres
of operation: local industry, local manufacturing, and the exchange of locally
produced goods and services (Allahar, 2004). With regard nationalism, it is
noteworthy to mention that, according to Munck nationalism matters because
people die for it but the motive is not clear (1986, cited in Allahar, 2004).
Further, this social class might place their egoistic interests and symbolic gains
before economic interests at large (Williams Jr., 1994) in the guise of
nationalism. Therefore, analyzing and interpreting the behaviour of such petty-
bourgeois through a Marxist lens is useful and important in explaining the
findings of this research.
2.7.5 Productivity is secondary to political motives

States make political compromises to preserve power whilst maintaining their
central planning role. Therefore, productivity motives become secondary to
political ones, and accounting reports are rarely discussed or used for
accountability. Accounting systems are maintained only as a regulatory
requirement to legitimize events to external bodies and the populace
(Wickramasinghe & Hopper, 2003). As a result, public enterprises became a
drain upon state coffers; their policy failures contribute to fiscal crises of the
state and political unrest (Gray, Owen & Adams, 1996). From 1977, over the
last three decades, heavy pressure from donor institutions/countries forced Sri
Lanka to privatize state-owned corporations leaving only the health, education,
defence, state finance and a few authorities such as railways, forest and water
under the control of the state. This situation created a very conducive
42
environment to the capitalist class to penetrate into many national-level

industries such as telecommunication, energy and construction and to strengthen
their social power base further.
Although import protection is seen as an evil in the process of reaping the

advantages of comparative advantage, Petras and Veltmeyer (2001) argue that
the growth of protectionism and national industry stimulated the growth of
domestic industries and the relative decline of global flows as against capital
accumulation.
The debate between “openness” and “infant industry protection” is still

attractive with concepts such as “comparative advantage”, “globalization” and
“learning curve” and others, especially in countries with low levels of
industrialization. Deraniyagala and Fine say “...poor countries are shown to
specialize in low technology products if free trade is allowed, but trade
restrictions allow them to develop complex industries (see Reddy, 1999)”
(2001p. 815). This research elaborates and places an emphasis on these
techniques of maintaining disproportionate power systems (political, social or
economic) for certain groups of people and also the access of the financial
capital to entrepreneurs for feasible projects.
2.8 Financial capital mobility system
“The stronger the power of my money, the stronger am I. The properties

of money are my, the possessor’s, properties and essential powers.
Therefore what I am and what I can do is by no means determined by my
individuality. I am ugly, but I can buy the most beautiful woman. Which
means to say that I am not ugly, for the effect of ugliness, its repelling
power, is destroyed by money. As an individual, I am lame, but money
procures me twenty four legs. Consequently, I am not lame. I am a
wicked, dishonest, unscrupulous and stupid individual, but money is
respected, and so also its owners. Money is the highest good, and
consequently its owner is also good” (Marx, 1975, p. 377 cited in James,
2008, emphasis original).
43
The wealth of a country could be distinguished between financial wealth and

real wealth. Financial wealth is ‘the value of pieces of paper’ such as shares,
bonds and cash while real wealth is the value of tangible assets such as plant,
machinery, infrastructure and stocks or inventories as well as knowledge and
technology. Financial wealth is an asset to some people and a liability to another
(Isbister, 2001). Further, De Brunhoff argues that, “The visible domination of
financial markets does not imply that industrial capital has lost its fundamental
importance. Rather, we could say that a new capitalist coalition has emerged, in
order to restore profitability after the crisis of the 1970s” (2003, p. 143).
This finance capital is playing a vital role in controlling the political power in
developing countries, compared to the other capital elements such as land,
buildings and managerial know-how. Isbister (2001) quotes from Gurley and
Shaw and argues that, in capitalist economies over time, financial assets
typically grow faster than real assets or national product, for example, they
estimated that financial assets were about one-half the level of real national
wealth in the early 1880s in the United States, rising to about twice the level of
real wealth in the early 1960s.
2.8.1 Coalition between financial and industrial capitalists

Therefore, the finance providers have become very powerful and have gone to
the extent that “the state is captured by capital and operates on its behalf to
protect, reinforce and support capital’s expansion and to maintain the
suppression of labour” (Gray et al., 1996, p. 34). The new Sri Lankan economy
was driven by an international capitalists’ coalition of financial and industrial
capitalists with the help of neo-liberal policies. The case studies under
discussion provide evidence to argue, these coalitions between financial and
industrial capitalists could be formed within a country under masks of
nationalism/patriotism or theories such as social responsibility/sustainable
growth or posing as against neo-liberal policies.
The accumulation process of capital requires both industrial and financial

capital. Therefore, the banking system has become a crucial instrument which
44
creates a powerful social mechanism for the centralization of capital (see De

Brunhoff, 2003). Critical analysis shows that pressure from the owners of
finance is very common on the management of production. The most common
example of this is appointment of bank officers as directors to the board of
directors of heavily indebted customers. According to De Brunhoff:
These directors not only have high salaries, but also obtain important
share portfolios by means of stock options or in other ways. And they
agree to change the organization of industrial production in order to
maximize both profits and financial rewards. This is the objective basis
for a coalition of financiers and top industrial directors (De Brunhoff,
2003, p. 147).
In Sri Lanka, though bank officers serve as directors on the boards of their
highly indebted clients, to look after the banks’ interest, there is no compelling
evidence that those clients rewarded them with another salary. However, they
enjoy various other benefits such as free holidays and large hampers in the
festival seasons.
According to Keynes (1936) the least useful economic group comprises rich
owners of money capital, the parasitic “rentiers”. They want high returns from
their financial investments; otherwise they will keep their money idle and
provoke a scarcity of finance for economic needs. This is quite evident in Sri
Lanka because banks can safely park their excess money with government
securities and still make a contribution margin. According to De Brunhoff
(2003) such irrational behaviour by owners of financial capital has no
justification and he further suggests that:
...financial activity should be taken out of the hands of the rich owners of
money capital and regulated by the state. The active economic agents,
entrepreneurs and workers should not be dependent upon the interest of
idle rentiers. This kind of analysis is often used today by people who ask
for the cancellation of the debts of less developed countries, and by those
proposing a new regulation of finance (p. 145).
45
But De Brunhoff (2003) warns that this new regulation should involve major
changes in the whole structure of capitalist accumulation of wealth. Therefore,
he suggests that:
It is necessary to understand more fully the complex relationship between

financial and industrial capital, and the respective roles of financiers and
entrepreneurs in capital accumulation. Then we will come back to the
general notion of capital, whether ‘real’ or financial (p.146).
2.8.2 Lack of state support for SMEs providing facilities including credit
According to Marx, the exploitation of labour is the basis of capitalist profit.
However, a capitalist credit system is required for financing new industrial
investments, and it also centralizes the money of all social classes. Owners of
small savings are passively involved in the process, while the ownership of
financial assets is highly concentrated in the hands of a few wealthy people,
including some industrial managers.
According to De Brunhoff, “Keynesian policy involves a social compromise

between capitalist entrepreneurs and workers. Financial markets and ‘rentiers’
who own money capital should be disciplined by public rules” (2003, p. 150). It
is worth noting that a survey of small businesses in Sri Lanka and Tanzania has
revealed that problems of access to finance and the high cost of finance,
materials, equipments and also regulatory problems concerned businesspeople
in both countries (Levy, 1993 cited in M. Moore, 1997). Therefore, lack of
support from the government in developing business enterprises appears to have
a detrimental impact on the formal banking systems pushing decision makers
towards arbitrary decisions with regards to financing enterprises. That is, in the
absence of regulatory policies and conducive economic-political environment,
the contribution of individual characteristics may be fostered and amplified.
2.9 Marxian interpretation of social structure and credit system

According to Marxian analysis (for example, De Brunhoff, 2003; Lapavistas,
2000; M. Moore, 1997), the distribution of profits between venture capitalists
46
and finance providers is problematic but the accumulation of capital needs both
of them. The credit system is such that it transforms idle money into loanable
money capital that is earning interest, and directs it back to accumulation
(Lapavistas, 2003). This “loanable capital”, i.e. money capital, Marx says, “no
longer passive but active, usurious, [and] proliferating capital” (1978, p. 569
cited in Lapavistas, 2003, p. 70). And, in societies where commodity exchange
is widespread, the economic power afforded by money naturally leads to social
power. “Money is the monopolist of the ability to buy, or in Marxist
terminology the ‘universal equivalent’”(Lapavistas, 2003, p. 70-71).
Therefore, the researcher’s argument is based mainly on broad theoretical

framework of Marxist class analysis and neo-Marxian critical theory, because:
first, it is appropriate to apply these theories to the case studies under review
where the financier and the industrialist are not in the same business; second, as
Moore (1997) explains, Marxian interpretations inspire empirical and historical
research. Also, Marxism has been identified as the main single source of
inspiration, political as well as intellectual, for research into Third World
capitalism (see Barrow, 2007; Kiely, 1998, 2005; Watson, 2004).
Marxism has been used extensively to explain inequality or uneven

development and therefore has evolved through different perspectives especially
addressing its weak points such as bi-class society and inevitable victory of
proletariats. According to Sherman the:
Marxian perspective has led to a new Marxism, which is unofficial,

independent, profoundly democratic, and critical of all societies and all
rigid ideas. The new Marxism has often been called critical Marxism
(1995, p. 3).
Therefore, it is not only the need for individual power that drives arbitrary
decision-making but also the systemic stimulants induced by the institution and
the social network as a whole, because the Marxian critique suggests that:
• power is held by capital and exercised on its behalf;
47
• there is a conflict between capital and labour;
• the state is captured by capital and used to suppress labour; and
• the emergence of the middle class is privileged by the situation (Gray et

al., 1996).
2.10 Summary and conclusions

This section summarises this chapter and provides conclusions on why the
Marxist lens of credit mechanism is used in this research to study the role of
bank lending from a critical accounting perspective. Many scholars argue that
the relationship between accounting and capitalism is not merely technical but a
deep-rooted bond and a justification. They insist that not only the capitalist
system but also the concept of capitalism itself is an outcome of the influence of
accounting ideas on economic and sociological thinking.
According to Marx, money is highly respected and therefore, money owners

are powerful irrespective of their methods of earning and accumulation of
money. Some researchers argue that powerless poor people do not possess the
necessary skills and capital to prosper by themselves, therefore, they must rely
on the powerful rich classes if they want to come out of poverty. They also say
that the rich classes, though they are visionary and capable, need workers’
support to accumulate wealth. These theories suggest that powerful-rich make
use of the powerless-poor to achieve these goals. The poor, though they may
have ideas and skills but no access to money (or sufficient credit) will arguably
never get out of poverty trap.
According to Marx, the government is an extension of the ruling capitalist class

and Marxian critical theorists argue that developed markets arise only through
state intervention. The state establishes the institutional and regulatory
framework for market transactions. It regulates the provision of infrastructure,
ensures that a healthy, trained and pliant workforce is available, and it controls
social conflict. The state establishes and regulates professional qualifications
and the accounting conventions.
48
With reference to Sri Lanka, researchers argue that production relations are not
only constituents of legal and political superstructures but also comprise free
will, individual autonomy, and factors such as religion, culture and ethnicity.
Research on micro-financing programmes in Sri Lanka reveals that post-credit
incomes of borrowers are unlikely to increase because of financial,
infrastructural and socio-cultural barriers. Micro-finance is too small and does
not constitute capital in the Marxian sense.
Despite the huge differences among development studies scholars, they all
agree on one fact: that the economic development of the developing countries
will be hindered by continuous structural roadblocks including access to credit
for potential projects of ordinary people.
2.10.1 Conclusions
Marxism was considered as the theoretical guide in this research for several
reasons. Marxian theory can be applied to different level analyses and is capable
of explaining not only within-level relationships but also between level
relationships. Marxism has earned widespread acceptance as one of the grand
theories which narrate social histories (George, 2003) compared to other critical
theories especially with regard to power relationships and credit mechanisms.
Marxian critical theories are useful tools to analyse power relations associated
with wealth and financial resources. Classical Marxian economic theories have
proved not to be practical.
State intervention discussed here is not about state ownership but conscious
interventions by the state as performed in developed countries for the interest of
the general public.
The Marxist concept of credit mechanism is the main analytical tool used in this
research. According to Marx, the credit system is a serious weapon in the battle
of competition and forms a significant social mechanism for the centralization
of capital. Equally, lack of money translates into powerlessness, deprivation and
exclusion from several social activities for the majority of the poor under
49
capitalism. In capitalist society, successful participation in social affairs

depends less on a person’s abilities and skills and more on possession of money.
There seems to be a barrier between ordinary people’s potential (through
abilities, ideas and skills) and access to money capital in capitalist society. In
the meantime, people (with or without abilities, ideas and skills) who possess
money gain the potential and reap the benefits. More gravely, when access to
money capital is coupled with ideas, abilities and skills, there will be could have
an undue advantage over moneyless people and this would increase exponential
effect in accumulating wealth.
The petty-bourgeoisie is traditionally in favour of protectionism. They are

unable to compete internationally, use masks such as nationalism and patriotism
to promote and protect their specific locally produced goods and services. This
social class places their egoistic interests and symbolic gains before the
economic interests of a country at large.
Marxian critical theorists argue that, in capitalism bankers and industrialists set
the ground rules in distributing the benefits and control the ultimate balance of
power between capital and labour. Their studies investigate how capitalist
forces influence decision-making/lending processes by weakening state power
(economic-political environment) and ignoring the role of individual’s abilities,
and the skills of bank professionals--and at the same time enhancing the social
power of a few “real” decision-makers in the sector. It is evident that most
individual, social-cultural and economic-political factors are collectively
directed towards protecting the social power of an advantaged class of the
capitalist society. Social power, privilege and inclusion in various activities are
intertwined with possession of money in capitalist society, meaning that the
economic power afforded by money eventually leads to social power.
Therefore, social power becomes the fundamental driving force for decision-
making based on preferred social norms in the state and private institutions,
particularly in the finance sector.
50
The Marxian critique suggests that it is not only the need for individual power
that enhances social inequality but also the systemic stimulants induced by the
institution and the social network as a whole. Accounting systems were
maintained as a regulatory requirement to legitimate the capital-concentration
process. Accounting provides the intellectual service for smooth and effective
functioning of the credit mechanism. This research investigates and shows how
and why individual, social and economic-political factors collectively contribute
to social power which in turn influences credit decision-making in a private
bank in Sri Lanka. It also seeks to find what impact would such decision-
making have on the economic-political environment, especially with regard to
the possibility of sustaining income/wealth inequality in Sri Lanka? That is,
examining the nature of the link between the inequality in society and certain
decision-making processes of a Sri Lankan private bank.
51
52
Chapter 3: Research Methodology
CHAPTER THREE
3 RESEARCH METHODOLOGY
3.1 Introduction
This chapter discusses in detail the methodology employed in the realm of
academic research in social sciences and specific relevance of certain
methodological perspectives to this research. Recent publications (for example:
Creswell, 2007; Denzin & Lincoln, 2005) on qualitative research methodology
show that research methodology can no longer be confined to a set of
universally applicable rules, conventions and traditions (Guba & Lincoln,
2005). According to Guba and Lincoln (2005), various disciplines and
perspectives (such as Marxism, feminist theories and queer theory) have been
integrated with certain methodologies in an unavoidable manner and they
suggest that, “...indeed, the various paradigms are beginning to ‘interbreed’
such that two theories previously thought to be irreconcilable conflict may now
appear, under a different theoretical rubric, to be informing one another’s
argument” (p. 191-2).
This chapter describes how and why the qualitative research methodology is
employed in conducting this research. A case study research approach is used to
explore and investigate how financial capital is provided to SMEs in Sri Lanka
by a private commercial bank. Gillham (2000) says that, “case study research is
very much like detective work. Nothing is disregarded: everything is weighted
and sifted; and checked or corroborated” (p. 32). Within the main method of
case study research several sub-methods are employed for data collection, data
analysis and interpretation (Gillham, 2000).
According to O’Leary, when research is focused on real-world problems the

research questions are often connected to a need for knowledge that can
facilitate problem solving (2005). However, O’Leary (2005) says that such
53
situations do not mean that research outcomes would resolve social problems
but she insists that:
Research can be a key tool in informed decision-making. It can be central

to determining what we should do, what we can do, how we will do it, and
how well we have done it. Research may not be the answer to our
problems, but it can supply some of the data necessary for us to begin to
tackle the real-world problems that challenge us all.
This chapter consists of 10 sections. The first three sections outline the type of
research perceptions and explain what research perceptions are shared by the
researcher. The fourth section illustrates the designing of research methodology
employed in this research. The fifth, sixth and seventh sections describe the case
study research design and portrays how the “explanatory multiple case study
method” (Yin, 2003) is used in this research, and then it reviews the methods of
data collection and analysis. Eighth, it explains how the trustworthiness,
dependability and credibility of this research were ensured. The ninth section
discusses the application of theories and finally, it provides the conclusion.
3.2 Paradigms, perspectives, assumptions and theories
True knowledge is limited to the objects and the relationships between

them that exist in the realm of time and space. Human consciousness,
which is subjective, is not accessible to science and thus not truly
knowable (Polkinghorne, 1989, p. 23 cited in Guba & Lincoln, 2005, p
203).
A research perspective is the standpoint researchers use to study the world, and
a paradigm is a set of propositions that explains how the world is perceived
(Sarantakos, 1998). Guba suggests that “the net that contains the researcher’s
epistemological, ontological, and methodological premises may be termed a
paradigm or an interpretive framework; a basic set of beliefs that guide action”
(Guba, 1990, p. 17 cited in Denzin & Lincoln, 2003).
In this thesis, the term perspective is used when the discussion is about the
standpoints of researchers such as the Marxian perspective while the term
54
paradigm is used in a broader and a deeper sense when the discussion is about
the worldview of the members of a particular community such as positivist,
interpretive and critical paradigm. For example, many religious perspectives
belong to the positivistic paradigm while feminist and neo-Marxian perspectives
belong to the critical paradigm and social constructivist and participatory
perspectives belong to the interpretive paradigm. Therefore, studying and
understanding paradigms and clarifying the researcher’s standpoint
(perspective) and the worldview (paradigm) are important because this sets the
basic guidelines for how research should be designed and conducted (Creswell,
2003; Laughlin, 1995).
3.2.1 Objectives of paradigms

Objectives of paradigms vary from discovering “the Truth” to
constructing/building theories in proposing solutions. Positivists aim to explore,
explain, evaluate, predict and to develop/test theories. The aim of interpretivists
is to understand human behaviour which means “sympathetic understanding”.
Critical theorists aim to criticize social reality, emancipate, empower and
liberate people, and propose solutions to social problems (Sarantakos, 1998).
Contrarily, constructivists aim to build theories through consensus (Jones, 1991)
and the participatory/cooperative paradigm (Heron & Reason, 1997) aims to
know practically, by participation.
Criticisms are now common on purists’ view that their paradigms are the ideal
for research, and they advocate the incompatibility among paradigms (Johnson
& Onwuegbuzie, 2004), for example, Guba insists that “accommodation
between paradigms is impossible...” (Guba, 1990, p. 81) while Johnson and
Onwuegbuzie insist that “obviously, the conduct of fully objective and value-
free research is a myth” (2004, p. 16).
3.2.2 Assumptions underlying paradigms

Assumptions of the researcher play a vital role in choosing a particular
methodology for his/her research of social inquiry. Creswell summarizes the
55
assumptions on which the research paradigms are based on into five categories:
the axiological, ontological, epistemological, rhetorical and methodological
assumptions (Creswell, 1994, 1998). Many sociologists place paradigms in
simple bipolar continuum of each assumption (for example: Burrel & Morgan,
1979; Creswell, 2007). However, Laughlin argues that this “...a simple bipolar
dualism... is too simplistic...” (Laughlin, 1995, p. 66) and, Guba and Lincoln
(2005) provides five stances of beliefs for ontology, epistemology and
methodology in the continuum from positivist, post-positivist, critical,
constructivism to participatory paradigms.
Axiology (ethics) refers to the role of values incorporated into the research.
Ontology refers to the nature of reality—what actually exists? Epistemology
addresses the questions, “Do you really know what you think you know?” and if
so, “How do you know what you know?” Rhetorical assumptions mean that,
instead of terms such as internal validity, external validity, generalizability, and
objectivity, the qualitative researcher writing the case study may employ terms
such as credibility, transferability, dependability, and conformability (Lincoln &
Guba, 2003) as well as naturalistic generalizations (Stake, 2000). Methodology
refers to a model entailing the theoretical principles and frameworks that
provide the guidelines that show how research is to be done (Sarantakos, 1998).
Laughlin places some of these assumptions together in a meaningful statement

as: “...a position on being (ontology), on the role of the investigator...on
perceptions on understanding (epistemology) and ways to investigate the world
(methodology) are implicit in the various approaches to empirical research”
(1995, p. 66).
3.2.3 The positivist paradigm

Positivism, which is sometimes referred to as a scientific ideology, is a social
research philosophy developed and introduced by Auguste Comte in 1848.
Positivists argue that the only authentic knowledge should be scientific
knowledge. Their ontological belief is that an objective reality exists and can be
known through research in contrast to post-positivists who concede that “we
56
might never know reality perfectly but ...accumulated efforts will move us
toward discovering what is real” (Bailey, 2007, p. 52). Contrarily,
constructivists argue that the truth is constructed within the minds of individuals
and between people in a culture. Constructivists’ view is that the truth is
constructed from a continuous process of research and by developing consensus
among individuals. The epistemological position of positivists is that knowledge
which can be gained does not depend on the researcher. There are numerous
research traditions, schools of thought or perspectives which are non-positivist,
followed by qualitative researchers who represent either interpretive or critical
paradigm.
3.2.4 The interpretive paradigm

The unsuitability and inappropriateness of the positivist paradigm have been
observed by many researchers in understanding a social issue (Laughlin, 1995).
These researchers seek understanding of the world in multiple realities and
often these subjective meanings are negotiated socially and historically
(Creswell, 2007). The ontological belief of interpretivists is that there is no
objective social reality instead there are multiple realities. The epistemological
position of the interpretive paradigm is that what is learned in research does not
exist independently of the researcher. The methodological approach of
interpretivists is qualitative. An inductive process is followed and often includes
interactions with, and observations of, participants (Bailey, 2007). Their
axiological belief is that value neutrality is not essential or even not possible in
the research process.
3.2.5 The critical paradigm
The common understanding is that researchers who belong within the critical
paradigm often want to document, understand and even change the way that
powerful groups oppress powerless groups (Bailey, 2007). Similar to
interpretive paradigm, critical paradigm too bear the ontological belief that there
is no single reality and they stress that “social reality is shaped by historical,
social, political, cultural, and economic factors, as well as ethnic, racial, and
57
gendered structures among others” (Bailey, 2007, p. 55). The axiological belief
within the critical perspective is that values are important and should be clearly
articulated in the research work. The methodology often followed within the
critical paradigm takes a macro approach rather than the study of a
phenomenon. According to Bailey (2007), analysis that springs from a critical
paradigm often includes emphasis on the negative effects of racism or unequal
power relations. This paradigm often focuses on historical, social, and cultural
events and “documenting the negative implications of capitalism, imperialism,
and unequal power relationships lies at the heart of much work undertaken
within the critical paradigm” (Bailey, 2007, p. 56).
3.2.6 Paradigm of this research

This research belongs to the critical paradigm because it aims for critique and
transformation and, the issues addressed in this research are social power
relations and inequality (Bailey, 2007; Guba & Lincoln, 2005). Further, the
researcher wants to document, understand and even suggest change to the
negative implications of capitalism and unequal power relationships (Bailey,
2007).
The ontological belief of the Marxian perspective is that reality is shaped by

social, political and economic values, crystallized over time (Guba & Lincoln,
2005). The epistemological stance is that the knowledge discovered by this
research depends on the researcher and is therefore, subjective. The main
question asked in this research is: Do credit mechanisms and income/wealth
inequality create a mutually reinforcing cycle in Sri Lankan society?, therefore,
the answers are inferred from the views of research participants and empirically
backed by their experience. The methodology follows dialogic (Guba &
Lincoln, 2005) strategies within the case study research methodology from the
point of story-building through data analysis and interpretation to theorization
chapters.
58
3.2.7 Basic beliefs

Some scholars such as O’Leary (2004) use the term post-positivist to refer non-
positivist paradigms but for others, for example Guba and Lincoln (2005), post-
positivism is a paradigm with slight variances from positivism in basic
assumptions such as ontology, epistemology and methodology. Therefore, for
some scholars, the paradigms such as interpretivism, constructivism and critical
are classified under post-positivism whereas others identify post-positivism,
interpretivism, constructivism and critical worldviews as four separate
paradigms. The qualitative school rejects the objectivity because it implies
distance and neutrality from the researched; that reality is objectively given; and
it emerges out of subjectivity (Sarantakos, 1998).
3.2.8 Business/accounting research

In accounting research, Chua (1986) identifies two basic paradigms; the
positivistic or scientific paradigm and the interpretive paradigm. However,
according to her, in the broader sense, this interpretive paradigm consists of
more “pragmatic” kind of paradigms, like “post-positivist” (for example,
Bruner, 1990) as well as very “radical” nature paradigms such as critical
theories (Tinker, 1980).
The positivistic paradigm views accounting as a mere technical process (Smith

& Taffler, 1992). However, the interpretive school of thought claims that
accounting is a social process with human interactions (Jonsson & Macintosh,
1997). They argue that the aim of research should be to uncover the meaning
and interpretation of the accounting process. Further development of this
interpretive school of thought paved the way for critical accounting theory
(Power, 2003; Sikka, 2001; Tinker, 1980). They argue that the aim of research
should not be limited to uncovering meanings but also focused on finding
reasons for change (Laughlin, 1995) and even suggesting solutions for social
issues (Jones, 1991).
59
3.3 Qualitative research strategies/approaches/traditions

There are several qualitative approaches for social inquiry. According to
Creswell these “approaches to research” (Creswell, 1998), have also been
identified as “strategies of inquiry” (Denzin & Lincoln, 2003) and “varieties”
(Tesch, 1990), etc. Creswell explains the complexity of these approaches in
different research paradigms as follows:
Tesch (1990), organizes 28 approaches into four branches of a flowchart,

sorting out these approaches based on the central interest of the
investigator. Wolcott (1992), classified approaches in a “tree” diagram
with branches of the tree designating strategies for data collection. Miller
and Crabtree (1992), organized 18 “types” according to the “domain” of
human life of primary concern to the researcher, such as focus on the
individual, the social world, or the culture...(Creswell, 1998, p. 245).
Creswell (1998) classified all these “types” of inquiry into five “traditions”
namely: biography, phenomenology, grounded theory, ethnography and case
study. However Creswell (2007) updated his analysis and the major change is
that he has renamed the research approach “biography” as “narrative research”.
3.3.1 Creative and strategic researcher

Many researchers feel a need to position themselves as a particular type of
researcher, and identify themselves with a defined way of knowing. The
question is to consider is whether there can be value in accepting various
assumptions. O’Leary (2004) places the researcher in a creative and strategic
position and suggests that:
Can divergent, disparate, and distinct understandings of the world, and in

particular research, simultaneously exist? For the researcher who
approaches research as “thinking game”, the answer is yes. Each research
situation and research question is unique, and assumptions can be as
varied as the situations. The trick is to understand what assumptions you
are working under and how they might affect your study (p. 8).
As explained in the next section this researcher too has taken a sort of strategic
position in designing the research methodology of this research.
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3.4 Designing the research methodology

A methodology is the selection, justification and sequential arranging of
activities, procedures and tasks in a research project. These activities,
procedures and tasks include the selection of: cases to study, methods of data
gathering, analytical techniques of data (Silverman, 2006), a theory, a range of
solutions (Gobo, forthcoming cited in Silverman, 2006) and approaches. On the
other hand, according to Yin (2003) the “role of theory development, prior to
the conduct of data collection, is one point difference between case studies and
other related methods such as ethnography and grounded theory” (p. 28).
However, according to O’Leary (2004), in designing the research methodology
“one approach is not necessarily better than the other. What is important...is that
all researchers work towards reflexive awareness and informed choice. There
are no easy answers. Methodological design is about informed decision-making
that involves weighing up pros and cons, and deciding what is best given your
specific context” (p. 87).
O’Leary (2004) explains that research generates knowledge and the purpose of
the knowledge varies from just “building understanding” to “action change
within a system” to “emancipate through action” or further to “expose the
systems”. Therefore, the research methodologies could vary from “basic” to
“applied/evaluative” to “participatory” or further to “critical/radical
ethnography” accordingly.
3.4.1 Choosing a research methodology

In one sense all research is case study: there is always some unit, or set of
units, in relation to which data are collected and/or analyzed (Hammersley
& Gomm, 2000. p. 2)
In supporting to this claim, O’Leary (2004) argues that case study is not really a
“methodology” but rather, an approach to research. She explains, “since ‘cases’
in a case study can involve individuals, cultural groups, communities,
phenomena, events and, in fact, any unit of social life organization, virtually all
methodologies and/or data collection tools can be called upon dependent on the
61
case at hand” (O’Leary, p. 117-118). The research question under study is

analysed using the “exploring methodologies” model (O’Leary, 2004, p. 90) as
illustrated in Figure 3-1 to provide a holistic view of the researcher’s position
and the approach followed.
62
Do credit mechanisms and income/wealth inequalities create

a mutually reinforcing cycle in Sri Lankan society?
I want to find out more.... I want to figure out what can be done What methods are used to accommodate
or to reject credit applications?
What is What is How does the I want to I want to look I want to work How does this
income/ the power lending process find out the at the with others for situation in Sri
wealth of lenders compare extent of the programmes better Lanka relate to
among lending aimed at understanding
inequality all about? problem income/wealth
institutions? reducing and change the
? system inequality?
inequality
I want to I want to
Is a particular Has an work with
Ethnography Grounded theory programme implemented expose
and empower
likely to programme inequities
the victims to
work? worked? change the
in the
system systems
Phenomenology Ethnomethodology Applied Evaluation Action

research research research Participatory
action
Case Study
Research approach
research
Figure 3-1: Exploring methodologies (adopted from O’Leary (2004, p. 90) to illustrate this research methodology)
63
64
3.5 Case study research design and method

According to Yin (2003), “…case study is an empirical inquiry that investigates
a contemporary phenomenon within its real-life context, especially, when the
boundaries between phenomenon and context are not clearly defined” (p. 13).
Therefore, Woodside and Wilson suggest that, case study research should have
a broader definition as “inquiry focusing on describing, understanding,
predicting, and/or controlling the individual (i.e, process, animal, person,
household, organization, group, industry, culture, or nationality)” (2003, p.
493).
In the case study method used in social research today, the soundness of
researchers’ arguments are refined and ensured by investigating the cases in
considerable depth (Hammersley & Gomm, 2000) rather than the number of
cases studied and/or amount of data collected on each case. Gluckman insists
that, “clearly one good case study can illuminate the working of a social system
in a way that a series of morphological statements cannot achieve” (Gluckman,
1961, p. 9 cited in Mitchell, 2000, p. 1). This claim is further strengthened by
Skinner (1966) who asserts that “...instead of studying a thousand rats for one
hour each, or a hundred rats for ten hours each, the investigator is likely to study
one rat for a thousand hours” (p. 21, cited in Woodside & Wilson, 2003, p.
493). As Woodside and Wilson (2003) point out, this view can be
misunderstood as that, case study research is always limited to the sample size
of n = 1.
3.5.1 Why case-study methodology is preferred over other methodologies

O’Leary (2005) points out that the nature of the research question is the key
determining factor in choosing the appropriate research methodology. The
empirical research questions in this study involve investigating whether credit
decisions are made in favour of influential applicants while certain groups are at
a disadvantage in accessing credit and, if so, to explore how and why these
decisions are made.
65
The vision of the researcher is set towards better systems by challenging

existing systems and the objectives of the research are to expose and understand
a current situation: in this case, the credit mechanism in Sri Lanka. However,
this research does not intend to suggest remedies or solutions such as
programmes and policies through which the state should interfere with the
banking system. Future research should focus on potential state-intervention
policies and programmes.
After evaluating the various research methodologies outlined in Figure 3.1 the
researcher was convinced that the case study research methodology was the
most appropriate for this study. This is further explained below.
Due to the controversial nature of the subject, the credit mechanism and its link
to income/wealth inequality, acceptance of the researcher by interviewees plays
a vital role in capturing genuine and honest responses and ensuring the
reliability of the data gathered (Krathwohl, 2009). On the other hand, to study
the decision-making process for a considerably long period of time it was
necessary to maintain prolonged involvement with the interviewees to collect
data over time (Krathwohl, 2009). Therefore, it was determined that survey-
based methodologies would not accommodate these requirements.
Methodologies such as participatory action research, action research and applied

research are far from being practical in this situation as the researcher access is
restricted in the banking sector (Fontana & Frey, 2005; Lee, 2000). Also the
acceptance of, and free interaction with, the researcher by participants are
arguably less likely to provide the data needed in the banking sector.
Phenomenology focuses on understanding the essence of experience of a topic

or a concept (Miller & Brewer, 2003). The focus in this research is to analyse
certain causal relationships in the process of decision-making. Therefore the
scope of this research is beyond the framework of phenomenology. On the other
hand, ethnomethodology covers the study of the methods that people use to
make sense of the social world (Miller & Brewer, 2003). Ethnomethdodology is
66
about methods of understanding everyday life in a broader sense whereas this

research focuses on a specific complex social mechanism: the credit decision-
making process.
Grounded theory is a set of integrated steps guiding the research process to

completion and finally to generate a theoretical statement (Miller & Brewer,
2003). Because Marxian critical theories were considered as the theoretical
guide for this research, the Grounded theory methodology was not considered.
Ethnographic studies are generally done in a six-months-to-one-year time frame

(Creswell, 1998, p. 245). Studying processes like credit mechanisms needs a
longer period in order to understand and analyse mechanisms and relationships.
On the other hand, financial institutions are closely regulated by a central
authority and they maintain the highest levels of integrity and confidentiality
about their practices (The Central Bank of Sri Lanka, 1988-2008). Therefore, a
major barrier to employing an ethnographic methodology in this type of study is
access to data. Information about clients, decisions and the amount of money
involved are kept highly confidential by financial institutions mainly because
for ethical and regulatory reasons and, also because of the highly competitive
nature of the banking business (The Central Bank of Sri Lanka, 1988-2008).
Therefore, “observation”, even from within, is not allowed or possible, due to
the very personal nature and confidentiality of customer information. Due to the
personal characteristics of the interviewer and interviewees, sometimes, face-to-
face interviews can create an uncomfortable atmosphere for respondents
(Krathwohl, 2009). Further, such interviews are exposed to the possibility of
providing biased data because issues are generally on current events, activities
and processes and the interviewees may be under direct influence of supervisors
on those credit decisions (Lee, 2000).
Due to the restriction on access to data in banks and the need for long-term data
analysis, the most appropriate and useful option left to the researcher is to carry
out a retrospective study of life experiences of several relevant individuals using
multiple sources: interviews, observations, documents, archival records,
67
questionnaires (not survey questionnaires), internet chats and exchange of e-

mails. This requirement is facilitated well in case study research methodology.
The multiple-case method is employed to enhance validity and allows for more
cogent theorization.
In summary, because of the complexity of the processes under study (credit

decision-making processes), the nature of characters involved (rich and
powerful individuals and senior bank officers), the length of the period of
observation warranted (3-5 years) and the nature of the research field involved
(confidentiality, integrity and regulatory issues), the case-study method was
identified as the most appropriate methodology in line with the research
questions and the knowledge gap identified.
Also, in business, case-study research is considered as useful especially for

practical real-world problems where the experience of the actors is important
and the context of the situation is critical (O'Leary, 2005). According to Yin
(1993), the case study approach is especially useful in situations where
contextual conditions of the events being studied are critical and where the
researcher has no control over the events as they unfold.
3.5.2 Types of case-studies

Yin (2003) identifies four basic types of case study designs based on two
variables namely the number of cases involved and the number of units of
analysis covered. The number of cases could be single or multiple and the
number of units of analysis can be single-holistic or multiple-embedded.
“Among these designs, most multiple-case designs are likely to be stronger than
single-case designs” (Yin, 2003, p. 19).
Stake (2005) identifies three different types of case studies namely intrinsic
(unique cases; not representative), instrumental (to provide insights or enhance
an existing theory) and collective (generalization is aimed at) based on their
purpose and nature. On the other hand Yin (1993) classifies case study research
into three major categories based on their approach, issues and applicable
68
theories. They are exploratory case studies, descriptive case studies and
explanatory case studies. Each category of case study research can be carried
out using a single-case type or multiple-case type. Each case study research type
may employ different designs either with one holistic unit of analysis or
embedded several units of analysis. These characteristics of different types of
cases are summarized according to their nature and purpose (Stake, 2005), and
approach, research issues, number of cases, nature of units of analysis and
applicable theories (Yin, 1993, 2003) as shown below in Table 3-1.
Table 3-1: Characteristics of three types of case study research
Case type Exploratory Descriptive Explanatory

Item
Field work is done Aimed at a Aimed at presenting a

Common prior to the definition complete causal relationship;
approach of research problem. description of a explaining which
Aimed at defining the phenomenon causes produced
issues of subsequent within its context. which effects.
study.
Broad design Encounter Emphasis on How

Research determined well ahead. enormous and Why do research
Issues Emphasis on actual problems in findings get into
behavioural events limiting the scope practical use?
rather than perceptions. of the study.
Theories Search for causal Requires theory to Search for

theories. guide data explanatory theories.
collocation.
Nature Intrinsic Instrumental Instrumental
No. of cases Single Single Collective
Unit/s of Holistic unit of analysis Sub-units/Holistic Sub-units/Holistic

analysis unit of analysis unit of analysis
Sources: Yin (1993; 2003) and Stake (2005), compiled by the author
3.5.3 Characteristics of case study method employed in this research

Reports and authors often do not fit neatly into one of these set of characteristics
(Stake, 2005), especially when a multiple case study method is chosen they can
69
share characteristics of different categories. However, studying collective cases

is not intended to generalize the research outcome but, as Stake (2005) suggests,
it will strengthen the optimizing process of creating a better understanding of
the credit system and its relationship to social power and income/wealth
inequality in Sri Lanka. This case study research shares characteristics of both
the explanatory and descriptive types. The research question in this research is
about the possible relationship between certain bank lending decisions and
unequal income/wealth distribution, therefore it shares the characteristics of
explanatory type case studies.
However, this case study research can be also identified as descriptive because a
theoretical guidance was used for data collection and this theory was explicitly
disclosed in advance: the Marxian critical theory. This research is an
instrumental one because it provides insight to an existing theory and, whether
the selected cases themselves are of particular interest or not, the focus was
maintained towards optimizing the understanding of the credit system within
which they operated. Although studying collective or multiple cases goes
beyond optimizing understanding to near generalization because of the
representative nature (Stake, 2005) of the cases under review, the researcher
maintains focus towards inductive reasoning and abductive
inferencing/reasoning for a better understanding of patterns in certain credit
decisions in Sri Lanka.
3.6 Triangulation and data analysis

According to Woodside and Wilson, “achieving deep understanding in case
study research usually involves the use of multiple research methods across
multiple time periods (i.e. Triangulation; see Denzin, 1978)” (2003, p. 498).
Triangulation includes direct observation of incidents and events, analyses of
archival records, exchange of e-mails, interviews, seeking
explanations/interpretations from the case participants (Woodside & Wilson,
2003). These qualitative data were analyzed using various analytical
tools/techniques/strategies in order to develop them logically towards a
70
conclusion. Data analysis strategies are numerous. The data collection, analyses
and interpretations in this research need to be iterative with a focus on story
building.
Creating stories or creating narratives is identified as a way of analysing data

not analysing stories. It is worth noting Bailey’s comments on narratives in this
regard:
Although I refer, at times, to the creation of narratives as a narrative

analysis, other researchers reserve the term narrative analysis to refer to
the procedures for analysing the stories, or narratives, told by the
participants. When used in this sense, a narrative analysis might focus on
how the participants’ stories are organized, the rhetoric with which they
are told, why they are being told, and their major themes (Bailey, 2007 p.
162).
3.7 Credibility, dependability and conformability

Now it is argued that gaining traditional “thick description” (Geertz, 1973;
Sanday, 1979 and Arnould & Wallendorf, 1994, cited in Woodside & Wilson,
2003, p. 497) alone is not enough to ensure the validity and reliability of a case
study research because, it may be limited to different levels of depth and detail
(Woodside & Wilson, 2003). On the other hand whether the description is
“thick” or “thin”, if it provides adequate evidence to the claim, the description is
considered as dependable (Bailey, 2007). Therefore, the description of case
studies were supported by other validation techniques and collaborative
evidence such as financial accounts, newspaper and magazine articles,
comments of fellow bankers, and finally through inter-rater reliability checks
(Schutt, 2001) with peer scholars. O’Leary (2004) suggests an additional
indicator that can be used to assess credibility in change-oriented research, and
that is “usefulness”. If a research objective is to expose an inequitable/unjust
situation, then a measure of success or credibility will be how useful the
research outcome is in proposing a remedy. Therefore, taking the seriousness of
the research problem in this research, it would be appropriate to claim that the
71
credibility of this research outcome is high because the “usefulness” of the

findings is substantial in exposing certain social mechanisms.
Hammersley (1992) suggests three evaluating criteria to evaluate the quality of

research: plausibility, credibility and relevance. However, Denzin and Lincoln
(2005) criticize Hammersley’s three criteria because they require social
judgment and claim that, “within Hammersley’s model there is no satisfactory
method for resolving this issue of how to evaluate an empirical claim” (p. 911).
Smith and Hodkinson (2005) insist that “method is thereby the crucial factor in
any judgment made about the quality of research” (p. 917) and the methods
applied in this case study research are discussed in detail in the next chapter.
3.8 Application of theories in the field of business

There are non-social approaches and social approaches to study human
behaviour. Naturalistic and individualistic explanations are the most resilient in
non-social approaches to human behaviour and, the structural theories and
interpretive theories are prominent in social approaches (Jones, 1991). Jones
criticizes these non-social approaches complaining that “we are, like animals,
biologically programmed by nature ... or human behaviour must therefore
always rest ultimately on the particular and unique psychological qualities of
individuals” (Jones, 1991, p. 92). According to Jones (1991), there are two rival
structural theories; structural-consensus theory and structural-conflict theory.
Social conflict theories are so-called because for them, there is an inherent
conflict of interest between its “haves” and “have-nots” in an unequal society
(Jones, 1991). Society as a structure of inequality; the influence of advantages
on behaviour is explained as:
Where advantages are unequally distributed, the capacities of the

advantaged to choose how to behave are much greater than those of the
disadvantaged (Jones, 1991, p. 96).
Therefore, “social conflict theory” differs from consensus theory not only
because it is interested in the way an unequal distribution of advantage in a
72
society structures behaviour but also differs because it is interested in the

conflict, not the consensus, inherent in such a society (Jones, 1991). Comparing
the two theories, he says, “The best known kind of consensus theory is
Functionalism. The best known kind of conflict theory is Marxist theory”
(Jones, 1991, p. 98). According to Denzin and Lincoln (1998) Marxism is not a
theory but a criticism and they quote from Guess and assert critical theories are
reflective:
Critical theories differ epistemologically in essential ways from theories in

the natural sciences. Theories in natural science are ‘objectifying’; critical
theories are ‘reflective’ (Guess, 1999). And Marxism, it is called criticism
and not theory, or it is interpreted politically, as a disguised version of
Marxism, or humanism (1998, p. 12).
3.9 Conclusion
The researcher’s worldview in this research belongs to the critical paradigm.
This research seeks to analyse and interpret the relationship between certain
bank-lending decisions and unequal income/wealth distribution in Sri Lanka.
And because Marxian critical theories primarily guided the data collection
process this case study research shares the qualities of both the descriptive and
explanatory type of case study research. Although studying multiple cases could
go beyond optimizing understanding towards a near generalization, the
researcher prefers to be more subjective in his interpretations of the research
outcome.
This research topic is not just a phenomenon of study--it broadly covers

contextual conditions and relies on multiple sources of evidence. This research
shares some characteristics of critical/radical study because it adds a political
agenda of exposing inequitable, unjust influences and social systems. This
research is a critical research conducted in the field of accounting using the case
study research approach/methodology. This methodological approach is
illustrated in the Figure 3-2 below showing the research paradigm, the
theoretical framework and lenses used within the case study research approach.
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Critical Paradigm
Marxian perspective; the lenses
Case study research

approach/methodology
Interviews, Questionnaires
Story building
In-depth investigation
Interpretation
and Theorization
Empirical field: Banking industry in Sri Lanka
Research question: Do credit mechanisms and

income/wealth inequality create a mutually
reinforcing cycle in Sri Lankan society?
Unit of analysis: Credit Mechanism
Figure 3-2: Lenses of the research and application of case study approach
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Chapter 4: Research methods
CHAPTER FOUR
4 RESEARCH METHODS
4.1 Introduction
When effective systems are in place for any process, the outcome is considered
as more reliable or trustworthy. Systems are treated as more effective when
appropriate methods are followed with proper procedures. Smith and Hodkinson
(2005) point out that, “no special epistemic privilege can be attached to any
particular method or set of methods” (p. 917) but they insist that:
If the proper procedures are applied, the subjectivities (e.g. opinions,

ideologies) of the knowing subject would be constrained and the knower
could thereby gain an accurate and objective depiction of reality. Those
researchers who adhered to method would thereby possess, in contrast to
all others, what one might call the well-polished Cartesian mirror of the
mind (p. 916).
This chapter describes the specific research methods, sub-methods, procedures

techniques and tools employed in this case study research. The research
methods used in this research share characteristics of both the explanatory and
descriptive type case study research methods because these case studies not
only describe but also explain the credit mechanism in Sri Lanka and explore
the motives behind the decision made.
This chapter consists of seven sections. First, it explains how the research
questions were articulated. The second section explains how the research
participants were selected and educated in this research, and third section
concerns how the cases were selected. The fourth section describes data
collection methods and interviewing techniques. The data-gathering process of
this research was carried out by employing multiple methods: a combination of
filling out questionnaires, interviewing, reconstruction of research participants’
own experiences and observation of events and document analysis. Fifthly, it
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discusses the data-description processes outlining the presentation framework of

case study research reports, which are presented in Chapter six. Sixth section
explains the data analysis strategies employed in this research. “Story building”/
“narrative analysis” (Reisseman, 1993) and “relying on theoretical premise”
(Yin, 2003) were the primary strategies used for data analysis of these case-
study “stories”. Finally, it discusses and elaborates on the interpretation and
theorization process of the research outcome.
Each one of the seven sections discussed in this chapter starts with an
introductory paragraph to provide an overview of different methods and views
relevant to the subject matter to provide a background to explain why and how
the particular method, sub-method or technique was practically employed in this
case study research. Also relevant theories are cited when justifying the
selection of method, strategy or technique.
4.2 Articulating the research questions from a real-world problem

Often, it is the researcher’s insight and experience that directs the researcher
towards a problem that needs to be researched (O'Leary, 2005). However,
figuring out a problem depends on the ontological and epistemological stance of
the researcher therefore, the chosen paradigm and theoretical perspective
provided the necessary guidance to identify the subject problem of this research;
how and why the credit mechanism contributes to income and wealth inequality.
The preliminary investigation into literature provided evidence to form the
foundation to make initial assumptions on which the research questions were
articulated. O’Leary says that “extending beyond your own workplace
experiences are problems tied to broader societal/political agendas” (p. 29) and
suggests five steps to clarify the issues. The researcher followed these five steps
as described below to articulate the research questions from the real-world
problems reviewed in the preliminary investigation as follows:
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1. What is the topic? The financial problems faced by entrepreneurs and

their connection to accounting technology, unemployment and
inequality.
2. What is the context? Banking industry and credit system in Sri Lanka
from a critical accounting perspective.
3. What is the goal of the researcher? To optimize understanding of the

credit mechanism and its link to exploitation, accounting and
income/wealth inequality in Sri Lanka.
4. What is the nature of the question? What methods (how) do credit

decision-makers follow and why?
5. Are there any potential relationships that could be explored? Loanable

money translates into social power and, social power in turn influences
credit systems that ensure more access to credit to certain groups of
applicants. Relationship between access to credit and social power.
Relationship between accounting technology and credit-decisions.
4.3 Selection of participants and cases

Access to data seems as an obstacle but is a critical part of doing research
(Feldman, Bell, & Berger, 2003). Many scholars stress the hardships that the
researchers undergo in obtaining access to private organizations, especially
banks as this could expose motives of certain powerful individuals (Lee, 2000).
Buchanan et al. (cited in Feldman et al., 2003). recommend a pragmatic, almost
opportunistic approach to fieldwork in organizations and assert that;
Research access has become more difficult to obtain, for at least two
reasons. ... We have been denied in some cases only because someone else
got there first, second, as the economic climate has become harsher, in the
private and public sectors, managers increasingly feel that they and their
staff have little time to devote to non-productive academic research
activities. (1988, p. 55).
77
Therefore, as Feldman et al. (2003) noticed, obtaining access through

friendships has become more common in organizational research where these
barriers exist for researchers. The case study site involved in this research is a
banking organisation in Sri Lanka. Banks, as the custodians of public funds, are
expected to maintain utmost faith and confidentiality and therefore, they are
protected by laws and regulations with regard to divulging customer
information. Therefore, the researcher followed the recommendation of
Feldman et al. (2003): obtaining access through friendships and also he made
use of his past banking experience as well.
4.3.1 Number of cases

The cases considered in this research are about typical credit applications and
decision-making processes practised in a commercial bank in Sri Lanka. The
number of cases studied was determined using the five criteria below:
1. Credit decision-making processes followed; formal procedures and

informal approaches.
2. Size of the credit applicant; small and medium-sized

enterprise/entrepreneurship.
3. Outcome of credit decisions made; credit was granted and denied/not

granted.
4. Hierarchical level of the decision-makers involved; top management and

medium-level management.
5. Type of the credit applicant: powerful/capable applicants and

powerless/poor applicants.
At least two cases were necessary to represent the five criteria outlined above
concurrently and/or separately. However, after going through the cases reported
by the research participants, an additional case was considered because it is
about manufacturing motor vehicles in Sri Lanka, import substitution, saving
78
foreign exchange, nationalism, patriotism and protecting the country from being
a dumping ground for used cars, etc. Also, this case provides strong support to
Marxian critical analysis of the cases. Therefore, it is concluded that a
maximum of three cases would be selected on the grounds explained in section
4.3.3.
4.3.2 Selection of participants

The participants of this research are senior bank officers having more than 20
years’ banking experience. They were invited to participate entirely on a
voluntary basis after it was explained that the research findings would be
helpful: a) to expose the weaknesses of the existing finance capital mobility
system; b) to provide an insight to policy formulators in promoting potential
entrepreneurs; and c) to accelerate the economic development of Sri Lanka, in
the final analysis.
As for the questionnaires, initially nine senior bank officers were contacted
twice over the phone during the month of June 2006 to gather basic information
about lending cases where they were involved in or aware of the decision-
making process. While conversations with two participants lasted for about 20
to 30 minutes on each occasion, the conversations with the other seven
participants lasted only about 10 to 12 minutes. The two participants, who
showed much interest and who were willing to recall and share their banking
experiences with the researcher, were selected as they seemed have adequate
information on the credit decisions that they were going to talk about. The other
seven participants had similar experiences but they appeared busy and their
recall was vague and, because only three cases were needed in this research,
they were considered only for cross-checking for accuracy of data provided by
the other participants.
4.3.3 Selection of cases

Three credit decisions were revealed by two participants. Two medium-size
credit applicants, who were socially connected, had been handled directly by the
79
Chairperson of the bank and credits had been granted. The other small-size
credit applicant had been handled by middle management. One case was
developed mainly by reconstructing the researcher’s own personal experience
supported by the comments of other research participants. Two cases were
adequate to cover the five criteria discussed above and to enfold the scope of
this research. But a supplementary case was added as a bonus because of its
interesting nature, to enhance the enthusiasm of the research and, more
importantly, it could provide more empirical evidence.
The cases reported are summarized in the following table, Table 4-1.
Table 4-1: Summary of the characteristics of the cases
Participants: Researcher Participant 1 Participant 2

Methods: Reconstruction Questionnaire Questionnaire
of experience and interviews and interviews
Decision maker
The Chairperson Case IV

Case I Case II
(Not chosen)
Middle Management Case III
According to O’Leary (2004), the selection of cases is generally done through a

strategic process. Three successful credit applications (Cases I, II and IV) were
handled by the Chairperson and only Cases I and II were considered for this
research because participants had hands-on experience with them. Case IV was
not considered because considering another typical case would not increase the
rigor of the research but instead would increase data unnecessarily. Case III, a
differently treated credit application, had been handled by middle-level
decision-makers and was considered for the research so that balanced
representation is fulfilled according to the five selection criteria discussed
above. These selecting factors are summarized in Table 4-2 below.
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All three credit applications, which have been considered for this inquiry, are
typical in nature in the Sri Lankan context as explained in the next chapter and
therefore represent the general credit culture in Sri Lanka.
Table 4-2: Five conditional criteria covered by the cases selected
Cases Case I Case II Case III

Criteria
Level of the Chairperson √ √

Decision-Maker
Middle √
Decision-making Formal √
Process
Informal √ √ √
Size of the Medium √ √

applicant
Small √
Nature of the Influential √ √

applicant
Not influential √
Credit granted √ √
Accommodation
Credit denied √
According to O’Leary (2005), “a prerequisite to all case selection should be

access” (p. 78). The researcher and the participants had substantial access to all
the cases considered and they also complied with guidelines suggested by
various scholars. The main points are:
(a) representation for typical examples of credit application and approval;
(b) relevance and interesting nature;
(c) link to the Marxian critical theories and accounting;
(d) nature of decision-making process adopted;
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(e) representation of both small and medium-size credit applications;
(f) publicity given by the media;
(g) politically topical and interesting;
(h) practical reasons; connected to researcher’s own workplace; and
(i) purposiveness; enable to make particular arguments.
All three cases are from one large private bank. In privately owned banks, the
major shareholders are heavily involved in day-to-day operations unlike in
state-owned banks. This bank enjoys approximately ten percent (8-9%) of the
market (customer deposits/assets) of the commercial banking sector in Sri
Lanka, which accounts for approximately thirty percent (41%) of the private
commercial banking market.
The research participants were in constant touch with the researcher until
completion of the case study research reports, which they volunteered to do so
showing strong support towards this research. The organizing and conducting of
interviews, and probing participants’ memories from the past five to 10 years,
etc., were challenges. However, the overwhelming support from participants is
commendable.
4.4 Data collection methods

Max (2001) identifies five main methods of qualitative data collection
(research); observation, interviewing, ethnographic field work, discourse
analysis, and textual analysis. According to Max, method is a set of techniques
that could be used in researching any group or social setting. However, some
sociologists, (for example, O’Leary, 2004) have identified discourse and textual
analysis only as qualitative data analysis strategies and not as “research
methods”.
Among these methods of data collection, observation, interviewing and textual

analysis stand undisputed for social research. Therefore, the major data
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collecting methods used in this research are interviewing supported by

document analysis wherever applicable. Interviewing technique applied in this
research is informal-unstructured which facilitates cross-questioning in the
process. These methods explained in detail in proceeding sections.
4.4.1 Reconstruction of research participants’ own experience

Reconstruction of direct observations and events “connecting with personal
experience” (Wolcott, 1994, p. 44) were the primary sources of data collection
in this research. A set of guidelines provided by Crawford and others
(Crawford, Kippax, Onyx, Gault & Benton, 1992, cited in Stephenson &
Papadopoulos, 2006, p. 58) was followed to document the life experiences of
the participants. For example, according to Crawford et al., writing memories
means “…writing a memory of a particular episode, action or event in the third
person in as much detail as is possible ... but without importing interpretation,
explanation or biography” (2006, p. 58).
The researcher has over 25 years’ experience from auditing to financial

management across industries such as manufacturing, service industries and
banking in Sri Lanka and other countries since 1983. With over nine years’
banking experience from 1994 to 2003, the researcher had the opportunity to
observe, as a regular participant at board meetings of the Soft Bank, the
decision-making procedures at the highest level of decision-making authority.
The other participants had been in banks throughout their careers and held
various positions from Teller to Chief Manager, a middle level position. The
other colleagues/interviewees (peer scholars, fellow bankers and accountants)
were contacted where necessary for cross-checking and reliability checking (see
Table 4.1).
4.4.2 Interviewing techniques

The interviews were guided primarily by questionnaire. Timing and places of
interviews were predetermined and initial preparation for interviews included
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making the interviewee comfortable, checking on their moods and attitudes and
ensuring maximum freedom from any superior influence, if any, or bias
(negative or positive). The following techniques were followed to ensure
comfortable atmosphere for colleagues/interviewees.
• The talking times were carefully selected to avoid emotion-charged

situations.
• As the researcher is well known to the interviewees personal contact

elements were kept to a minimum.
• Preliminary friendly overtures were made and moods were noted before
getting into the subject. If there was any sense gained that the
interviewees were not in a relaxed state (i.e. overly positive or negative)
s/he was contacted at a different time.
• Most interviews were conducted at weekends when they were free from
stress and any adverse influences.
• Continuous refinements were made when interviewees were on incidents

from previous interviews and therefore, saturation point was gradually
reached as repetition occurred.
• All 20 respondents, including the two research participants, were

enthusiastic because: they were participating in useful research with a
prestigious university in New Zealand; research findings would be
shared with them; and participation in future research was also
discussed.
4.4.3 Data sources

Data collection was done through both primary and secondary sources. The
primary sources are the main participants, including the researcher, for each
case study and also include cross-referencing from participants and colleagues
for further explanations on each others’ case stories at data analysis and
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interpretation stages. Secondary data mainly consist of documents and records

analysis and the sources include central bank publications, legislations and
enactments, directives issued by regulatory authorities, circulars and policy
manuals of the subject bank, annual reports, management reports such as
corporate plans and treasury reports, research reports published by stock
brokering companies and rating reports published by rating agencies such as
Capital Intelligence and FITCH, Newspapers and magazine articles and
personal communications. Research data for corruption published by
Transparency International was helpful in developing the background chapter,
Chapter five.
4.4.4 Data-collecting process

Data collection was carried out for three case-studies through reconstruction of
the participants’ own experiences (the researcher and two other research
participants) and those of 18 other colleagues. That makes total of 20
interviewees. All of them were contacted over the telephone, web based
teleconferencing, internet chats, e-mails and obtaining answers to questions via
e-mails. The research participants, including the researcher himself, were the
account managers for the identified cases and had adequate data to build stories
of the cases. These interviews were one-to-one conversations with multiple
sessions. There are several advantages of having interviews over the phone or
via e-mail and internet chat over face-to-face interviews (Krathwohl, 2009). The
main advantage of e-mail interviews is that transcripts are readily available
because they are in writing. E-mail interviewing avoids a certain level of
discomfort when discussing sensitive or controversial issues such as those in
this research; it avoids spontaneous responses and enables respondents to be
consistent in answering. As with questionnaires, it allows the interviewees more
time to prepare as questions can be given in advance.
It is noted that the views expressed by the participants were likely to be biased
given that they knew the way in which their views would be used. However, it
is an important ethical consideration that they should be informed about the aim
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of the research before the study and also the outcome of the research after
completion of the study (see Appendix 2: Participant Information Sheet).
Preliminary interviews with nine bankers lasted for about 10-30 minutes each in
June 2006, the researcher exchanged a few e-mails and had several internet
chats and several telephone conversations with the participants and
colleagues/interviewees. Based on the questionnaires and the answers provided,
two lengthy interviews were conducted (35-45 minutes each) with the
participants. Cross-checking with the other 18 colleagues/interviewees was as
short as five to 10 minutes but they were conducted in multiple sessions.
Responses to the questionnaires were used mainly to develop case-descriptions
(they are now stored as anonymous). Interviews, e-mails, internet chats and
secondary sources were used basically to fill the gaps, link events and incidents
towards building the stories, ensure accuracy. Finally those responses were used
in the stage of in-depth analysis to find answers to how and why questions
reliably.
4.4.5 Saturation
The interview data was incorporated into the analysis by building links between
events, tracing commonalities, patterns and relationships or/and posing critical
questions towards theorization, for example: “Was the decision made for
personal gratification?” After managing the three credit-client accounts for
more than five years, a lot of data was generated and the volume was adequate
to achieve saturation point. Further clarifications and verifications in the
analytical stage were helpful in reaching saturation point. Saturation of data
collection was further ensured after obtaining independent feedback from the
reviewers and the participants at presentations of conference papers.
4.4.6 Primary data collection: when, by whom, how and to what extent
After conducting preliminary interviews with nine bankers in June 2006, the
descriptive-type questionnaire (Appendix 1) together with “Participant
Information Sheet” (Appendix 2) was sent to them via e-mail in July 2006. Two
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participants responded in detail about their experiences on three credit decisions

by the end of August 2006. The researcher exchanged a few e-mails and had
several internet chats and short telephone conversations with these two
participants during the months of September and October 2006. These
communications were helpful in designing the analytical-type questionnaire
(Appendix 3) for in-depth investigation with no restrictions imposed on the
length of their answers. They were encouraged to describe in detail, as much as
possible, the series of events and incidents that they had observed and/or
experienced. They responded, with detail, events and procedures that they had
observed during the period of 1994 to 2004 with regard to the credit decision to
which they were referring. Since, these data were provided by e-mails, cross-
questions were posed repetitively by return mail, through internet chats and via
phone calls and most of them had answered promptly during the three-month
period from September to November 2006. Draft case study stories were sent to
the participants in mid-December 2006 and requested to provide feedback as to
their opinions in relation to the research topic: “the role of bank lending in
sustaining income/wealth inequality in Sri Lanka”. Their feedback was received
within one to two weeks, by the end of December 2006.
The data provided by the participants through questionnaires, e-mails and

internet-chats on Case III was nearly 4,000 words which has been transcribed to
five single spaced pages under appropriate headings. The participant who
reported on Case II provided another five pages of data which also consists of
4,000 words. Even for Case IV (not considered), one of them provided another
five pages of single-spaced data which accounted for another 3,500 words. All
these data had been received by the end of December 2006. In the meantime,
with regard to Case I, the researcher reconstructed his personal experience on a
credit-decision made by the Chairperson in the year 1997 by using the same
questionnaires. Further primary data were collected through other interviewees
and, that provided another 5,000 words of data. All the e-mails total
approximately 600 words. Therefore, primary text data available for this
research is over 16,000 words (16,260 words in Table 4-3) in addition to the
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data collected through telephone interviews and internet chats (a total of more
than 300 minutes). The data-collection techniques employed, their timing,
nature and the amount of data collected are summarized in Table 4-3 below
separately for different participants and cases.
88
Table 4-3: Primary data collection techniques & timing, nature & amount of data collected from different participants
TECHNIQUES Initial Telephone Descriptive Series of Short Interviews (ii) Analytical type Further
Interview type Questionnaire Feedback
ITEM (i) Questionnaire E-mails Chats Phone (2) Phone/e-mail
(1) (iii)
When June 2006 July-August 2006 September 2006 October-November 2006 December 2006
Case I 3 Calls
Amount N/A 650 words 13 Once 45 minutes 3700 words 100 words
of data: Case II 2 calls
Approx- 25 Minutes 680 words 14 Twice 35 minutes 2400 words 150 words
imate
Case III 4 calls
No. of
Minutes/ 26 Minutes 530 words 12 Twice 45 minutes 2800 words 200 words
Words
Cross-checking; 105 Minutes 250 words 41 Nil 30 calls 3200 words 800 words
All cases 62 minutes
Background Basic information Friendly chat with the view to design the Analytical and Verifications/
information of the on participants’ analytical type questionnaire to obtain explanatory data of the cross-
Nature of data
bank/credit applicant, experience on more explanations on the credit credit application, checking/reliabilit
nature of involvement credit decisions decisions and to obtain critical analytical approach, negotiation and y checks
of the participant considered data through cross-questioning decision-making
Total Duration (7 months) / One month Two months One month Two months One Month
Words (16,260 words) 156 Minutes 2110 words 600 words 137 Minutes 12,100 words 1,050 words
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4.4.7 Secondary data collection

Secondary data covered different sources and provided sound understanding to
design questionnaires and prepare for interviews. On the other hand, secondary
data helped to validate certain primary data provided by the participants while
learning about major events, technical details, historical development and main
organizational players and their roles. They also supported exploration of
responses during e-mail exchange, internet-chats and interviews.
Publications of the Central Bank of Sri Lanka such as annual reports, Sri Lanka
socio-economic data, quarterly research reports and press releases from 1995 to
2008 were referred to to gather data relating to regulatory directions, income
distribution, employment levels, and SME development in Sri Lanka.
Legislation and enactments such as the Banking Act 1993 and the Securities
Exchange Act 1989 provided supporting data to validate certain restrictions
imposed by the directives issued by regulatory authorities on the issues such as
single-borrower limit, liquidity requirements, capital adequacy requirements
and shareholding restrictions.
Internal circulars and policy manuals issued during the period from 1995 to
2003 of the subject bank provided data with regard to credit-evaluation
processes, credit approval authority levels and procedures relating to bad loans
and provisioning. Annual reports of the subject bank for the years from 1994 to
2007 provided data in relation to liquidity position, capital structure and
profitability. Management reports such as corporate plans for 1998 and 2003,
budgets for the period from 1998 to 2005, cash flow statements and treasury
reports provided data on efficiency and effectiveness of operations and solvency
status of the bank as well as of the credit applicants. Market statistics from
1999, 2000 and 2003 published by the Colombo Stock Exchange, research
reports published by stock brokering companies and rating reports published by
rating agencies such as Capital Intelligence and FITCH provided data on the
performance of the subject bank. Newspapers and magazine articles provided
data on publicity given for the credit decisions and also post-event/research
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performance of the credit applicants and the bank. The World Bank
Development Reports of 1987, 1995 and 2005 and the World Bank
Development Indicators Database of The World Bank were also used. Scholarly
research publications such as The West and the Rest in the International
Economic Order, Poverty Reports of 1999 published by the United Nations
Development Program provided valuable information. Research data relating to
corruption levels of various nations published in the Corruption Perception
Index of 2006 and 2007 by Transparence International were helpful. Personal
communications with fellow professionals were useful to gather data on the
financial situation of the credit applicants. Data obtained through personal
communication are mainly financial data of the credit applicants which were not
publicly available.
The gathering processes of the above-mentioned secondary data and their

sources and uses are summarized in the following Table 4-4: Secondary data
and their sources and uses.
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4: Secondary data and their sources and uses
BILITY World-wide Sri Lanka Organizational Personal
Web sites Official publications, websites, Regulatory publications Telephone conversations

Data bases newspapers, Research reports Internal documents E mails
Research reports Regulatory directives
od 1995-2008 1997-2008 1994-2004 1997-2008
ata Development- economics Development economical, Legal Public; Annual reports Financial statements
Poverty and regulatory information Confidential; policy Project proposals
Corruption Stock market and rating manuals and circulars
performances
Analysis of income Analysis on inequality and Understanding policy Understand and assess potenti
distribution and unemployment procedures Support primary data
inequality Understand legal and regulatory Assess liquidity, solvency
requirements and activity levels
Share prices
sed in Chapters II & V Chapters II, V, & VI Chapters VI &VII Chapters VI,VII&VIII
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Chapter 4: Research Methods
4.4.8 Record-keeping and storing data

All the answers and descriptions provided by the participants via e-mail have
been printed and kept as hard copies anonymously. The draft logically-arranged
“chain of evidences” (Yin, 2003, p. 105) developed from the case study data
base were sent back to the participants for verification and they were returned
with minor amendments. No special software was necessary to store or analyze
data.
The names used in this case study reports are fictitious and the most common
rationale is that “when the case study is on a controversial topic, anonymity
serves to protect the real case and its real participants” (Yin, 2003, p. 158). But
maintaining anonymity makes the mechanics of composing the case difficult,
and also some important background information had to be eliminated (Yin,
2003). Also the original documents were permanently deleted after taking prints
of the texts, (after building case stories and completing analysis and
interpretation) which are now anonymous, to ensure the confidentiality of the
participants.
Wolcott (1994), in his DAI formula, insists that description, analysis and
interpretation should be well balanced in a qualitative inquiry. However he says,
“[N]o single combination can be regarded as best, nor is a researcher required to
include all three” (p. 49).
4.5 Data description

Data description is the first part in Wolcott’s DAI formula. He identifies a
number of ways to organize and present the descriptive section of a qualitative
inquiry and insists that, “qualitative researchers need to be story tellers”
(Wolcott, 1994, p. 17). The most appropriate method for story telling” is “plot
and characters” because “individuals and sociological roles are central to a
study, the researcher may proceed as through staging a play” (Wolcott, 1994, p.
20). Polkinghorne (1987 cited in Czarniawska, 2004) says that “plot” is the
basic means that brings all the events and incidents into one meaningful whole.
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In this staging process, first, main characters are introduced, then the story is
presented following a sequential and/or a logical order, whenever appropriate.
This analytical framework provides the linking mechanism to build the stories
more logically and to depict a more meaningful picture of the case under study.
The following procedure was followed to build the case-study stories. First the
background information of main actors of the cases is provided. Then the
negotiation process between the bank and the borrower is explained. This
process is presented as a logically arranged chain of events, based on the project
proposals forwarded by clients (borrowers). Then, the researcher reports the
decisions made, with the extent of credit facilities approved, paving the way for
an in-depth analysis and, for a brainstorming exercise towards theoretical
discussion.
After providing background information on Sri Lanka in a separate chapter,

each case study report is organized and presented with separate subheading as
follows:
(a) the background of the case;
(b) the credit proposal;
(c) the negotiation process;
(d) the decisions made; and
(e) the logical analysis of how and why the decisions were made.
An example of this linking exercise of evidence from data to case-study story is

provided in the Appendix 4 for the case-study I.
In the meantime, every attempt was made to keep the case study reports as brief
as possible while providing relevant and essential data which are sufficient
enough to understand the basis for analysis and interpretation. The data
collection and analysis are iterative with a focus on “story building” (Reissman,
1993). The case study reports were repeatedly validated through inter-rater
reliability checks with the participants and colleagues to improve the credibility
94
of the reports. Therefore, data description in case study stories presented in the
narrative form is part and parcel of the data analysis process as well.
4.6 Data analysis

Data analysis methods for quantitative and qualitative data follow distinct
strategies. They are known as statistical analysis and thematic analysis. O’Leary
(2004) explains these methods as follows:
• Statistical analysis – can be descriptive (to summarize the data), to

inferential (to draw conclusions that extend beyond the immediate data)
• Thematic analysis – can include analysis of words, concepts, literary

devices, and/or non-verbal cues. Includes content, discourse, narrative,
and conversation analysis; semiotics; hermeneutics; and grounded theory
techniques (p. 11).
Thematic analysis is the data analysis method applicable to this research.

“[N]arrative analysis” or narrative mode of knowing (Polkinghorne, 1987) also
referred to as the paradigmatic mode of knowing (Bruner, 1986, cited in
Czarniawska, 2004) is the primary analytical strategy employed in this data
analysis because first, as Llewellyn (1999) claims, “narrating is a mode of
thinking and persuading that is as legitimate as calculating” (p. 220); secondly,
as Czarniawska points out, “the narrative mode of knowing consists in
organizing experience with the help of a scheme assuming the intentionality of
human action” (2004, p. 7); and also Bruner asserts that “’narrative’ in Latin
probably comes from gnarus (‘knowing’)” (1986, cited in Czarniawska, 2004,
p. 16).
Further, Llewellyn (1999) insists that, “...narratives can be explanatory but,

more significantly, for accounting and management research, narratives can
make some stronger research claims than calculative research” (Llewellyn,
1999, p. 220).
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4.6.1 Narrative approach leads to story building

The primary analyzing techniques applied within this narrative analyzing
strategy are “story building” (Reissman, 1993) and then “fleshing out”
(Wolcott, 1994, p.21). The “cross-case synthesis” (Yin, 2003, p. 109) technique
was also appropriately applied because this research is a multiple case study
research.
As Wolcott (1994) suggests, the narrative technique could be used as “a

fleshing out process of the analytical framework that guided the data collection”
(p. 21). Therefore, the following questions were raised to develop an analytical
framework for those stories in Chapter seven in order to provide for more
plausible and credible (Hammersley, 1992) interpretation in Chapter eight:
(a) How did the borrowers approach the decision-makers of the bank?
(b) How and why did the decision-makers accommodate or deny credit?
(c) How was the transaction concluded?
(d) Why were those decisions concluded in that manner?
This analytical process supports to build the cases as stories and therefore, in
this case study research the data description and data analysis activities are
complementarily linked together.
4.6.2 Theoretical propositions, rival explanations and case description

According to Yin (2003), there are three strategies available for analyzing case
study data; “relying on theoretical propositions”; “thinking about rival
explanations” and; “developing a case description” (pp. 112-114). These
strategies are not mutually exclusive in application. However, “thinking about
rival explanations” is not employed here because the focus is on Marxian
critical interpretation. Therefore, the other two strategies are appropriately
followed in analyzing data in this research, as explained in the next section.
Yin (2003) suggests that, “the first and most preferred strategy is to follow the
theoretical propositions that led to your case study” (p. 111). The theoretical
96
propositions in this research are derived from the Marxian concept of the credit
mechanism. Further, Wolcott (1994) advises “if theory (or theories) works for
you as a starting place, use it...let theories guide you...” (p. 402). Therefore,
neo-Marxian critical theory was selected to guide the researcher in analyzing
and interpreting the research questions, as justified in the preceding chapters.
However, Wolcott (1994) further insists that “if the turn to theory (theories)
does not help, then story telling is a good place to start, and good story telling is
a great way to start” (p. 402). Therefore, the data analysis methods used in this
research provide a strong foundation for data interpretation by presenting the
data in a form of story telling supported by theoretical guidance.
According to Hooper (2001), “searching for themes ... which may be linked to a
theoretical proposition” (p. 6) is the primary objective of this story telling. This
objective is achieved by organizing the data to emerge a “linking logic”
(Hooper, 2001). Therefore, this story-building structure was designed for logical
data analysis and discussion, in order to lay the general foundation and, as a
“rehearsal for interpretation” (Hooper, 2001) to explain, how and why those
decisions were made. Then possible root causes and motives were critically
examined towards theorization using qualitative validity techniques such as:
collaborative evidence such as explanations and interpretations from the
research participants, and inter-rater reliability checks (Schutt, 2001).
4.7 Reliability/credibility and validity/conformability

Reliability of data in qualitative data primarily depends on the rigour applied by
the researcher. A triangulation of various data collecting methods was employed
to link the events and incidents reported by the participants towards story
building. O’Leary (2004) suggests an additional indicator that can be used to
assess credibility in change-oriented research: “usefulness”. If a research
objective is to expose an inequitable/unjust situation, then a measure of success
or credibility will be how useful the research outcome is in proposing a remedy.
Therefore, considering the seriousness of the research problem in this study, it
would be appropriate to claim that the credibility of this research outcome is
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high because the “usefulness” of the findings is substantial in exposing certain

inequitable social mechanisms.
All preventive and remedial measures were followed to ensure the reliability
and validity of data collected in this research: use of pre-tested questionnaires;
improving question order, format and removal of inappropriate questions
including “biasing”, “negative”, and “double barrel” questions (Krathwohl,
2009) life event calendars (to assist in avoiding memory loss); continuous
improvement of cross-checking techniques and obtaining prompt feedback.
Extensive efforts were made to maintain interviewee enthusiasm and a letter of
participation was promised.
4.7.1 Verification process to ensure reliability of data

Reliability of data is significantly enhanced by the triangulation of data from
multiple cases. The main characters of the case study stories are the four
decision-makers (the Chairperson in respect of Cases I & II and the Branch
Manager, Recovery Manager and Chief Recovery Manager in respect of the
third case) and the three credit applicants themselves: Tony, Yousef and Silva.
The Chairperson was personally observed by the researcher for nine years.
Tony’s account was handled by the researcher for two years and the researcher
had the opportunity of sitting with the board of the Tony Group as the
representative of the Soft Bank during those two years.
Tony, of Case I, has been in business for more than 35 years. Tony was
frequently interviewed in the media for his contribution to the nation as the one
of the largest foreign exchange earners and employment generators in Sri
Lanka. As such, there is extensive public information available through
independent media; therefore these reports are auditable if Tony’s identity is
revealed.
Yousef, of Case II, and his automobile manufacturing businesses had wide
publicity in Sri Lanka. There were numerous news articles about his
98
automobiles and his business plans. The researcher was able to contact Yousef’s
accountant for verification of projections as well as actual performance.
Officers of the Registrar of Motor Vehicles were contacted to verify certain
assertions made by research participants and media reports.
In fact, most of the information analysed in this research where the Chairperson
is involved as the decision-maker is freely available to the general public of Sri
Lanka.
The credit managers of all credit applicants were thoroughly involved in this
research. The researcher made the maximum efforts (choosing appropriate
times, place etc.) possible to minimize bias and the effects of superior influence.
Silva (Case III) cannot be contacted as he was not in business but the researcher
managed to contact all other players: the Branch Manager, the Credit Manager,
Recovery Manager (I) and the Senior Recovery Manager (II).
The researcher had constant contact with his colleagues (contemporary fellow
bankers and accountants) and made use of that social network to gather very
pertinent, confidential and useful data.
An analysis of all the interviewees at initial, descriptive and analytical data

collection stages is given in the Table 4.1 below:
Table 4-5: Number of interviewees
Participants Colleagues/interviewees Total

Data collection stage
Case descriptions 3 12 15
Analysis 3 18 21
Saturation 3 16 19
Total 3 18 21
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4.7.2 Ensuring external validity/generalisability

External validity refers to the generalisability of study findings to other
situations while internal validity refers to how well the study provides evidence
for the causal process investigated. In any study, there is a trade-off between
internal validity and external validity (Krathwohl, 2009). Although studies with
large representative samples have high external validity, they may suffer from
low internal validity. On the other hand, single case studies with thick
descriptions (Geertz, 1973) have high internal validity. Internal validity is high
in this research as it discusses processes, patterns and relationships in an
organization with three case studies. However, these types of case studies may
lack external validity. In the present study, the researcher attempted to
maximize both internal validity and external validity by studying a
representative bank with three representative cases.
Table 4.4 below shows the level of representativeness of the credit applicants in
Sri Lankan enterprise financing through bank loans. The Soft Bank typically
represents the private commercial banking sector as elaborated in Table 4.5
below. All appropriate, relevant and stringent measures were taken to ensure the
validity of this research. These were as follows:
A sample of initial contact persons was selected to reflect a cross-section of the

banking culture in Sri Lanka. Extremes were avoided:
• Not too young or too old (from 42 to 62 years of age);
• From different levels of decision-making (senior, middle and front;

branch manager, credit manager);
• Different levels of qualifications—professionals, part qualified and

experienced;
• Different departments – large and medium credit management, loans in

the recoveries department and branch level credit; and
• No relatives, friends or connected parties of any credit applicants and

credit decision-makers.
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4.7.2.1 Representation of the cases
Twelve common characteristics of credit applicants were tested to assess the

representativeness of the three credit applicants studied in this research as
tabulated in Table 4.2 below. All the bank officers contacted for this assessment
have had branch manager positions in various parts of the country. They were of
the view that ordinary credit applicants face problems with collateral, rigid
credit evaluation rules and lack of support from accountants with regard to the
accessibility, affordability and availability of credit. Also they agree that
medium and large credit applicants are beyond their authority and are mostly
accommodated with extra effort by the senior officers. Customer get-togethers
are common in all Sri Lankan banks and all respondents agree that only large
and medium sized clients are invited to such functions. Representation is ranked
as high, average and low compared with other credit applicants the respondents
had been aware of for the last 10-20 years.
101
Table 4-6: An assessment of representation of Sri Lankan credit applicants

in general by the credit applicants considered
Level of representation
Tony Yusef Silva

Characteristic
Legal form of the Average; with 2-5 High; with 1-3 private High; sole
business entity private companies companies proprietorship
Ownership High; with 80% with High; with 80% with High; with 100%
owner-manager owner-manager with owner-manager
Credit amount Low; US$4 million is Average; with High; with

involved too large US$500,000 US$20,000
Type of business High; labour Low; car manufacturing High; labour

intensive in Sri Lanka intensive
Employment Low (exceptionally High High

generation high generation)
National interest High with large High with unique import High with high
exports substitution employment
Number of banks Low (many banks) High (a few banks) High (only one bank)
involved
Problems with High Average High

collaterals
Bank’s authority Average with senior Average with senior High with middle
level involved management management management
Informal approach High High High

by the applicant
Informal methods by High High Average

the decision-makers
Success in credit High High Low

approval
Source: Compiled by the author through annual reports and interviews
Ranking high and average on most characteristics, it is evident that the three
cases selected represent the SME sector in Sri Lanka in general.
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4.7.2.2 Representation of the Soft Bank
Sri Lanka has a total of 22 commercial banks equally distributed between

domestic and foreign (11 banks each) and, out of 11 domestic banks, nine
private domestic banks, including the Soft Bank, share 40 percent of all banking
business while the two state-owned banks share 57.5 percent in terms of branch
distribution and approximately 41.1 percent in deposits, loans, assets and
turnover in 2004 as well. That leaves only 2.5 percent of banking business to all
of 11 foreign bank branches (The Central Bank of Sri Lanka, 2008). The Soft
Bank alone enjoyed a 8-9 percent of market share in 2004.
Sri Lankan commercial banking business distribution is condensed and

compared with the Soft Bank in the following Table 4.3.
Table 4-7: Distribution of market share of commercial banking industry in

Sri Lanka in 2004 (percentages are given in parentheses)
State banks Domestic Foreign Total The Soft

private banks Bank
Item
banks
Number of 778 (57.5) 535 (40) 39 (2.5) 1352 110 (8)

Branches
Assets 576 (56.2) 423 (41.1) 29 (2.7) 1028 88.5 (8.6)

LKR billions
Source; CBSL, 2008
A set of common characteristics were tested to establish the representativeness

of the Soft Bank compared to other domestic private banks which share 41
percent of the banking business in Sri Lanka. In Table 4.4, fourteen such
characteristics were tested with interviewees to assess the level of
representativeness of the Soft Bank in the Sri Lankan private banking sector.
The representation level is indicated by Yes/High, Average/Likely/Medium and
No/Low. The banks numbered as 1-5 represent listed privately owned
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commercial banks, number 5 being the Soft Bank and number 6 comprises all
other small/unlisted/private commercial banks.
Table 4-8: An assessment of representation of private banks in Sri Lankan

compared to the Soft Bank
Level of representation
Bank 1 2 3 4 5 6
Characteristic
A few large shareholders Yes Likely Yes Yes Yes Yes
Large number of High Likely High Likely High Low

shareholders
Large shareholders interfere Yes Likely Yes Likely Yes Yes

in decision-making
Bureaucratic management Yes Yes Yes Yes Yes Yes

style
Rigid management policies Yes Yes Yes Yes Yes Yes

and procedures
Regulated closely by CBSL Yes Yes Yes Yes Yes Yes
The external auditors are Yes Yes Yes Yes Yes Average
from Big Four audit firms
Positive perception of Medium High High High Low N/A

investors; Measured by the
PE ratio
Branches are distributed all Yes Yes Yes Yes Yes No

over the island
Catering to the same market Yes Yes Likely Likely Yes Likely
Similar deposit base Yes High High High Yes Average

structure
Catering to corporate clients Average High Average Average Average Low
Level of non- performing High Low Medium Low High Medium

loans
Level of similarity in High High High High High Average

transaction processing
104
Source: Compiled by the author through annual reports and interviews
In addition to the above characteristics, they also share similar features such as:
management hierarchy comprising of 15 levels (level one being the lowest
grade for drivers and peons and level 15 being the General Manager/ Chief
Executive Officer); very similar levels of decision-making authority assigned to
each grade, similar salaries and perks pertaining to each grade, same levels of
capital adequacy and liquidity and similar physical appearance of head offices
and branch offices. Also, according to interviewees, though the Chairpersons of
other banks (private or state owned) do not exercise executive powers,
directions are commonly given by Chairpersons to Management and when this
is done credit is granted in most cases.
Given the evidence for commonalities and the patterns observed in the three
cases and, based on the 12 and 14 characteristics tested for representation of the
cases and the Soft Bank respectively, the researcher argues that certain
relationships are common in the Sri Lankan banking sector. Therefore, this
research demonstrates nature of the credit culture of the Soft Bank which may
be taken as a representative bank within the private banking industry in Sri
Lanka. Hence, though the original aim of the research was not really to
generalise the findings to claim a credit culture applicable to Sri Lanka, this
representativeness encouraged the researcher to pose a theory that the credit
culture of the Soft Bank may be replicated in other Sri Lankan private banks.
4.8 Interpretation and theorization

As emphasized by Stake (2005) this research too was designed primarily “to
optimize understanding of the case rather than to generalize beyond it” (p. 443).
Further, Bailey (2007) asserts that regardless of the analytical strategy applied,
the goal of a research study remains as “to understand experiences and
meanings attached to them” (p. 175). According to Bailey (2007), creativity
plays a very important role in interpreting data and Jorgensen (1989) advises the
researcher to imagine saying that, “use your imagination! The analysis of data
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leading to discovery requires creativity” (p. 110 cited in Bailey, 2007, p. 175).
Therefore, interpretation is seen in a more artistic sense rather than a scientific
exercise in qualitative research. Bude (2004) says that, interpretation is an art,
“to dealing with ambiguities, handling limitations and mixing separate
components” (p. 321).
4.8.1 Inductive generalization and abductive inferencing/reasoning

Bude (2004) promotes abductive inferencing/reasoning as a more artistic way of
interpretation, quoting from Charles Sanders Peirce (1839-1914) as follows:
Charles Sanders Peirce, in his famous methodology of “abductive

inferencing” saw a way beyond inductive security of generalization and
deductive certainty of derivation: deduction proves that, for logical
reasons, something must be the case; induction demonstrates that there is
empirical evidence that something is truly so; abduction, by contrast,
merely supposes that something might be the case. It therefore abandons
the solid ground of prediction and testing in order to introduce a new idea
or to understand a new phenomenon (p. 322).
The strategies applied for the analysis of research data provide necessary
background to think about data and, “this is step along the way to building up
ideas and theories” (Coffey & Atkinson, 1996, p. 139). The widely accepted
polar-opposite logics for interpreting research data are inductive generalization
and deductive derivation. Hooper (2001) says, “...philosophically, it is argued,
inductive and deductive methods cannot be combined” (p. 4). In this light, it is
worth noting the comments of Coffey and Atkinson on these two logics:
Inductivism is based on the presumption that, laws or generalizations can

be developed from the accumulation of observations and cases that the
close inspection of ever more data can be made to reveal regularities. The
polar opposite—a strict adherence to deductive principles—...is founded
on the assertion that empirical research can be used only to test
theories...Neither of the polar types is satisfactory in informing the actual
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generation of ideas...One needs to break free of the strait-jackets imposed

by conventional logic (1996, p. 155-156).
Much interpretation of this research relies on inductive generalizations

especially in explaining the ‘how’ questions and, also on abductive
inferencing/reasoning especially in explaining most of the ‘why’ questions.
Therefore, the researcher first identifies a particular phenomenon; a surprising
or anomalous finding, then tries to relate that phenomenon to broader concepts.
Abductive inference/reasoning suggests to go beyond the data themselves and
the researcher should not have to be restricted to fit themselves into existing
ideas. Therefore, abductive inference is more appropriate for qualitative
inquiry--an open-minded intellectual approach is normally advocated (Kelle,
1995b, cited in Coffey & Atkinson, 1996). However, the inductive approach is
more applicable to answer “how” questions when the conclusions can be
generalized from empirical evidence.
4.8.2 Subjectivism, objectivism, constructivism and criticism

In explaining interpretation, Umberto Eco (1990) suggests that:
To interpret means to react to the text of the world or to the world of a text
by producing other texts...The problem is not to challenge the old idea that
the world is a text which can be interpreted, but rather to decide whether it
has a fixed meaning, many possible meanings, or none at all (p. 23).
However, Czarniawska (2004) says “explanation is often set in contrast to

interpretation ... but all inquiry asks both ‘what does this text say? And ‘how
come?’ ” (p. 63). Czarniawska classifies these different schools of thought
concerning the modes of explanations or interpretation into three groups:
Subjectivists (voluntarists), Objectivists (determinists) and Constructivists. She
says that subjectivism is the “most traditional way of explaining texts...by
deducing the intentions of the authors...comes from reading Bible, Talmud or
Koran as authored by God” (p. 63). In contrast, she suggests “the meaning of a
text is neither to be ‘found’ nor ‘created’ from nothing; it is constructed anew
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from what already exists” (Czarniawska, 2004, p. 66). But she agrees that “there
are great many excellent explanations of subjectivists and objectivists type” (p.
69).
On the other hand, the democratic nature of interpretation is well accepted,

appreciated and consciously applied and this theoretical perspective is often
called critical Marxism (Sherman, 1995). This research is about social injustice.
Therefore, critical interpretation is deemed more appropriate in interpreting the
outcome of this research as explained in the following section.
4.8.3 Interpretation of social injustice

The interpretations provided by the modern critical theorists (for example,
Allahar, 2004; De Brunhoff, 2003; Faulks, 1999; Goulet, 2002; Gray et al.,
1996; Lapavistas, 1994; 1997; 2000; 2003; M. Moore, 1997; Neimark, 1995;
Saad-Filho, 2003; Passe-Smith, 2003; Tinker & Gray, 2003; Tinker, 1980;
1999) based on Marxian theories provide stronger framework for explaining
social injustice.
It is worth noting Czarniawska’s arguments on discovering knowledge: “The

task of critical social sciences – and therefore of critical reading – is to unmask
interests that underlie the enterprise of knowledge (Habermas, 1972)” (2004, p.
66). Czarniawska argues that the Marxist theory of interpretation, which is
based on “dialectical criticism” (Jameson, 1981), “does not analyze isolated
works; each work is but a part of a wider historical situation, and so is each
reading. A dialectical criticism seeks to unmask the surface … to reach the
depth of the concrete historical ideology...” (p. 66).
In line with this argument, because this research problem is a part and parcel of
the problems of the Third World hegemonic-economic systems (see Saad-Filho,
2003) and because it is a part of a wider historical ideology, the socio-economic
issues, especially in the Third World which cannot be “isolated” from the
present-day globalized world economy (see Robinson, 2004; Goulet, 2002;
Perelman, 2003) the Marxian interpretations are appropriately employed in
108
explaining the research findings. As (House, 2005) says, “there are political
reasons why qualitative studies were viewed as too subjective and illegitimate.
Ultimately, it has to do with social justice” (p. 1074) or injustice.
4.8.4 Theoretical framework

According to Llewellyn’s “differential realities”, this research study overlaps
mainly structural and cultural realities because; “the structural world is
dependent upon human activity – it is not self subsistent” (2007, p. 60). The
realities which the researcher attempts to discover and explain are not “the
mental world” because, the research findings are not private to the researcher
and they do exist outside human minds. The Marxian analysis and
interpretations used in this research are not orthodox Marxian “objectivist
explanations” or “constructivist-subjectivist claims” because, as Smith and
Hodkinson (2005) point out “the subject-object dualism of empiricism is
untenable” (p. 915) and “there is no possibility of the objective stance or view –
often called the ‘God’s eye’ point of view” (p. 917). Therefore, as Bude (2004)
suggests, the more appropriate method of understanding the outcome of this
research is “abductive inferencing or reasoning...[means] ‘something might be
the case’ ” (p. 322) as opposed to deductive derivation where something must be
the case. But this abductive inferencing is well supported by inductive reasoning
wherever possible and applicable which “demonstrates that there is empirical
evidence that something is truly so” (p. 322).
The purpose of this case study research is “to develop a form of cultural
criticism revealing power dynamics within social and cultural texts” (Kincheloe
& McLaren, 2005, p. 311). According to Hooper (2001), “the purpose of a case
study may be to develop a theory or test a theory, or use a theory to critically
analyze phenomena” (p. 6). This research is primarily designed to use Marxian
theories to critically analyze the credit mechanism in Sri Lanka.
109
Chapter 5: Background; Sri Lanka
110
CHAPTER FIVE
5 BACKGROUND: SRI LANKA
5.1 Introduction
This chapter provides information about Sri Lanka and its people--the socio-
cultural, economic and political background of the case studies discussed in this
research. Changes in socio-cultural values, beliefs and habits of a society are
strongly intertwined with the historical development of the economic and
political systems within it.
Sri Lanka covers 65,610 square kilometres. The population was 3.5 million a
century ago in 1901 and 20 million in 2007. This tiny island has characterized
its nationality differently in the midst of numerous invasions from the South, the
East and the West. This information is useful in understanding the significance
of the role played by such invasions and colonisations in influencing the
lifestyle of its people. The chapter proceeds, first outlining briefly the political
history of the island. Second, it explains how these changes in governance
influenced the socio-cultural habits and values of Lankan society especially
with regard to decision-making methods and monetary systems. It also
compares the inequality status of Sri Lanka with global inequality.
5.2 History
Sri Lanka has been ruled by more than 200 Kings since 543 B.C. In 1815 Sri
Lanka became a colony of Great Britain. Beginning with a land-based capitalist
structure after gaining independence in 1948 Sri Lanka followed mixed
economic policies of both capitalism and socialism. In 1977, a capitalist-centred
(right-wing) government revolutionized Sri Lankan politics, marking the end of
the state-centred economic system. Stimulated by IMF and World Bank
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initiatives, public enterprises were seen as economic burdens and the

government sought a more competitive market environment and privatization.
5.2.1 Currency, mortgages and money-interest in medieval times
According to Siriweera (2004), medieval literature refers to kahavanu a kind of

currency used by villagers to pay for ghee, venison and lime and coins have
been found at sites in the city of Anuradhapura in layers datable to a period
around 100 B.C. People have deposited their money for interest returns and,
even borrowed money against their assets and paid interest similar to present-
day mortgages. Siriweera states that,
...currency was deposited in guilds in expectation of a return in interest

payment and there were instances of obtaining currency loans on interest
(poli) by individuals on trust or by mortgage (ukas) of movable or
immovable property (2004, p. 214).
5.2.2 Ceylon under British rule (1796-1948)
On 2nd March 1815, a convention was held at Kandy between the British
governors and the chiefs representing the people of (then) Ceylon. Ceylon
acquired a typical colonial export economy supplying the world market with a
few primary products and importing consumer goods. British governors
revolutionized the economy of Sri Lanka by introducing an export-oriented
agriculture-centred economy. Sri Lanka soon became world renowned for
producing drinking tea, brand-named Ceylon Tea. Sri Lankan society
transformed dramatically embracing Western customs and practices and classes
started replacing castes with the power of money and land capital. The next
section describes these changes briefly. Between 1885 and 1915 the Ceylon
economy had grown rapidly and major contribution was from exports
(Jayawardena, 1972). As a result of these capitalist industrial developments, the
educated peasant villagers not only got a break from agricultural work but also
had an opportunity to break through into the urbanized middle-class pattern of
living (Jayawardena, 1972). During this time radical social movements too
started raising their heads, apart from moderate national movements and anti-
112
Christian campaigns. The Donoughmore reforms were implemented and a State

Council was elected under universal suffrage in 1931, a political event which
marked a significant breakthrough by the Ceylonese middle class into
parliamentary politics (Jayawardena, 1972).
5.2.3 Voting rights and Marxist influence
Sri Lanka was the first Asian electorate to enjoy the benefits of universal
suffrage just after two years after Britain and 20 years ahead of India (M U De
Silva & Wriggins, 1988). Meanwhile, British-educated Marxist political leaders
also appeared, challenged the conservative labour organizations and took over
the leadership of urban labour in the mid 1930’s. They became popular not only
among the urban working class but also among the rural farmers who found a
similarity between Buddhism and Marxism. This demonstrates a marked
difference between Hindu beliefs and Buddhist beliefs because, in India Marxist
ideology was rejected by the masses as Max Webber explains:
a religious ordinary peasant who abides by prescribed traditions, never

demands over-pay, never deceives as to quality...and as long as the karma
doctrine was unshaken, revolutionary ideas or progressivism were
inconceivable (Webber, 1958, p. 123).
According to Jayawardena (2000), the economic activity of Sri Lankan

capitalists during the 19th century was mildly entrepreneurial. She says that, Sri
Lanka like other Third World countries, was neither wholly capitalist nor feudal
but comprised features of both because development of capitalism is an
“unfinished business”. Therefore, as in many colonies, the Sri Lankan
bourgeoisie was a kind of colonial type of capitalist and a class dependent on
protection and opportunities provided by the colonial state (Jayawardena, 2000).
According to Jayawardena, this double-headed class mostly imitated the ruling
British including embracing Christianity but imposed their power on the general
public as in the medieval king-ship era and showed willingness to help others
by sponsoring social and religious activities which in turn rewarded them by
other means such as access to resources without competition and honorary
recognitions. She explains this situation as follows:
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Sri Lankan bourgeoisie was the product of colonial form of capitalist

production it was an appendage of imperialism, a dependent as opposed to
an independent class...[their] life styles were imitative of a feudal
aristocracy and land owning gentry, and acts of philanthropy and the
funding of social and religious causes (which brought rewards...) further
enhanced the prestige and status of the class (Jayawardena, 2000, p. ix).
The next section explains the post-colonial socio-economic and political

background of Sri Lanka after gaining its independence on 4th February 1948.
5.2.4 Post-colonial administration after independence in 1948
Sri Lanka has doubled its multi-ethnic population to 20 million during the past
50 years after gaining independence, surpassing a population density of 320
persons per square kilometre by 2007 (The Central Intelligence Agency, 2007).
The ethnic conflict and the terrorist activities led to migration and the majority
of such migrants are Tamils the representation of which is now only 3.9%.
There are two principal languages used, Sinhala (75%), and Tamil (25%). Most
of the world’s great religions are practised with the majority of people being
Buddhists (69.1%) and others consisting of Muslim 7.6%, Hindu 7.1%,
Christian 6.2%, unspecified 10% (Amnesty International, 1993).
Sri Lanka was awarded its independence in 1948 without much of the
bloodshed experienced in India. The governments elected followed mixed
economic policies of capitalism (open market system) and socialism (centrally
planned system). Beginning with a feudal-capitalist structure (land-owning
capitalist structure) in the 1950s, it embraced policies of a planned economy in
the 1960s and then it made a revolutionary change to follow market-oriented
growth policies in the mid 1970s with restrictions on off-shore capital transfers,
and some import taxes. After practising open market economic policies for 29
years, Sri Lanka improved its GNP per capita from US$250 in 1977 to
US$4,700 in 2006 in spite of a 20-year civil war and a bloody insurrection of
“Marxist” youth in the South from 1987-89. On both occasions Sri Lanka lost
more than 100,000 lives (Amnesty International, 1993).
114
The whole Third World including Sri Lanka is struggling to improve their living
standards, infrastructure facilities and comfort levels. However, the statistics
and analysis below show that most of those countries have not shown
satisfactory progress, either in their development activities or their social well-
being when compared to that of developed nations. There are various theories
which have been presented to explain this situation. This research also attempts
to explore the possible root-causes for this social problem with a view to assist
the policy-makers of developing countries to find a solution.
5.3 Impact of invasions and transformation
The ancient system in Lanka was such that the king was supreme, and his
autocratic power was controlled only by custom and by the fear of assassination
(Codrington, 1926). The administration of justice was in the hands of the chiefs
and headmen, all of whom had the power of inflicting slight punishments and
fines. The king alone had the power of life and death, and the Great Court
consisting of the principal chiefs could only impose such punishments as were
within the competence of the Adigars (ministers); all important matters were
referred to the king.
Traditionally, Sri Lankans with their Buddhist-Hindu culture are scared of

wrongdoing and wrong thinking because of their beliefs in karmic repercussion
either in the present life or even in other lives after death. The primary feature
of Sri Lankan culture was a self-sufficient agricultural lifestyle based on non-
violence and mutual cooperation (De Silva, 1997). According to (Endagama,
1997) the ancient Sri Lankan people did not have either the habit or the
necessity to save money because of their simple lifestyle. However, she says
that from the 16th century onwards the political, social, economical and cultural
environment started changing because of the arrival of Europeans. When the
Portuguese arrived in 1505, the whole island of Sri Lanka had been ruled as a
kingdom. This crown-based administration system had been deeply rooted
according to the traditional socio-economic values of Sri Lankan culture for 20
centuries, since 483 B.C. The sovereign-authority of the King was a harmless
115
dictatorship and the people had the faith and expectation that the King would
protect their customs and values which were strongly linked to the prevailing
unwritten traditions (Codrington, 1926).
5.3.1 Early signs of informal methods
However, changes started appearing in the coastal areas where preferential

terms were followed by the rulers towards Europeans and converted Lankans
especially under the monopolistic nature of trade by the Portuguese and the
Dutch. Also, according to Codrington (1926), the Kandyan Court never
observed any treaty obligation. Codrington says that many articles have been
published on the iniquities and unjust approaches of the Portuguese. Corruption
and discrimination prevailed in all departments of the administration therefore,
the Sinhala chose to abide by their own laws at the meeting at Malwana in 1597.
Codrington further states that:
Under the old government the chiefs had a wholesome fear of the king,
who, if a strong ruler, suffered no tyrant but himself; under the Portuguese
every lord of a village, every petty headman, assumed powers which
would not have been tolerated before (1926, p. 160).
For example, the cinnamon peelers (the people who extract cinnamon from
cinnamon trees) rose against their headmen, but were subdued, punished and
deprived of many privileges (Jayawardena, 2000). By a system of rules the
Dutch also kept a tight control of all sections of the people in the area. The
people needed permission to start their trades and introduction of strict price
control of products in addition to moral supervision by the puritanical Dutch
rulers (De Silva, 1997) would have paved the way for the people to exploit
informal means to carry out their business in more competitive manner.
The grievances of the people in general were many. Fines were imposed for
failure of their children to attend school; the cultivation of chenas or low jungle
periodically cleared and sown was wrongfully monopolized by the headmen.
Watubadda, a tax on certain gardens was introduced. The cinnamon peelers
complained of unjust treatment by their headmen and of heavy taxation. In this
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regard, De Silva quotes from the writings of Franciscan Reverend Trinidade and
Jesuit Reverend Kerose and says that:
The implementation of the orders to maintain the law and order was not
successful because the Portuguese bureaucrats at every level had been
corrupt to some extent. They neglected the directions from the Portuguese
Governor as well as from the provincial King. The people in these areas
lost the faith on the Portuguese administration on the matters related to
justice, because they had realized that the bureaucrats were out of control.
Proper investigation was not carried out for the complaints made by the
people against corruption (De Silva, 1997, p. 117-8).
With regard to British mercantilism, according to Jayawardena, trade came

under rigid mercantilist control and restricted by “licences”. Codrington says
that,
it must be remembered that the worst enemies of the villager often were
his own fellow-countrymen; the Vidanes were as bad as any Portuguese
village lord, and the Lascarins in 1636 actually prayed for Portuguese
instead of Sinhala Mudaliyars and Arachchis, a prayer curiously
reminiscent of a similar request by the people at Kandy in 1815 (1926, p.
157).
5.3.2 Development of corruption
This situation created a lot of pressure and unrest among the people in the
coastal areas and the evils such as corruption, discrimination and favouritism
had gained more recognition than law, order and justice. According to De Silva,
(1997) this is a critical factor for the Portuguese in losing the battle against the
King with the new arrivals of Dutch. Another factor that worked against
Portuguese in winning the hearts of the people was their “by-force” conversion
policy imposed on Buddhists and Hindus. Under the Sinhala kingdom system
every citizen was entitled to and owned a piece of land. But Portuguese
Governors disregarded this rule and confiscated lands and transferred them to
affluent people and government bureaucrats (Codrington, 1960).
They rented these lands to ordinary people for cultivation on a crop-sharing

basis called the ande system (Chandraprema, 1997; M U De Silva & Wriggins,
117
1988). A system of official shares offered for government service was

administered objectively under the Sinhala kingdom system, but this system
was abandoned by the Portuguese governors and allowed the official share to
pass to the next generation making them official owners of those lands over
time. Therefore, a powerful class, irrespective of caste, had been created as
land owners without any service to the government or the people. On the other
hand De Silva says, quoting from a Portuguese writer Ruberu, that “bureaucrats
had the power to deliver even death punishment to an accused without a proper
trial” (p. 118) which was the right of only the King before.
Rich people from castes such as Karawa (fishermen) and Salagama (cinnamon
peelers), who are considered as lower castes compared to the castes of farmers
and King’s administrators, converted to Catholicism and obtained positions in
the administration. Ordinary people shifted their faith from law, order and
justice to bribes, favouritism and cronyism. The lifestyles started changing from
peasant, non-violent mutual cooporation towards enterprising competition.
An increase of corruption in the state bureaucracy was discussed by several

scholars (for example,Liyanage, 1997; Ponnambalam, 1980; Ratnapala, 1986;
Srathchandra, 1982)) during the centre-left (socialist-centred) governance of “a
curse of seven years” from 1970 to 1977. The perception towards the
government was such that, the people elected the exact opposite right-wing
(capitalist-centered) United National Party (UNP) government with a historical
landslide victory of 80 percent of the seats in the parliament in the 1977 general
election. But the criticism is worse for corruption as well as deterioration of the
socio-cultural value system (The Central Bank of Sri Lanka, 2008) during the
17 years of right-wing liberal economic governance which was defeated again
decisively by the people in 1994 and the impact is such that the UNP has not
won a single election for the last 16 years.
5.3.3 Interpretation of traditional methods

However, it is important to recognise methods such as bribes differently from
traditional methods of greeting the superiors by way of dekum or presents which
118
were given in public on appointment. The King received these presents also at
the New Year, at those festivals the chiefs benefited as well, receiving presents
from all the minor headmen whose turn of office only lasted for a year. The
system still continues in the Kandyan temples.
5.3.4 Monetary system
There was a popular credit system which prevailed in Sri Lanka known as
Seettu; pooling of money by a group of people and each takes a turn to enjoy
the total amount of money, the order of turn taking was determined by a lottery
system. If anyone was in urgent need of money he/she could demand a turn
offering a discount which was distributed proportionate to the contribution to
the pool. It is similar to zero-coupon bond where the interest is paid up-front.
The first bank in Ceylon was established in 1841 (Andree, 1863). By 2003, Sri
Lanka had 22 commercial banks; 11 local and 11 foreign banks. Out of 11 local
banks the two state banks dominated the banking industry with a 60 percent
market share. Out of nine private commercial banks, four listed banks in the
Colombo Stock Exchange accounted for another 34 percent of the banking
market. There were nearly 1300 bank branches and offices all over the island
with around 500 automated teller machines (ATMs) (The Central Bank of Sri
Lanka, 2008). ATMs were introduced as early as 1988. However, according to
the Governor of the Central Bank of Sri Lanka, the informal money market still
accounted for approximately 30-40% of the total money market operations of
Sri Lanka (The Island, 1999).
5.4 Bank supervision regulatory framework in Sri Lanka

The Central Bank of Sri Lanka (CBSL) confirms to international standards in
their regulatory framework. The banking regulatory framework consists of the
Banking Act No. 30 of 1988 and its amendments, directives, circulars and
Guidelines issued by the Bank Supervision department of CBSL based on the
standards set by the Basel Agreement to maintain healthy balance sheet for
banks. The Bank Supervision Department of the Central Bank of Sri Lanka
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monitors compliance with regulatory and statutory requirements in force at any

time and attempt further strengthening the regulatory framework to meet the
new developments and challenges in the banking sector and the changes in the
international regulatory standards. They monitor, on a regular basis, the
statutory requirements such as: ownership structure; capital adequacy; single
borrower exposure; interest recognition; provisioning for bad loans; corporate
governance; and timely publication of Financial Results. The Financial
Intelligence Unit of CBSL monitors compliance with requirements arising out
of the legislation on Anti Money Laundering, Prevention of Terrorist Financing,
and Financial Transaction Reporting Acts.
The regulation and supervision of licensed banks in Sri Lanka are governed by a
number of enactments, legislation and supervisory measures. The primary such
Acts are listed below:
1. Monetary Law Act No. 58 of 1949;

2. The Banking Act No.30 of 1988 and Banking (Amendment ) Act No. 33
of 1995, Banking (Amendment ) Act No. 46 of 2006 and No. 15 of
2006;
3. Exchange Control Act No. 24 of 1953 and its amendments;
4. Payment and Settlement Systems Act No. 28 of 2005; and
5. Financial Transactions Reporting Act No. 6 of 2006.
The laws empower the Central Bank to implement the following:
1. Grant approval for the establishing and closing of banks, branches and
other business outlets of banks;
2. Issue prudential directions, determinations and orders to banks, under
statutes;
3. Conduct off-site and on-site examination of banks; and
4. The enforcement of regulatory actions and the resolution of weak banks.
For these purposes, the Central Bank has requested such banks appoint a
suitable senior staff member as a Compliance Officer. However, all banks need
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to file Compliance Reports on a monthly and quarterly basis and it is mandatory

for the CEO of the bank to sign such Compliance Reports.
Minimum entry capital requirement: In 2005, the Central Bank increased the
minimum entry capital requirement for Licensed Commercial Banks to Rs.
2,500 million (from Rs.500 million) and for Licensed Specialised Banks to
Rs.1,500 million (from Rs.200 million) (Direction No 2, 2007, The Central
Bank of Sri Lanka, 1988-2008).
External auditors: Recently the CBSL warned external auditors of banks not to
be too lenient towards compliance requirements and suggested that banks
should change their auditors every five years (Circular No. BS/38/90, The
Central Bank of Sri Lanka, 1988-2008). There are quite a number of
International audit firms present in Sri Lanka including the “big four”: KPMG,
Earnest & Young, PriceWaterhouse and Deloitte & Touche. All private banks
have auditors with international reputations.
Non-performing loans: Interest income is recognised strictly on a performance

basis and if a loan is not serviced for 90 days the interest is credited to a suspense
account and the account is transferred to non-performing after 180 days. This
complies with the guidelines issued by the director of bank supervision, Central
Bank of Sri Lanka. Provisions are made for the net exposure after considering
possible recoveries from the forced sale values of collaterals (Direction No. 3 of
2008, The Central Bank of Sri Lanka, 1988-2008).
Capital adequacy: The capital adequacy requirement is 8 percent with Tier 1

capital requirement of 4 percent. Tier 1 capital consists of total shareholders’
funds and preference shares and subordinated instruments such as debentures are
classified as part of Tier 2 capital. Assets are weighted according to their risks as
stipulated by BASEL agreement in calculating these ratios (Direction No. 9 of
2007, The Central Bank of Sri Lanka, 1988-2008).
Liquidity: The liquid assets requirement is 20 percent of deposit liabilities and

reported daily to the Bank Supervision department. Liquid assets include all
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sovereign instruments and money market instruments apart from cash in hand.
There is a minimum cash maintenance requirement of 2 percent of deposit
liabilities (The Central Bank of Sri Lanka, 1988-2008)
Ownership restrictions: The Banking Act allows only 10% of shareholding by

a person or persons who are acting in concert (The Banking Act No. 30, 1988).
The Security Exchange Act in Sri Lanka restricts holding shares by any single
shareholder to 5% in a company listed in the Colombo Stock Exchange (The
Securities Exchange Act, 1989). The banking act prohibits lending money to
purchase and/or grant advances against its own shares but the loophole exploited
by the Seylan Bank board of directors was that, if the beneficiaries are the
employees of the bank such purchases are exempt from this requirement (C I
Rating, 2007).
The single borrower limit: A single borrower limit restricts banks to lend to a
single applicant 30% and for a group of companies 33% of Tier 1 capital of a
bank (Direction No. 7, The Central Bank of Sri Lanka, 1988-2008).
The restriction imposed to limit the service period of directors of banks:

CBSL introduced new rules concerning age and service periods of a bank
Chairperson. The board of directors of the Seylan Bank fought against the
CBSL, challenging this regulatory direction which limits the service period of
the directors of banks in Sri Lanka to 9 years. The case was lost (Corporate
Governance Direction No. 11, The Central Bank of Sri Lanka, 1988-2008).
Corporate governance: A document issued by CBSL specifies, among other

matters, the responsibilities of the Board, composition and the criteria to assess
the fitness and propriety of directors. The roles of chairman and chief executive
officer have been separated and the board is required to have board committees
covering Audit, Human Resources and Remuneration and a Nomination
Committee and Integrated Risk Management Committee (Corporate
Governance Direction No. 11, The Central Bank of Sri Lanka, 1988-2008).
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5.5 Accounting profession in Sri Lanka

The Institute of Chartered Accountants of Sri Lanka (ICASL) is the primary
accounting body in Sri Lanka. Also, there are other accounting professionals
who are members of international accounting bodies such as the Chartered
Institute of Management Accountants (CIMA). The ICASL has 3,602 members
according to the directory of members and firms 2009. There are 2,651
members in Sri Lanka, mostly employed in large organisations while a few are
employed in medium-sized organisations. Another 951 members are overseas
scattered through 43 countries (The Institute of Chartered Accountants of Sri
Lanka, 2009).
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Chapter 6: Case Studies; Stories
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CHAPTER SIX
6 CASE STUDIES; STORIES
6.1 Introduction
This chapter has two main sections. First, it presents the background
information to all three case studies considered in this research. This section
provides information about the lending institution involved; the bank, its
management style and operational aspects. It also provides information on
policies and regulations applicable in the banking industry in Sri Lanka
supported by an industry outlook as well. The second section deals with the case
studies and it provides the background information of borrowers with sections
on credit proposals, negotiation processes, decisions and outcomes of the
decisions. This presentation style is followed consistently for all three cases.
6.2 Background
There was a terrorist attack in Colombo, the Capital of Sri Lanka, in January
1996. The damage was heavy with a death toll of more than 30 people and
casualties of more than 300 people. It caused severe damage to the buildings
around, including the office of Mr. Perera who was the Chairperson of Soft
Bank, the banking arm of a large group of companies. He was hospitalized with
serious injuries to the left eye and eventually he lost the eye.
Mr. Perera (the Chairperson), in his late fifties, was a devoted Catholic, and the
most venerable priests came and prayed for him in the hospital. He was told that
“…Your duty for this world is not over; therefore the God has saved you to
serve the people more.”
The University of Sri Lanka recently awarded the Chairperson with a Doctorate
for his contribution towards the business development of the country. He was a
well recognized business tycoon having more than 100 companies under the
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name of Soft Group, and 10 of them had been listed on the Colombo Stock
Exchange. A leading business magazine named him as the Personality of the
Year in 1997. The Soft Group had more than 10,000 employees, US$80 million
of net assets and US$2 billion of total assets. The Soft Bank accounted for
almost 50% of the assets base and one-third of the workforce of the group.
6.2.1 The Soft Bank

While Mr. Perera was under clinical treatment in London, the General
Manager/Chief Executive Officer (CEO) of the Soft Bank had a clash with the
Board and he left the Bank together with almost all the members of the senior
management team of the Soft Bank in June 1996 and formed a new bank.
Further, more than 100 officers left the Soft Bank and joined the new bank in
September 1996. The dissidents, in canvassing an already known customer
base, also launched adverse propaganda against the Soft Bank. The bank was
facing severe problems, losing staff, deposits and customers simultaneously and
without a strong management team, in need of strong leadership. As a result the
Chairperson had to be involved heavily in the day-to-day operations of the bank
and therefore, he suggested to the board that he would have weekly meetings
with the senior management of the bank to monitor the progress closely. He also
strengthened his power on the board by inviting a few loyal confidants (two
lawyers, an accountant and an IT specialist) on to the board of directors of the
Soft Bank.
6.2.1.1 The management style of the Soft Bank, pre-1996
Normally the full board meeting was held on the last Friday of the month when
all the board members participated and crucial decisions were made. It was
evident that the board/Chairperson approved only the proposals (credit, re-
structuring of large facilities, new recruitments, staff promotions and capital
expenditure, etc) recommended by the then management. When there were
customer/staff complaints or requests for credit facilities from the
Chairperson/directors, they were re-directed to management, and the CEO had
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to report on those at the next board meeting. This process was followed to
avoid conflicts by giving due respect to the formal hierarchical-authority.
6.2.1.2 The management style, 1996-1997
The new CEO was a very senior banker, in his late 50s and demonstrated a very
democratic and consultative style of management. He had no experience of
holding the “hot” seat before and showed laissez-faire type leadership qualities.
The Finance Manager, a qualified accountant, was promoted to the position of
Chief Financial Officer (CFO), by the new management. In addition to the full
Board meeting, the Soft Bank started three more weekly review meetings, on
the other three Fridays of the month, for the Marketing, Recoveries and
Information Technology functions of the bank. The relevant senior officials
were summoned to these meetings whenever necessary, while the CEO and
CFO were invited for all three meetings.
It was the practice of the Chairperson to allocate some time to handle customer
complaints, plights of potential customers and even requests from the general
public. He always exhibited his customer-friendly attitudes and often allowed
the customers to confront the bank officers openly, sometimes, causing
embarrassment to respective officers.
As the Chairperson of 100-plus companies, he used to give directions over the

telephone to the CEOs of those companies for speedy implementations of his
decisions. He is so “liked” by his friends and confidants, including his wife, on
the Board of Directors that no question is raised against his decisions; all
decisions were unanimously approved.
He once approved a proposal forwarded by one of his group companies to buy

and implement a computer system for branch banking, priced at US$40 million,
without a proper investment appraisal. The IT chief of the bank later revealed to
the researcher (personally) that the project never came up and the bank was left
with a few computers, printers and outdated software. The IT chief of the bank,
a Washington University PhD, who drew the second highest emoluments in the
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bank with foreign trips and other perks, said “Why should we worry? His (the
Chairperson’s) car and his petrol, let him drive as far as he can?” This IT expert
is now the IT chief of the General Bank of Sri Lanka.
Most of the support services such as catering, security and printing, etc., were
diverted to group companies. The catering service was provided by Russel’s
Catering Services owned and operated by Mr. Russel who was a relative of the
former CEO. Russel’s only customer was the Soft Bank head office. Spotting a
slight fault, Russel’s service was discontinued and diverted to a group company
by the Chairperson. The justification of firing this small businessman was that
infiltrators, especially from the former CEO and the senior officers, could have
access to the back-office of the Soft Bank in the uniform of Russel’s Catering. It
could be a threat to the Bank.
The Chairperson’s favourites were given rapid promotions, frequent and

substantial pay hikes, foreign trips and special bonuses, etc. These
developments caused unrest among the staff but nobody dared to speak because
it was well known that the intelligence network of the Chairperson was very
effective, even conversations were tape-recorded and reported to the
Chairperson immediately. The punishments include transferring personnel to
areas (called Siberia) where the “suspect” had no expertise. Then they would
find faults; create reasons to fire those officers for “incompetence”. It was also
common to observe that, if the staff member was influential (or honest but not
loyal, or a crony but not honest), he/she is offered substantial compensation for
voluntary resignation. Therefore, the staff including the top managerial officers
seems very “loyal”, dumb and blind to the Chairperson’s decisions.
6.2.1.3 Compliance with banking regulations/standards
Strict compliance of the single-borrower limit prevented the Soft Bank from
lending to sister companies in the Soft Group. The Chairperson was not very
happy about this concept since most of the group companies paid significant
amounts of interest to other banks on their borrowings and the process was not
reciprocal because none of the other banks operated as a part of a group as the
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Soft Bank operates. He used to say in a lighter vein that, “the Rugger Ball
technique is the best strategy for these regulators. We must do the best for us
and let the regulators chase behind us”.
The Soft Bank had obtained special approval from the Central Bank Sri Lanka
for direct holding of 18 percent of its equity by the Soft Group. The Banking
Act allows only 10 percent of shareholding by a person or persons who are
acting in concert. But the Soft Bank had more than 50 percent of its ownership
with the Chairperson, his wife and a few companies of the Group, through
indirect holdings and employee share ownership schemes, which are allowed by
the Banking Act. This loophole is that the special permission granted to
purchase shares of a bank by its employees by creating trusts in the name of
employees called “Employee Share Ownership Plan” (ESOP) but the ownership
is limited to five percent. Under normal circumstances banks cannot lend money
to purchase their own shares but ESOPs are exempt of such restrictions.
Therefore, the Soft bank created six ESOP trusts and lent money at a
concessionary rate of interest to purchase its own shares, and each trust acquired
4.99 percent of ownership adding up to 29.9 percent of ownership in total. The
present owners did not inject a single cent as new capital but it was a “smart”
way of using others’ money to acquire the controlling power of an institution.
The directors of these ESOPs are their most loyal employees (such as relatives
and friends) and, in this way the Chairperson feels more powerful because he
looks after not only himself but his cronies as well.
Under these circumstances Mr. Perera became the all-powerful Chairperson of

the Soft Bank. One rating agency had reported “[T]he Bank’s Chairperson, a
promoter shareholder, plays a disproportionately large role in running the Bank
and particularly in setting policy. The Group’s track record in managing the
Bank has not been good so far”.
6.2.1.4 Financial outlook of the Soft Bank
The Soft Bank was very successful in marketing customer deposits and it had
some unique strengths. The bank was young (incorporated in 1989) and had a
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young enthusiastic workforce, led by a prominent businessperson in the country,

backed by a large group. The advertising and publicity campaign was
aggressive and the Soft Bank soon became a household name all over the island.
It expanded rapidly, opening 100 branches during the first seven years. The
customer deposit base was three times of that of SET Bank, which was also
incorporated in 1989. It was the second largest private bank in terms of
customer deposits and assets and became the largest private bank in terms of the
branches and number of employees by the end of the year 1996.
However, the profitability figures were poor, reporting its Return on Average
Assets (ROAA) as less than one percent and Cost to Income (C/I) ratio as more
than 70 percent, which was the highest among private banks listed in the
Colombo Stock Exchange. The amount of non-performing loans (NPL) had
risen to more than 20 percent of the total loans. The Central Bank of Sri Lanka
severely warned the management several times and had set time frames to
address the issues immediately. The Chairperson was frequently summoned by
the Director of Bank Supervision of the CBSL to monitor progress and reassure
the commitment of the management to compliance. The Chairperson gradually
developed doubts on the efficacy of the systems as well as the personnel of the
Bank.
The market price of the Soft Bank stock was also not performing in par with the
industry average Price Earning (PE) ratio. Research reports on the Soft Bank,
published by most of the stockbrokers were adverse with a recommendation to
“sell” or “hold”, because of poor financials when compared to the financials
published by the peer banks.
In 1995 the Soft bank had reported US$3.5 million of after tax profits. The
share had been trading with an average PE ratio of seven times, where the
industry had performed at 12 times. The Cost to Income ratio worsened from 70
percent in 1995, to 80 percent in 1996. The NPL level was also in the high side
with 18 percent in 1995 and 20 percent in 1996, compared to the industry
average of 14 percent, while the CAT bank reported the best NPL ratio of seven
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percent. The ROAA of the Soft Bank was one percent in 1995, came down to
0.6 percent compared to the two percent of the CAT bank--the international
average was reported as two percent.
The Capital Adequacy Ratio was reported as eight percent, just within the
regulatory requirement. The Soft Bank was experiencing a hard time with the
external auditors and the Bank Supervision Department of the Central Bank of
Sri Lanka with regard to the provisions to be made for bad loans. The provision
for bad debts, as a percentage of after-tax profits was 50 percent for the Soft
Bank whereas the industry average was only 10 percent in 1996. But the deposit
growth of the Soft Bank was reported to be the highest in the industry with 35
percent growth, from US$520 million to US$703 million during the year 1996,
compared to the industry growth of 15 percent. The Soft Bank achieved a
remarkable loan growth of more than 54 percent (industry average loan growth
was 20 percent) in 1995 and 25 percent (industry average of 20 percent) in 1996
contributing to the total assets base growth of 22 percent compared to the
industry average of 15 percent.
The selling pressure on the Soft Bank share was aggravated by the adverse
rumors spread by the dissident group, who worked for the new bank. This
situation pushed the share price further down.
6.2.1.5 Interest rate changes and the Government Policy
With the change of the Government in 1994 the CBSL cut the REPO rate (Re-
Purchase Offer rate similar to the OCR, (Official Cash Rate in New Zealand)
and Reverse REPO rate frequently. This situation affected most of the banks
(with low Advance to Deposit ratio) which had invested their funds in
government securities. The REPO rate, which was at 18 percent at the
beginning of the year 1995, was slashed frequently in 1995 and 1996 to remain
at 10 percent at the end of the year 1996. The spread between the REPO rate
and the Reverse REPO Rate also fell from three percent to two percent.
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Sri Lanka had a very peculiar type of interest rate scenario where the
Government Securities (GS) carried higher rates of interest than the rate offered
by banks to the public for their deposits. Therefore most of the banks followed a
very conservative lending policy, comfortably parking their excess funds in
risk-free Treasury Bills and/or Treasury Bonds, and made an easy secured
spread.
This is because the GS (Treasury Bills/Bonds) were not easily accessible to the
general public especially for small customers because there was a minimum
amount required for investment. Also the investment and the liquidation
procedures were complicated so that ordinary customers conveniently opted for
the closest, friendliest branch of a bank and invested their money in deposit
products with a lower return.
6.2.1.6 The liquidity position of the Soft Bank
The Soft Bank had about US$100 million invested in Government Securities.
This amount is over and above the statutory liquidity requirement. The Soft
Bank was highly liquid with an extraordinary growth in customer deposit base
and had reported 34 percent of statutory liquidity ratio as against the regulatory
requirement of 20 percent. This situation was reported to the Management by
the CFO and pointed out if the bank mobilized funds at the present rate of
interest and invest in GS, without investing in loans/lending, the bank would
make a negative gross spread (contribution) of three percent on incremental
deposit funds. The Chairperson was critical of the lending policy of the Soft
Bank and the regulatory requirements such as Capital Adequacy and Single
Borrower Limit, and approved the following two strategies to be implemented
immediately:
• To cut the interest rate offered by the Soft Bank for deposits by three
percent.
• To introduce attractive loan products for aggressive lending, offering a

lower rate of interest.
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The CEO and the top management officials were very nervous about reducing
the rate of interest for customer deposits, citing that the Soft Bank would not be
competitive among the rival banks which were still offering the same rates
despite the official rate cut by the CBSL. The CEO warned that there would be
a “run on the bank”. The Chairperson queried the tolerable limit of such a “run”
and instructed the CFO to monitor the deposit movements daily and report if the
liquidity position of the Bank was in jeopardy.
On the other hand, the senior credit officials were severely warned and assigned
with a massive task of achieving already increased lending targets. The
marketing team was asked to make a presentation on some innovative lending
products after working with the advertising agency of the Bank. The budget and
the cost-benefit analysis had to be vetted by the CFO and a quick time plan for
the launch had to be tabled at the next review meeting.
The Soft Bank lost deposits due to offering the lowest interest rates in the
market but the trend was not that alarming to the liquidity position. The
marketing team was very critical about the situation and warned, “Once you
lose a customer, it is very difficult to win them back.” One of the popular
arguments was: “We worked very hard to win this customer base. The cost of
regaining them would be much more than the saving that we get from the
reduced interest rate.”
However, it was surprising to note that all other banks followed suit and
reduced their interest rates for deposits, in six to eight weeks’ time. The growth
rate of deposits of the Soft Bank too returned to normal. The average interest
rate offered by the banks for one-year fixed deposits as at 30th June 1996, was
12 percent. The Soft Bank reduced that to nine percent in August. In the middle
of August the average rate came down to 11 percent, then to 10.5 percent by the
end of the month and finally to nine percent by the third week of September
1996.
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6.3 Case Study I: Tony Group
6.3.1 Background
One Friday, while the Chairperson was conducting one of the review meetings
of the Soft Bank, Mr. Tony, the owner of Tony Group, contacted the
Chairperson for an immediate appointment to discuss an urgent matter. The
Chairperson immediately made arrangements for a quick meeting showing all
the respect due to another business tycoon of the country.
Tony was adjudged the Entrepreneur of the Year in 1995. His group had
accounted for a major share of textiles and garments exports, which was the
largest foreign exchange earner of the island. The Tony Group expanded very
fast, especially during the previous regime of the Republican Government, with
huge loan facilities from the government-owned banks, for the setting up of
factories in rural areas. The Tony Group had a very good reputation for
manufacturing garments for world-renowned brands like Marks & Spencer,
GAP, Van Hussein, and a few others. Those buyers also had invested in high-
tech equipment and quality-control experts in the Tony Group factories. The
Tony Group had been running smoothly. The total export income of Sri Lanka
was US$12,050 million in 1996, and the Textiles & Garments Sector accounted
for US$6,484 million which was more than 53 percent of the total export
income of the country. The Tony Group accounted for approximately US$200
million in the year 1996.
Tony arrived in 30 minutes with his team of professionals including the Finance
Director (experienced accountant) Financial Controller (chartered accountant),
Chief Operating Officer and three Joint Managing Directors. Tony explained
how he developed the group. He stressed the national importance of his
business, especially in employment generation and foreign exchange earning.
6.3.2 The proposal

According to Tony, his group had 15,000 permanent employees and another
15,000 contract workers. He tabled the details of his factories with their
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capacity and locations. He blamed the newly appointed Labour Government for
not allocating an adequate quota for him to work on full capacity and therefore,
he complained that his group was running with a negative cash flow due to
under-utilization of assets. He was in the midst of a crucial issue, and stated that
he had no money to pay the salary bill for the current month. The best
employees were leaving the group and he said he had no option other than
agreeing to the foreclosure suggested by the banks.
He also pointed out that the new owners of his business would not be able to
maintain the same rapport with the international buyers as he did and, the whole
episode would end up in a tragedy, pushing 30,000 workers out into the streets.
He was pleading to the Chairperson to bail him out, assuring that this credit line
would rejuvenate the whole group and the future cash flows would be very
healthy with the orders in their hands. He also requested a facility of Letter of
Credit (LC) to import the necessary fabrics and accessories.
At the request of the Chairperson he explained his cash-flow situation and

borrowing positions. The total borrowings of the Tony Group were more than
US$20 million. This comprised US$5 million from Bank of Lanka, US$5
million from SET Bank, US$2 million from HAT Bank and a syndicated loan of
US$8 million from all three banks. He had borrowed from three private banks
and the Bank of Lanka, the largest state-owned bank in Sri Lanka, which had
structured a syndicated loan as well. The monthly commitment for servicing
these loans was US$0.7 million. Due to non-servicing of interest, almost all the
banks had classified Tony Group as a defaulter and had reported this to the
Credit Information Bureau (CIB), which is the central monitoring authority for
defaulters.
When evaluating the creditworthiness of a client, the first thing a credit officer
has to do is to call for a CIB report of the client. Tony had applied for a facility
from the Soft Bank a week ago and the team leader of Corporate Credit
Division had declined it on the basis of the CIB report.
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Tony was very convincing and very politely explained how the senior officers
of the Soft Bank rejected his proposal and praised the Chairperson for his
visionary leadership and patriotic attitudes in advance.
6.3.3 The negotiation

The Chairperson showed his grief about the situation and blamed the politicians,
regulators and bankers for not identifying the need of the country.
He said, “This is the whole problem with our bankers. They are guided by some
stupid rules called banking practices and ruin people like you [Tony]. They will
never think beyond that cage of banking practices. Even our state policies do
not have provisions to support people like you. Now, you have generated
30,000 jobs. If they lost their jobs and you lose your business, the cost will be
much more to the economy in the long run.” Then, in a disappointed tone, he
said “I don’t know, when these people will learn these things?... .”
After listening to overjoyed remarks by Tony who too joined the Chairperson to
criticize the prevailing systems, the Chairperson suggested “...tell me Tony how
much do you want? And what is the collateral you can offer?”
Tony said, ”Sir, all my assets have been taken by the banks, I can give my
personal guarantee and the secondary mortgage of the assets which have already
been mortgaged to the other banks, and Chairman sir, believe me and I will not
let you down.”
“Your house?” the Chairperson queried. “That’s in my wife’s name and I am

sorry sir, I can’t draw her into this, she will eat me”, Tony answered.
Then the Chairperson asked, “Can you give your wife’s personal guarantee?”
But Tony politely disagreed saying, “I am very sorry sir, but do not worry I will
never let you down and I will pay every cent due to your bank on time, and I am
not going to deal with any of those other banks in the future, my one and only
bank is your bank for the rest of my life”.
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The Chairperson smiled and said, “Ok, tell me your requirement, have you got a
good accountant? Do you have the cash-flow projections?”
“Yes sir, our cash flow is always positive but not adequate to service the loans
because of production hiccups and not performing our factories in their full
capacity. If you help we can have enough orders to fill the factories to perform
at full capacity then we will have cash surplus of US$1 million initially and
would grow to US$1.5 million in three months’ time. To do this I need US$2.5
million advance to pay my salary bill and other statutory dues. And I need a LC
facility of US$1.5 million to finance input materials for uninterrupted
production.” (A monthly cash flow projection was tabled and explained it by the
Financial Controller and the Chairperson looked convinced).
“Is that all you need? Tell me right now, you will not be facilitated under the
normal banking practices by our credit officers in the bank.”
Tony was jubilant and said, “That’s what I wanted your Honor. I do not need a
cent more than what is necessary”, and he invited the Chairperson to chair his
board: “Why don’t you come and chair our Board meetings as well?”
The Chairperson thanked him for the invitation and said, “I don’t want to
interfere with your business, you are the best person to manage your business,
but you can give us good publicity.” “Of course, sir”, Tony readily agreed.
The following day the business page of a leading newspaper carried an article
entitled, “Soft Bank rescued Tony Group”. The news spread fast and Tony
announced that Mr. Perera had helped him. He issued a special circular to the
Tony Group employees saying that they all must do banking with the Soft Bank
explaining that the Soft Bank was a truly kind bank, while criticizing all other
banks for advocating him to sell the factories.
The Chairperson was very happy about the publicity given and the copies of the
paper cutting of the news item circulated among the Board members at the next
Board meeting. He assured the board that he will bring more and more business
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and expressed his regrets that he could have done that before, meaning
involving himself more in the day-to-day activities of the bank.
6.3.4 The decision

The Chairperson approved all the facilities amounting to US$4 million. He was
very critical of the bank officers who rejected Tony’s proposal purely on the
CRIB report and said, “I think we need a good accountant, not a banker, to
manage Tony’s facilities” and appointed the CFO as the credit officer in charge
for the Tony Group. The CFO was instructed to monitor the cash flow position
thoroughly and whenever there was a situation which warranted over the limit
borrowing, he had to report to the Chairperson.
Tony was jubilant on the quick decision made by the Chairperson and offered
him a seat on the main Board of the Tony group with a brand new Mercedes,
which was still in the harbour, imported under the permit granted for exporters.
The Chairperson politely refused the offer and appointed his CFO as an
observer in the Board of the Tony Group. The Chairperson, pointing the CFO,
said “He will be my eyes and ears in your Board”.
6.3.5 The outcome: what happened to the Tony Group?

Sunil, one of long-time close confidants of Tony, was fired. He was one of
Tony’s executive directors. It was a known fact among the accountants that, it
was very difficult to work with Tony. No financial controller had worked for a
long period at the Tony Group and it was not rare to notice vacancy
advertisements for the post of Financial Controller for the Tony Group. Senior
executives started leaving Tony Group, or were asked to leave. Sunil criticized
Tony’s financial discipline and always complained about liquidity problems. He
complained that Tony did not transfer sales proceeds in full to Sri Lanka. He
said that Mr. Tony was very particular about the closed exchange control policy
of Sri Lanka, and always had a buffer in overseas. Tony used various tactics to
keep a part of his wealth overseas. Once he successfully convinced the
Chairperson of the Soft Bank to open a factory in an African country as well.
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Tony remitted money for this purpose as a capital investment outside Sri Lanka,
under a special permission from CBSL.
The Tony Group’s fate is not a unique one. With the cessation of the quota
system, the other countries like China and Malaysia could supply the same
garments at a lower cost, therefore the buyers naturally shifted their business
out of Sri Lanka for better margins. This threat was brought to the knowledge of
garment businesspersons, and only a few dynamic enterprisers created their own
brands and successfully transformed the threat into an opportunity. But the
Tony Group was over-dependent on international brands and lost some of the
contracts to Malaysia.
6.3.6 The outcome—Tony Group account at the Soft Bank

Later, the Tony Group account was taken away from the CFO and handed over
to the Corporate Banking division. The new credit officer submitted a formal
proposal for the Tony Group and the management approved the package
recommended and extended a further facility to smooth the cash flow.
After four years of operation, the Soft Bank had to provide for bad debts since
the Tony Group could not service the loan. The interest loss was around US$0.3
million which was in interest in a suspense account, and the capital write off
was nearly US$1 million by the end of 2003. The Tony Group gradually lost
their business and started closing down factories under the pressure imposed by
the banks. The staff cadre had come down to 10,000 with only 20 factories
operating by the end of 2003. The monthly sales of US$2 million in 1998 had
came down to US$1.5 million in 2003 and were virtually making a negative
contribution.
6.4 Case study II; The Lan-Car Ltd.

Similar to Case I presented in the previous chapter, this case-study story follows
the same style of presentation starting with the background information of the
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borrower followed by the credit proposal, the negotiation process, the decision,
a few important events and the outcome of the decision.
6.4.1 Background
The promotion of Foreign Direct Investment (FDI) was the central strategy of
the newly formed Republican Government to generate more employment, as
they had promised in the election manifesto. However, Sri Lanka continued to
experience poor levels of Foreign Direct Investments. Though the government
was successful in suspending the war, which had prevailed for more than two
decades, the FDI flow did not improved as expected. The FDI was reported as
US$176 million in 2000, and US$157 million in 1999 against the target of
US$500 million per year (The Central Bank of Sri Lanka, 2003).
The private sector was very critical on inefficient and ineffective

government/policies and was demanding a dramatic change in the development
strategy. In response, the government decided to stimulate domestic investments
by offering more incentives and forming separate decentralized authorities to
minimize the effect of the inefficient bureaucracy in the government agencies.
The government also invited the well-reputed private sector business personnel
to take charge of these authorities and show promising results.
Mr. Perera (the Chairperson of the Soft Bank) was appointed as the head of
Western Province Economic Development Authority (WEDA), one of the five
authorities set up under the new government policy. The other four zones were
based in the North, East, South and the Central provinces. Mr. Perera publicly
canvassed for stimulating domestic investments and minimizing foreign
investment dependence. The domestic investment as a percentage of GDP was
reported as 25.1 percent in 1998 and 27.3 percent 1999 as compared to the
target of 35 percent per annum.
The Chairperson was very enthusiastic about the new role and started his duties
with a “big road show”. He set up a fund from his own companies and full-page
advertisements appeared in the newspapers for the grand opening of his office
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as the President of WEDA. His wife started a reservoir project and named it
Dora—her own name. He reserved Mondays for his new venture and Sunday
newspapers used to carry huge advertisements on the investment promotional
activities in the Western Province.
At the board meetings of the Soft Bank, as well as at the Soft Group companies,
he used to mention that he was bringing more business to those companies.
The Television programme he started became a trumpet for Mr. Perera and his
group. The participants appeared as entrepreneurs praised the Chairperson for
his support; some of them almost worshiped him for rescuing them from debt
traps. The Chairperson initially used TV Channel One, then extended to
Channel Two and telecast a few advertisements during the Tele-programme
sponsored by the Soft Bank on Channel Three, to advertise his contribution in
promoting local investors—big or small.
6.4.2 The proposal

Lan-Car Ltd., an automobile manufacturing company located in the Central
Province, was the second automobile manufacturing company in Sri Lanka. The
first was in operation in the 1970s and that was closed soon after the open
market economic policies were introduced in 1978. Lan-Car Ltd. manufactured
two models (a car and a van) and branded them as “Lancar” (the car) and
“Lakvan” (the van). Except for the engine and a few parts, imported from Italy
and China, all other parts of the car were made and assembled in their factory in
Sri Lanka. But these vehicles had been refused registration by the authorities on
the grounds of a lack of conformity to safety and not being roadworthy, etc.
The owner of Lan-Car Ltd. Mr. Yousef, and his management team approached
the former Hon. Minister of Lands to obtain a piece of land to establish their
plant and sought assistance to expand production that was running at a rate of
eight cars per month. They waited for more than a year for a favourable
response from the Hon. Minister, but were disappointed. Eventually, they
sought favours from the Chairperson, who was holding a series of investor
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seminars in 2000 to promote economic activities in the region under his

purview.
Yousef and the team attended one of the seminars and realized that they could
find solution with the Chairperson. They came up to the next forum equipped
with the best car and van they had made. Throughout the oral presentation, that
lasted barely 15 minutes, the Chairperson appeared convinced and said that he
was going to extend maximum support to them. He expressed his displeasure
about the oligopoly type of vehicle market in Sri Lanka, dominated by a few
countries, mainly for dumping their used vehicles, and draining away the
country’s foreign exchange resources. After inspecting the vehicles and having
a test-run as well, the Chairperson immediately decided to provide them with
suitable land to set up their new factory, and he requested them to identify a
suitable piece of land in the Western Province.
The Chairperson used to host lunches for the participants of the investment
forum, at a tourist hotel restaurant (sponsored by the Soft Group) and discussed
the financial matters related to financing their projects. There was no one from
the Soft Bank to point out prudent lending terms to the Chairperson; instead
Soft Bank officials only answered his questions, mostly endorsing the
Chairperson’s view. The prospective investors, politicians, if any, and the top
officials of WEDA often participated in these discussions.
6.4.3 The negotiation

Yousef and the team did their homework well and returned with the details of a
few suitable pieces of land. The most preferred land already had an almost
complete factory building which they could use. Apparently, it had been vested
with another investor, by the WEDA for an ill-fated project that had been
abandoned for some time without any action as per the terms of bestowal. The
President of WEDA (the Chairperson) had full powers to transfer the land to
another prospective investor. But Yousef volunteered to negotiate with the
former investor for a fair compensation. They praised the President for his
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support in finding a suitable piece of crown land through WEDA, for their
project.
Yousef boasted that he was unable to cater for the demand for vehicles. Because
of lack of machine-capacity and factory-space, he proposed to install new
machinery to increase the production. They were already incurring losses, as
production was insufficient to meet the fixed costs, so they appealed to the
Chairperson to save them from total ruin.
The Chairperson was convinced about the feasibility of the project. He asked
Yousef to consult a professional accounting firm to prepare a project report.
The Chairperson promised market-support as well, placing an order for 200

Mobile Banking Vehicles for the proposed Soft Bank branches in rural areas
that were not covered within the branch network. Lan-Car’s prospects were
significant, and they should make 200 such banking vehicles in the next year
commencing with 10 vehicles for 2000. Table 6-1 below shows the projections
presented by the accountants of Lan-Car Ltd.
Table 6-1: Production and financial projections of Lan-Car Ltd.
Year 2001 2002 2003 2004 2005 2006
Sales (Units) 20 30 50 100 200 900
Sales $ 50,000 75,000 125,000 250,000 500,000 2, 250,000
Loan (31Dec.) $ 500,000 700,000 1.2M 1.2M 1M NIL
Interest thereon $ 60,000 84,000 130,000 130,000 100,000 60,000
Cash flow $ (30,000) (39,000) (68,000) (30,000) 100,000 840,000
Fixed cost proportion is negligible. Break-even point is US$325,000 (130 cars) and
Contribution Margin Ratio is 60% in 2001, 2002, 50% in 2003 and 40% afterwards as
no price increase.
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6.4.4 The decision

The Chairperson was keen on promoting investments by Sri Lankans and used
his powers as the President of WEDA to sort out various problems of investors
within his authority area, without hesitation. He used to quote Professor Yunus
from Bangladesh to justify certain credit decisions he made in favour of certain
small/poor self-employed enterprisers. But these accommodations were
perceived by bank officers as tactics for publicity.
Yousef presented the project report with positive financial projections

professionally prepared by qualified accountants. Based on the cash flow budget
and profitability forecast, Chairperson immediately approved a loan of
US$500,000. The bank officers endorsed the Chairperson’s decision without
any hesitation as the decision was justified by the feasibility figures on paper.
No one raised the question of roadworthiness and refusal of registration by the
Registrar of Motor Vehicles. He approved a further facility of US$200,000 in
2001 and US$500,000 in 2002 to accelerate production.
6.4.5 A few important events

Though the facilities were provided continuously, Lan-Car Ltd. could not
perform as expected due to various obstacles. Some problems identified and
reported by Yousef were as follows:
• Red tape at the Sri Lankan Customs to import the factory fittings and
machinery items.
• Production capacity was still not at the contributory level, and running at
cash-flow deficit, therefore, the bank facilities were escalated.
• Registrars of Motor Vehicles refused to register the vehicles, according

to Yousef, mainly due to absence of methodology to check the safety
measures of the vehicle.
The morale of Yousef and his team was also depleted and Lan-Car was in
jeopardy; even the cars released to company employees had been run using
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temporary numbers. The Chairperson, constantly briefed on the progress of the

projects, decided to take a Lan-car personally to the Registrar of Motor Vehicles
and got it duly registered using his social status and influence, and this opened
the gateway for the Lan-car to the roads.
6.4.6 The Outcome—what happened to Lan-Car Ltd.?

Though Yousef is still struggling to organize his factory to meet the demand, his
loan is in the active category due to the continuous support extended and the
interest would have been paid by new loans.
Finally, Yousef abandoned the manufacturing project, but converted the

resources to assemble a different automobile by importing all the parts. The car
manufacturing plant was established in 2001. By the end of 2006 the factory
had 19,500 square metres of land, 7,500 square metres under roof
and 1,500 metre of test track. However, the plan was to have 1300 cars by 2006
and to make a positive cash flow of US$850,000 after paying all the loans in
full. The loans had increased to US$2 million by 2006 and some of the interests
were in a suspense account. In 2006, a company spokesperson said there are
about 500 cars on the roads in Sri Lanka but these cars were not manufactured
as planned but assembled in his factory with all foreign parts for which huge
import duties are levied. Therefore, the cars did not contribute 40-50 percent as
projected and break-even was never achieved; cash flow was negative.
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The bank had earned handsome interest, maybe through its own loan. The
project was a failure. The loans are now serviced from a different project which
is assembling automobiles. No credit officer would have considered this
automobile manufacturing business as a feasible project purely because the
product cannot be marketed in Sri Lanka; there is a refusal of registration due to
problems of roadworthiness. Though it was registered by the Chairperson,
informally, using his powers, doubts on safety hindered the demand and on the
other hand, Yousef never achieved the expected production. The Soft Bank will
have to write off some capital with interest overdue.
6.5 Case study III; Superclean Services

Similar to the previous two cases this case-study story follows the same style of
presentation starting with the background information of the borrower, followed
by the credit proposal, the negotiation process, the decision, a few important
events and the outcome of the decision.
6.5.1 Background
Superclean Services was a sole proprietorship of Mr. Silva of Dehiwela. He
started this janitorial service business in 1991. His first client was the Dehiwela
branch of the Soft Bank, which was the first branch of the bank. His service was
very satisfactory so that he was contracted with all janitorial services of the
bank. As the bank expanded its branch network rapidly Superclean’s business
boomed, becoming the sole janitorial service provider to the bank.
Mr. Fernando, the manager of Dehiwela branch (BM) handled the Superclean
account very systematically, financing its initial capital investment requirements
to serve the newly opening branches. The recovery process was streamlined by
directing the payments from the Soft Bank to the loan account of the
Superclean. Superclean was exceptionally good at meeting the needs of
“finishing up” at branch openings, mostly at short notice, sometimes at
concurrent branch openings. Further, he did these services all free of charge for
the opening day polish-ups, strengthening the relationship with the Bank. The
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business is small scale and neither Mr. Fernando nor Mr. Silva worried about
hiring qualified accountants to manage the accounts and finances of Superclean.
Silva had accumulated a considerable amount of assets in his business, and

always had substantial payments due from the bank, against which he had
facilities including an overdraft. His ambition was to cater to big institutions
like the parliament, airport, embassies, etc. For that purpose he invested more in
the business, which created a liquidity problem. Fernando was worried about
continuing requests for additional facilities and/or overdue loans and Silva’s
argument was that there was money overdue from the bank. But he did not have
the accounting expertise to prove his claim.
Silva used to send a team to polish the house floors of bank officers, who did
him even the slightest favour, at Christmas or at New Year. Such personal
favours to the bank officers gradually became as dues and his inability to cope
with the requests made by down-the-line staff (in addition to the managers)
caused irritation amongst staff circles. The staff made it a point to complain that
the Superclean services were not up to standard and branch managers started
cutting payments for the slightest lapse or error of Superclean staff. Further,
branch managers sought permission from the CEO of the bank to look after
their own janitorial needs and started recruiting Superclean employees on a
contract basis.
Meanwhile, Mr. Nath, who was in-charge of janitorial services at ABC Ltd.,
which was an established large company in the same business, approached the
Soft Bank through the Personal Assistant (PA) to the CEO. Finally, the PA, who
was a classmate of Mr. Nath, became in full charge of the bank’s janitorial
services and started to divide branch janitorial work between the two
contenders, ABC and Superclean. Still, it was expected that Superclean should
attend to the opening day’s work of new branch openings, which was offered
free, and thereafter it was the PA who decided “to give which branch to whom”.
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6.5.2 Action taken against Silva as a defaulter

Fernando, manager of the Dehiwela Branch, was promoted and transferred to
head office and the credit officer of the branch, where Silva had his account,
became powerful in the branch. The credit officer, who was not on very good
terms with Silva over some misunderstanding, started treating Superclean
account in the strictest sense of discipline, ignoring delays in receiving bank’s
payments thereto and thus depriving him from business expansion. The PA’s
intervention aggravated the issue. Silva was experiencing a very severe liquidity
crunch, lost business gradually because the Soft Bank:
• Did not issue any performance bonds for Superclean to canvass new
clients.
• Returned all cheques if without fund and no arrangements made.
• Did not extend advances against payments from the bank and did not
allow withdrawals from his account until “overdues” are cleared (despite
payments to him from the bank being still overdue for months.
It was later revealed that the branch has over-recovered (charged) interest,
substantial enough to recover half the term loan. The Superclean was too small
to afford qualified or experienced accountants and totally relied on the bank
statements.
Soft Bank classified the Superclean account as non-performing and transferred

the file to the recoveries department for closely monitored recovery action,
failing which, the Soft Bank could serve a Letter of Demand proceeding
towards legal action.
6.5.3 Negotiations at the recoveries department

After careful examination of the account, realizing that the bank had
overcharged interest and pushed the client to the present condition, Manager–
Recoveries (M–R) comprehended Silva’s plight in all aspects, i.e:
• Overcharging of Interest.
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• The non-recovery of capital whilst funds actually being available (due

from the bank) causing a loss situation to the client.
• The deprivation of business expansion was “criminal” negligence in

banking sense.
By this time, Silva had lost all his credibility and business integrity and was
unable to pursue tender bids without performance bonds. The only business that
Superclean had at this time were a few branches in the conflict areas (the North
and East) where ABC was reluctant to serve.
The Manager–Recoveries called for explanations from the new branch-manager

of the Dehiwela branch on the overcharged interest. A bank officer said that,
“This action probably may not have been taken to take action against the errant
staff but may be to build up a case and find an avenue to help the victim of
errant action of the bank”.
6.5.4 The first decision

The Manager–Recoveries was a professional experienced banker and was
working with Soft Bank from the beginning. He had authority to re-structure
loans for the purpose of recovery/settlement and if new facilities were required,
he had to recommend them to the CEO for approval. He had no authority to
approve new facilities. But realizing the lapse on the bank’s part, and
identifying the need of resurrecting Superclean, Manager–Recoveries made the
following decisions.
• Set-off of overcharged interest against capital outstanding;
• Re-scheduling the Term Loan; and
• Appropriation of money due from the bank for the services rendered to
bank branches.
The Manager–Recoveries, going beyond his authority, further approved the

following facilities for reasons unknown:
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• Performance bond facility to secure future contracts;
• A small overdraft; and,
• Additional facilities as and when he successfully negotiates business on

assignment of payments direct to the bank.
Mr. Silva started building up his business outside the bank and was able to
secure a few lucrative contracts in outstations. Some friends helped him because
he deserved it but with the blemish created by the bank’s unreasonable action,
he lost a few good contracts. However, he was gradually coming out of his
commitments but was rejected again by a higher officer who strictly followed
“banking rules”.
6.5.5 The outcome

The Manager–Recoveries lost his job for approving facilities (including
Superclean), without authority. The succeeding Chief Manager–Recoveries
(CM—R), a retired senior banker assigned on contract for special recovery jobs
declined the credit applications of Superclean for new facilities on grounds that
Silva should settle a substantial part of the existing commitments for him to
recommend a new facility and/or did provide a positive cash flow projection to
convince the decision-maker.
Silva is now in a pathetic situation, struggling to save his house which was
mortgaged to Soft Bank, and looking for an opportunity to present his case to
the Chairperson. However, he did not have the necessary social network to
reach the Chairperson as Tony did nor had an appealing project to present at an
investor promotion forum as Yousef did. He had a certain amount of wealth,
different networks and a customer base although he was not in the affluent class
such as Tony or Yousef. He is small and powerless.
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Chapter 7: Case Studies- Analysis
CHAPTER SEVEN
7 CASE STUDIES - ANALYSIS
7.1 Background
This chapter analyses the case study stories and present additional empirical
data on possible influencing factors on the behaviours of lenders, borrowers and
credit mechanisms. These analyses provide the foundation for theoretical
discussion of research findings in the next chapter based on Marxian critical
interpretations. These analyses are developed around four basic aspects of bank-
lending processes described in the case-study stories:
a) The approach and method used by the borrower for credit applications.
b) The approach and method used by the lender to accommodate or reject

credit applications.
c) The influencing factors of decision-making.
d) The decision-making.
This discussion is staged case-by-case for all three cases. A combined analysis
is also presented for the first two medium-sized credit applications as they share
common features, and therefore, repetitions can be avoided. This analysis
provides the necessary foundation for the theorization of the research outcome
presented in the next chapter.
7.2 Discussion and analysis of Case Study I

As explained in the data analysis section in the Research Method chapter, the
analysis is developed through a series of questions and logical presentation of
probable explanations. The common questions are: Why did the borrower
approach the Chairperson directly? Why did the bank accommodate the
borrower informally? How was the negotiation carried out? And what are the
influencing factors and the decision?
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7.2.1 Why did Tony approach the Chairperson of the Soft Bank directly?
For credit applications, the usual practice in Sri Lanka is that, if the customer
knows an officer in a higher rank, he/she always gets that officer to introduce
himself/herself to the credit officer. As discussed in Chapter five in detail, in Sri
Lanka, the perception is that, if one doesn’t know somebody in the institution
concerned, the expected service is either delayed or never made available. On
the other hand, Tony was a powerful businessman and it was not that awkward
to contact another businessman for a business deal. Tony had the access to the
Chairperson of the Soft Bank, because they were in the same social network and
had been known to each other for some time. Furthermore, Tony Group had
tried the formal path but had been rejected by the credit officers of the Soft
Bank. Therefore, Tony had contacted the Chairperson directly for a credit
facility, which can be considered as an informal personal approach.
7.2.2 Why did the Soft Bank accommodate Tony informally?

To uncover “Why did the Chairperson decide to lend to the Tony Group”,
following possible arguments are considered.
a) Was the decision made because of the prevailing excess

liquidity position causing a negative spread to the bank?
b) Was the decision made for business development purpose

because of the misleading influence of Tony and his accountants?
c) Was it for personal gratification?
d) Was it on sympathetic/patriotic/nationalistic grounds and/or

based on social responsibility?
e) Was it because of a personal relationship?
f) Was the decision influenced by the ego of the Chairperson?
g) Did the organization structure force the chairperson to make

such decisions?
These possible arguments are discussed and analyzed in detail below.
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7.2.2.1 Was the decision made because of the prevailing excess liquidity position
causing a negative spread to the bank?
The bank was desperate to shift their funds from low interest bearing gilt-edged
Government Securities to commercial lending for higher return in June 1996.
But the bank lost their additional liquidity position later, because of the strategic
decision made to cut the interest rates offered for customer deposits. The Soft
Bank was comfortably canvassing deposits at lower cost in the level playing
field, because the competitors also had reduced the interest rates by September
1996. The Chairperson was fully aware of the situation because, the CFO was
reporting the position daily. Therefore the Chairperson’s decision to extend the
credit facility could not be persuasively related to the excess liquidity position
or the prevailing negative return position.
7.2.2.2 Was the decision made for business development purposes because of the
misleading picture shown by Tony with his accounting projections?
In previous instances the Chairperson referred such requests to the Management

of the Bank for due recommendation after proper credit evaluation.
The Chairperson would have thought of getting all the banking business of
Tony by bailing him out in this crucial situation. He would have been carried
away by the positive cash flows projected by Tony’s accountants; US$1 million
per month which is over and above the required commitment of US$0.7 million
to the banks. The service cost of the Soft Bank credit was around US$0.07 per
month, the annual effective rate of interest (AER) charged from Tony Group
was in the range of 17 to 22 percent as they had not been sufficiently backed by
collateral. But why he did not do that previous occasions for other applications?
The Chairman was well aware of the already committed liabilities of Tony to
other banks. The single-borrower limit would not allow the Soft Bank to
acquire the banking business of the Tony Group with other banks by settling
Tony’s debts to other banks because such an exposure would be too much for a
bank like the Soft Bank where the Capital Adequacy was only just at the
stipulated level. Capital adequacy of a bank is calculated by weighing the assets
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(including loans) according to the risk of realization at a point of bankruptcy.

Loans are weighed according to their collateral. The Basel Agreement, which
was reached by the leading banks in the world in Basel, Switzerland, is to weigh
the loans, backed by commercial properties by 50 percent assuming that they
are at risk of price fluctuations. The Chairperson was of the view that
developing countries never experience downward price fluctuations for
properties. However, the volume of business that the Tony Group had offered to
the Soft Bank was significant.
7.2.2.3 Was it for personal gratification?
The Chairperson refused the Mercedes Benz car offered by Tony. He had the
control of over US$2 billion assets. The Chairperson rejected the offer of being
the Chairperson of the Tony Group as well. Therefore, this decision could not
be treated as one that was influenced by immediate personal gratification.
7.2.2.4 Was the decision made on sympathetic/patriotic/nationalistic grounds

and/or based on social responsibility?
The Chairperson might have been sympathetic to the workforce of 30,000 of the
Tony Group, and especially with the remarks made by the priests that “..the God
has saved you to serve the people”. There was not sufficient evidence to
conclude that he made this decision purely on sympathetic grounds. Then, his
move might have been influenced by patriotic attitudes, if we recall his
criticism, quoted in the previous chapter, on banking practices and government
policies towards SME development in Sri Lanka:
...this is the whole problem with our bankers. They are guided by some
stupid rules called banking practices and ruin people like you. They will
never think beyond that cage of banking practices. Even our state policies
do not have a proper system to support people like you. Now, you have
generated 30,000 jobs. If they lost their jobs and you lose your business,
the cost will be worth much more to the economy in the long run… …I
don’t know, when these people will learn these things?
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On the other hand, the Chairperson, being the head of more than 100
companies, was fully aware of the grievances of the 9,000 small individual
shareholders and 1.5 million deposit customers. But one of the colleagues
argued saying that, “The fate of the 30,000 employees of the Tony Group was
critical and warranted an immediate remedy, therefore, the Chairperson may
have acted rationally to address first things first”. However, this argument looks
like eyewash to the public because the Chairman’s justification to the board of
directors of the Soft Bank for accommodating The Tony Group was “bringing
more business to the Soft Bank”. Therefore, this patriotic or social
responsibility claim cannot be justified in a business sense. Also,
accommodating a client who had been blacklisted in CIB is a clear indication of
disregarding state intervention to protect public deposits from potential risk of
default. Also it is an act of working in the opposite direction to maximizing
shareholders’ wealth which is the primary goal of a firm. On the other hand one
could argue this act was a socially irresponsible decision with regard to public
depositors, unethical in the interest of minority shareholders and totally
unprofessional.
7.2.2.5 Was the decision made due to a personal relationship?
The Chairperson had great respect for Tony who is a successful premier
businessperson in the country. On the other hand, most of the people who
approached the Chairperson were privileged to obtain a favorable decision from
him. Most cases so referred were defaulters to other banks and the Chairperson
used to accommodate them with generous concessions. However, The
Chairperson was very lenient in applying due diligence and acted significantly
on “trust” and “gut-feeling”’. Therefore, this decision can be interpreted as an
extending of a “favour” and getting another fellow capitalist, who is also a
powerful individual (as an award-winning leading foreign exchange earner in
Sri Lanka), hooked into his social network.
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7.2.2.6 Was the decision influenced by motives such as ego or prestige of the
Chairperson?
This could be a contributory factor since he had achieved the highest level of
social status. The Chairperson was very keen on making popular decisions,
followed by a good propaganda campaign. The Chairperson asked for publicity,
which he got promptly from Tony.
Though the Chairperson’s name Mr. Perera was a household name, he was
known as only a businessperson. With the narrow escape from the bomb, now
he may have thought of developing his image as a patriotic businessperson and
win the hearts of the people in the latter stage of his life. He did not have any
child to hand over his business and always used to say that his employees are
his children. He started his own newspaper and a one-hour TV programme
which showed negotiations with the clients/customers of his group. That
propaganda was to convince the public that this was how generous he was in
helping small entrepreneurs in Sri Lanka. All the clients who participated in that
TV programme praised the Chairperson for the generous support he extended to
their business, especially during the hard times.
The Chairperson was convinced that he could boost his image as a patriotic
businessperson with the publicity promised. Therefore, it is more realistic to
assert that he would have made this decision to fulfill his egoistic motives under
the pretence of patriotism or social responsibility.
7.2.2.7 Did the organization structure force the Chairperson to make this
decision?
The organizational structure was very conducive for him to make such
decisions. It is evident that he had legitimate authority under a poor
management support and weak organization structure. Also, he had no faith on
the formal credit approval and monitoring systems. He always criticized the
formal systems. He had very little confidence in the credit officers of the bank
and appointed CFO, who was a non-banker, to monitor the Tony Group
account. However, it was not expected of him to make such decisions at the
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highest level of authority and it was not the practice of the banking industry.
Therefore, it is also believable that the organization structure was conducive to
making such decisions especially as the decision-maker was vested with
enormous power.
7.2.3 What were the influencing factors?

What could be inferred from the above analysis is that the arbitrary/informal
decision was made under the enormous power entrusted to the Chairperson in a
weak organizational structure with a poor management support. The decisions
may have been influenced by patriotic attitudes and egoistic motives especially
when the decision-maker is from the top slot of the bank. However, further
analysis is necessary to discover the roots for such attitudes and/or to find more
convincing reasons. This issue is further discussed in the next chapter:
Theoretical Discussion.
7.2.4 How was the decision made?

Tony was very impressive and convincing on his marketing capabilities and
“filling the factories with orders” for uninterrupted production if materials are
supplied. The Chairperson made a quick assessment of Tony’s integrity and the
risk and return of the credit involved based on the cash flows presented by the
team of accountants, including chartered accountants. He did not want to
consult credit experts in the bank, as he had no faith or confidence in any of
them. He had the power and he was confident that the Board would not decline
what he recommended. Therefore, he approved this incomplete credit
application and granted US$4 million over the table. Table 7-1 below provides
the summary of this case study.
Table 7-1: Summary of the description and analysis of Case Study I
ITEM Credit Applicant: Credit Decision-Maker:

Tony—Tony Group Chairperson Mr. Perera
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Background Tony is in the garment Mr. Perera became the all-

manufacturing business. He powerful chairperson of the Soft
accounted for the largest single Bank with his loyalists as board
share of country’s exports and members and weak Management.
30,000 workers. Tony’s credit The Chairperson was in a business
application had been rejected by the development drive as he had no
credit officer of the Soft Bank faith in the bank’s Management
based on an official credit-default especially the credit officers. This
investigation report. He had won powerful businessperson had
several awards for his contribution become a fame seeker after a “near
to the country. death” experience.
Approach Tony and Mr. Perera knew each other as leading businesspersons in Sri
Lanka. Tony’s request for an appointment with Mr. Perera was
accommodated promptly even though the Chairperson was at a meeting
at that time. The approach was casual and formal rules were bypassed.
Influencing The business that Tony brought was lucrative and significant. The credit
factors decision was justified by the positive cash and profit forecast by
professional accountants. The Chairperson was not aiming at any
personal gratification but showed some “patriotic” feelings and
“sympathy” over the workforce who were without wages facing
redundancy because of the foreclosure of factories called by the other
banks to recover their debts. The state policies on such issues were not
helpful to borrowers or to lenders. The Chairperson had an egoistic
motive to boost his image and wanted to strengthen his social power base
by getting another powerful businessperson tactfully hooked into his
social network. Tony promised the publicity warranted by this ego-
maniac Chairperson.
Decision- Tony was very impressive. The Chairperson got a quick assessment of
making Tony’s integrity and the risk and return of the credit involved. The
Chairperson had the power and he was confident that the Board would
not decline what he recommended. Therefore, he instantly granted US$4
million. This casual decision was made under the enormous power
entrusted to the Chairperson in a weak organizational structure with a
poor management support. The decisions were defended under the façade
of “patriotic” attitudes and influenced by egoistic motives especially
when the decision-maker is from the top echelon of the bank and more
importantly backed by projected cash flows presented by accountants.
Post- Tony’s accountant complained about Further credits were granted but
decision not bringing all the sale proceeds to later the loan was classified as
events Sri Lanka. This situation had caused bad and provisions were made
liquidity problems therefore, Tony to comply with the prudence
frequently demanded enhancement of principle of accounting and
credit. The workforce had been regulatory requirements. The
reduced to 15,000 and monthly sales interest loss was around US$0.3
had reduced by 25% and were making million and the capital loss too
a negative contribution by 2003. was significant.
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7.3 Discussion of Case Study II

Similar to Case I, this discussion too developed through a series of questions
and logical presentation of probable explanations. The common questions are:
Why did the borrower approach the Chairperson directly? Why did the bank
accommodate the borrower informally? How was the negotiation carried out?
And what are the influencing factors and the decision?
7.3.1 Why did Yousef approach the Chairperson of the Soft Bank
directly?
Mr. Yousef, unlike Tony, contacted Mr. Perera not as the Chairperson of the
Soft Bank or as a known personality but as a business promoter authorized by
the government. They had seen on TV programmes how Mr. Perera, who was
also the Chairperson of the Soft Bank, provided solace to those in financial
difficulties. They were desperately exploring possibilities for launching their
products: Lan-Car and Lak-Van. They had tried one of the Government
Ministers as well, the usual way that Sri Lankans were used to getting things
done, but without success. The Management of Lan-Car Ltd. was aware of the
way that the Chairperson made decisions at the investment forum headed by the
Chairperson. The patriotic speeches by the Chairperson, encouraging domestic
investments, would have created an optimistic perception in the minds of the
local car manufacturers. But for the greater part, it was their desperation that
brought them all the way to the Western Province business development forum
from their own Central Province.
7.3.2 Why did the Soft Bank accommodate Lan-Car Ltd. informally?
When this question was posed, a colleague said that, “He [the Chairperson]
wished that his bank should support the majority who were left out by those
formal banking practices.” To prove his [the Chairperson’s] point he used to
quote from his personal experiences where his diamond project was declined by
the banks, on the basis of those formal banking practices, but he had taken that
diamond project to its maximum heights by generating 500 employment
opportunities and declaring huge dividends to the shareholders, continuously.
161
Therefore, it is evident that he had no faith in the formal credit evaluation

systems of the banks, especially with regard to new ventures.
The Chairperson was also critical of some of the regulations, especially the way
they were interpreted by the Department of Bank Supervision of the Central
Bank of Sri Lanka. He was critical of the Capital Adequacy ratio, which was an
outcome of the Basel Agreement, saying that the concept of “Capital
Adequacy” was irrelevant for developing countries like Sri Lanka. He was
critical of the conditions imposed by the World Bank and the IMF towards
developing countries, and basically he wanted to show that his bank was
different and he would go out of his way to help Sri Lankan entrepreneurs.
The following question was posed to a research participant who accompanied

the Chairperson to the investors’ forum, in order to ascertain the perception of
the officers behind him. “Why did the Chairperson accommodate Mr. Yousef
and Lan-Car without following formal banking practices?” The officer said, “It
was not that the Chairperson totally disregards caution, reason, peril; nor that he
was acting on his dreams and fantasies, and made these unsystematic decisions.
In fact, he added value to the abandoned factory premises and took the total
picture into account, to approve the loan. It was informal, because normal
systematic banking could not accommodate this loan.” Responding to the same
question, he further added, “Though the decision was informal, it was a
deserving case, not only to an emerging national venture but also to a
prospective client to the bank.”
The bank officer, who was working closely with the Chairperson argued by
cross-questioning, “was it fair to penalize a prospective business venture
because of the prevailing systems which are not advanced enough to cater for
new concepts?” He also said “Let us accommodate them till the relevant
authorities develop necessary systems to cater for them and allow the “James
Watts” in Sri Lanka to advance our lives and theirs.” On the other hand the
Chairperson justified import protection saying that dumping used vehicles
would drain away the foreign exchange from Sri Lanka. A colleague of the
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researcher responded to this claim saying that “How can a small country like Sri
Lanka manufacture automobiles?” He further said that “Even New Zealand tried
such ventures such as automobiles and electronics like TVs etc., but failed.”
7.3.3 The influencing factors

The Chairperson had taken over a significant part of the business development
function of the Bank, with his new appointment as the President of WEDA
which was one of the business development agents of the government. On the
other hand, the government and the public are watching how Mr. Perera
performs as the President of WEDA.
Therefore, it is sensible to deduce that the Chairperson accommodated Yousef

because he had the power to disregard prevailing systems; wanted to show his
performance using nationalism/patriotism as a smokescreen supported by rosy
financials prepared by accountants. Table 7-2 below provides the summary of
this case study.
Table 7-2: Summary of the description and analysis of Case Study II

Yousef—Lan-Car Ltd. Chairperson Mr. Perera
Back- Yousef was in the automobile Mr. Perera was appointed as the
ground manufacturing business. His President of Western Economic
automobiles were made with Development Authority (WEDA) by
fibreglass bodies and imported the government. He inaugurated the
engines and parts. He had new task with a “big-show” and all of
produced a few sample his “quick” decisions were given wide
vehicles—a car and a van and media coverage and the cost was born
was desperate for financial by his companies including the Soft
assistance. The barriers include Bank. He was the all-powerful
the prevailing state policies on chairperson with all the board
credit, Customs red-tape and members with “Yes, Sir” attitudes and
vehicle registration regulations. weak Management.
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Approach The wide publicity enjoyed by Mr. Perera as the President of WEDA
attracted Yousef to one of his weekly investment promotion forums.
Yousef came up with his new car and was able to convince the
Chairperson that he could facilitate an “import substitution” to the
automobile market in Sri Lanka and said, “We will save Foreign
Exchange for our country.” Mr. Perera criticized the automobile market
for using Sri Lanka as a dumping yard and immediately decided to help
Yousef, again under the label of “nationalism” promoting domestic
investments as against FDIs.
Influenci- Lan-Car Ltd. was very appealing as a venture of import substitution. Mr.
ng factors Perera had no faith in the formal credit evaluation systems especially for
new ventures. According to Yousef, he could not cater to the demand for
his vehicles due to capacity limitations. The Chairperson had become
front runner of marketing credit in his bank and, on the other hand, the
government and the public were watching how Mr. Perera performed as
the President of WEDA. The Chairperson had the power to disregard
prevailing systems, wanted to show his colours in investment promotion
and affection to “nationalism/patriotism”. The Chairperson had an
egoistic motive to show that he is different (diregard the IMF, the World
Bank, the Basel banking standards or regulatory issues) and he was well
convinced by the cash flow projections certified by accountants.
Decision- The Chairperson had the power and he was confident that the Board of
making Directors of the Bank is always behind him. Therefore, he instantly
granted US$0.5 million. The Chairperson also promised market support.
This casual decision was made under the enormous power entrusted to
the Chairperson in a weak organizational structure and weak
management. The decisions were defended using the mask of
“nationalism”, influenced by egoistic motives and, justified by very
positive cash flow projections certified by professional accountants.
Post- Lan-Car could not perform as The Chairperson had to interfere

decision projected. Customs delays and personally to get the automobile
events registration problems frustrated approved using his power.
Yousef. The project resources finally Further credits of US$0.7 million
converted for assembling of vehicles were granted and the loan was in
which had very low contribution the performing category because
margin and still struggled to achieve interest was serviced by further
the break-even point. loans by 2004.
7.4 Combined conclusions for Cases I and II

In the final analysis, it can be concluded that no bank would consider Lan-Car
Ltd. as a prospective client purely because of the product that cannot be
marketed (Lan-car could not be registered) in Sri Lanka. With regard to Case I,
the Tony Group had no alternative other than approaching the Soft Bank, since
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the banking sector was well aware of its default situation and listing in the
CRIB.
On the other hand, in Sri Lankan culture people believe that an informal
approach is an easy way out to get things done quickly. The perception of the
general public is that, one must know someone in the institution concerned to
receive a positive response. This problem is severe with regard to the public
service where customer service is not considered to be an important element.
Even though some of the banks are private, the belief is such that to get a credit
facility, one must know someone.
It is very common that customers who enjoy credit facilities always deliver
bulky hampers to the officers/branch managers of the banks in festival seasons.
One senior officer of a bank revealed that he got a refrigerator full of food and
beverages as a New Year hamper. Lunches are frequently organized, either by
the customers or by the bank officers. Issuing letters by members of the
parliament, requesting senior officers of various institutions to accommodate
their supporters is very common in Sri Lanka.
Therefore, these decisions could be related to the enormous power enjoyed by

the Chairperson within a weak organizational structure, enthused by egoistic or
any other motive and appealing cash flow projections by accountants. This
claim is further discussed in the next chapter which theorizes the research
findings.
7.5 Discussion and analysis: Case III

The discussion and analysis of this case is developed in a similar manner as the
previous two cases but poses different questions according to the circumstances.
Initially a banker (Manager–Dehiwela Branch, Mr. Fernando) was instrumental
in building up Superclean. Then a few other bankers tried to bring him down as
they had personal grudges. Again another middle-level officer informally
helped Superclean to rebuild, ultimately another upper-middle level manager
165
decided to recover the money due to the bank, and declined new facilities,
pushing Mr. Silva to a desperate situation.
“Why do so many contradictory views and judgments exist within the formal
banking systems?”
The research participant, who was well aware of this case, answered in an
appealing tone saying, “Study of an enterprising person, taking a calculated risk
in deciding to finance the young entrepreneur, who, of course, was providing a
service to his bank was all to the credit of the banker [Manager–Dehiwela
Branch] who had been looking to support entrepreneurs. It is a lack of exposure
and dispositions with conventional-type attitudes of the officers that make such
a big difference among their views and judgments. It would be an uphill task to
identify true entrepreneurial skills.”
He further said,”When there is a new entrepreneur, it is important to be close to

him, correct him and back him as necessary such as the support Mr. Silva
received from the first Manager–Dehiwela Branch and the Manager–
Recoveries.”
Mr. Silva had following complaints against the bank:
• Misuse of his free service for opening ceremonies of new branches but
not rewarded with contracts for continuous service.
• Deprivation of business expansion by not extending required facilities.
• Interest overcharged.
• Dishonouring cheques, at the same time as the bank is defaulting

payments to him, damaging his image.
• Robbing of his workers which also deprived him of the ability to fulfill
his contractual performance.
• Cutting payments by exaggerating lapses and errors of Superclean staff.
166
Explaining the situation, the bank officer said, “The overcharging of interest
from Superclean shows not only how shortfalls in simple checks and balances
were overlooked, but also how much personal animosity against a client on
narrow personal issues, could kill simple obligations in banking.” To the
contrary, according to this bank officer, Mr. Silva showed gratitude to the
Manager–Recoveries who had re-adopted a comprehensive customer-
rehabilitating approach even going beyond his authority and succeeding in
reaping results for his ingenuity and customer care.
7.5.1 How and why did Manager–Recoveries approve facilities

informally?
The performance of Manager–Recoveries was measured by the amount of
recoveries he made and the extent of reduction he achieved in the non-
performing loans under his purview as against the targets set. The measuring
system was such that the comparing was not carried out taking each and every
client/account, but taking the net outstanding in bad loans (Brought Forward
Balance less Recoveries less Restructured and Transferred to the branch). New
bad loans transferred from branches to the recoveries department were shown
separately. This formula encourages re-structuring which is somewhat more
practical than squeezing the client against the wall.
All the bad loans, which were restructured by the recoveries department, were
transferred back to the respective branches for close monitoring and
rehabilitation. The Manager–Recoveries had a practice of restructuring and
transfering such loans with new facilities beyond his authority so that he could
recover part of the interest, which was in the interest in suspense account
(capitalizing the interest by adding them to the loan capital). This process
showed an extraordinary improvement in the level of non-performing loans
under his purview. By doing this he could convince the Management and so
managed to secure handsome raises, bonuses and rapid promotions as well.
When he was fired he had been promoted twice to the level of Chief Manager.
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7.5.2 Why did the credit officer and the Branch Manager carry out
instructions of an unauthorized officer?
A bank officer answered to this question saying: “The credit officer might have
been under threat of disciplinary action for the negligence/errors he committed
in calculating the interest receivable from Silva.” The gravity of the offence
depended on the level of severity that the Manager–Recoveries would attach in
reporting them to Management. Therefore, the credit officer might have
followed instructions of the Manager–Recoveries with the blessing of the
Branch Manager, who also benefited with the improved branch performance in
terms of lower levels of bad loans and higher interest income.
7.5.3 Why didn’t the new Chief Manager–Recoveries accommodate

Superclean?
Chief Manager–Recoveries was a senior banker recruited on a contract basis
and was following orthodox banking practices to the letter. He discovered that
Superclean was not accommodated under the normal banking rules and reported
that the practices followed in the recoveries department were not regular. Also
Silva did not have qualified accountants to provide “convincing” financial
projections about his business prospects. He was new to the bank and maybe he
was trying to impress the CEO with some “good” work.
7.5.4 Why did the Soft Bank accommodate a new service provider?
What would be the reasons to obtain the services of another service provider
especially when the bank was happy with the services of Superclean? The
Personal Assistant to the CEO would have extended favours to his classmate
and would have been influenced by potential personal gratifications as well. On
the other hand it is also sensible to argue that the Management of the Soft Bank
would have made some strategic move to obtain the services of a competitor for
better services from both parties and avoid any over-dependence on a single
service provider. Therefore, it is evident that the credit decisions have mostly
been made on other grounds rather than the potential, skills and capabilities of
the applicant.
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7.5.5 How was the decision made?

The Manager–Recoveries abused his authority and just made decisions because
the staff down the line (Branch Manager and the credit officer at the branch)
who carry out the orders were under obligation (or threat) because of their
mistakes and negligence. The Manager–Recoveries was further encouraged
because the senior management ratified those decisions indirectly by
recognizing and appreciating his work through rewards and promotions.
Therefore, the Manager–Recoveries restructured this loan too by himself and
implemented it without due approval. Finally he lost his job because of such
decisions. The Chief Manager–Recoveries, on the other hand, followed the rules
and denied credit with proper approvals.
It is noteworthy that the research participants agreed with the researcher that, if
Mr. Silva was powerful or had come from the same social network, the
Manager–Recoveries would have got another reward instead of losing his job.
They said, “It is not rare that directions coming from the top to treat customers
differently, when they were denied and had the power of reaching the top to
complain about that”. The grapevine works this way but no one dares to speak
being scared of being exposed and reported. Table 7-3 below provides a
summary of this case study.
Table 7-3: Summary of the description and analysis of Case Study III

Silva—Superclean Ltd Recoveries Department
Back- The threats to Silva’s janitorial Fernando, the branch manager who
ground business include: the new entrant who nurtured Silva and his business
was a friend of the then top Superclean, was promoted and
Management, harassment by the credit transferred (Decision 1). The
officer due to a personal grudge. Silva Superclean account was classified
lost business to the newcomer and was as non-performing and transferred
facing liquidity problems and financial to the recoveries department. First
barriers for business development and it was positively handled by the
got into the bad books as his loans M–R and then negatively by the
were not serviced. Chief M–R.
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Approach Decision 1. Under normal banking practices

Decision 2. M–R comprehended Silva’s plight by extending several bank
facilities outside the normal credit rules. M–R discovered some errors of the
branch staff and blamed them but did not report to the Management rather
used it to intimidate the branch staff. Silva was happy with M–R and had
praised him with research participants.
Decision 3. CM–R applied the set credit rules strictly and stopped all the
facilities extended by M–R and requested Silva to settle existing outstanding
immediately for him to consider further facilities.
Silva searched for avenues to approach the Chairperson as advised by people
who are aware of the Chairperson’s approach and, as Mr. Perera was
boasting of helping small businesspeople via his TV shows, but without
success because he was not influential and not in as powerful circle as Tony
or did not have such an appealing project as Yousef had.
Influencin Decision 1. Under normal banking practices

g factors
Decision 2. M–R’s performance was measured by the reduction shown in
the bad loans handled by him. He could transfer restructured bad loans back
to branches as performing loans and that process enhanced M–R’s
performance for which he was rewarded. But M–R did not have the
necessary authority to approve such new credit facilities. Even the staff at
the branch at the mercy of M–R due to their blunder committed for interest
calculation had no alternative but to carry out M–R’s unauthorized orders.
Decision 3. CM–R was an orthodox banker and he strictly applied the rules
and tried to impress the Management about his “good work”. Silva could not
afford get the services of professional accountants to project his prospects
convincingly.
Decision- Decision 1. Under normal banking practices

making
Decision 2. M–R abused his authority and was at an advantage that the
branch staff was under obligation. M–R was promoted and encouraged by
the Management for his performance though the decisions were not duly
approved.
Decision 3. CM–R followed normal banking practices, did not believe
Silva’s appeal about his business prospects and declined further credits. He
was contemplating serving a letter of demand threatening legal action
against Silva and his house which was mortgaged to the Bank.
Post- Research participants were of the view that if Silva had enough power or
decision adequate influence to reach the Chairperson with the backing of accounting
events expertise, he could have got the necessary facilities and M–R would have
got another promotion instead of losing his job. Unfortunately Silva was not
from that class and social network and could not afford professional or
experienced accountants.
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7.6 Latest developments

In December 2008, Mr. Perera (the Chairperson) had been questioned by the
Criminal Investigation Department (CID) of Sri Lanka and they filed a case
against him and other directors for an alleged scam of US$250 million which
happened in one of his group companies which had accepted money-deposits
without a Finance Licence. The Soft Bank nearly crashed following a “run” due
to loss of confidence (in the group) but the Central Bank of Sri Lanka (CBSL)
intervened and saved it by giving an “assurance”, yet depositors are not allowed
to withdraw money prematurely.
The Board of Directors of the Soft Bank, including the Chairperson, was
dissolved by the CBSL. The management has been handed over to the Bank of
Sri Lanka, the largest State bank in Sri Lanka and a new Chairman and three
directors have been appointed by the CBSL.
Repeated requests from the solicitors of the Chairperson to bail him out were
rejected by the Colombo High Court and the Chairperson and other directors
were further remanded in March 2009. The CID has sought assistance of the
Interpol to arrest Dora–the wife of the Chairperson who has been avoiding the
courts forwarding medicals from overseas. The magistrate blamed the police for
not acting promptly and allowing her to leave the country.
7.7 Summary of the analysis of case studies

The nature of the credit applications, approach, issues, negotiation process and
decision-making processes of all three case studies are summarized in Table 7-4
below. The explanations/justifications section of this table provides the
necessary background for the theoretical interpretations discussed in the next
chapter.
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4: Summary of the analysis of case studies data
Case Study I Case Study II Case Study III
Medium-scale credit for a garment Medium-scale credit for a car Small-scale credit, an upcoming
manufacturing company struggling with manufacturing company in Sri Lanka, service enterprise struggling with
lack of orders and liquidity problems. struggling with regulatory authorities and business and with financing problem
financing problems.
Casual, informal and personal. Both the Social, outside the bank at an investment Formal, within the normal banking
ch credit decision-maker and the client are forum, both the credit decision-maker and and credit rules. Then followed
socially powerful businesspersons. the client are socially powerful. Informal methods by the credit decision-make
credit application and accommodation.
Client was under threat of foreclosure Import protection? Protect foreign reserves. A big competitor penetrating into th
and redundancy. These automobiles were refused Soured relationship between bank o
The client was the highest single foreign registration on road worthiness and safety the client. Businessman without
exchange earner in Sri Lanka. issues. Investment promotion mechanism. social network.
tion Friendly. Accountants helped. Quick. Enterprise promotion oriented. Accountants Formal. No qualified accountants
helped. Quick. Dragged.
Without formal evaluation. Without formal evaluation. Decision one: Formal. Granted
n Granted, over the table. Granted, over the table. Decision two: Informal. Granted
three: Formal. Denied.
tion/ Sympathetic/patriotic grounds. Patriotic/nationalistic grounds. Decision one: Normal practice. Dec
ation Prevailing systems are not good. Prevailing systems are not good. Personal benefits, error rectifying.
three: Rigid application of rules.
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Chapter 8:Theoretical Discussion
CHAPTER EIGHT
8 THEORETICAL DISCUSSION
8.1 Introduction
This chapter further discusses the case study research data described, discussed
and analyzed in the previous two chapters from theoretical perspectives.
Theorization (or conceptual framing) is the “value-added” of qualitative
academic research (Llewellyn, 2003) and, according to Coffey and Atkinson,
“theorizing is integral to analysis; they are not separate stages in the research
process” (1996, p. 139). The findings of this research are theorized in three
steams. First, interpretation of various types of credit decisions observed in the
case studies and framing them conceptually into a matrix. Then an attempt to
strengthen the Marxian critique that accounting plays a significant role as a
technology in credit mechanisms and exploitation mechanisms. Finally, there is
an argument to establish a relationship between bank lending, the socio-
economic power of credit decision-makers and income/wealth inequality in the
Sri Lankan society. A common theoretical analysis was carried out for Cases I
and II, because of the similarity of their backgrounds, identical pattern of
decision-making processes and types of decisions to avoid repetition, and for a
cogent argument for theorization. Final conclusions were drawn from the
interpretations of all three cases.
As explained in Chapter four; Research Methods, much interpretation are

primarily based on inductive generalization where the researcher provides
empirical evidence to prove “how”’ it happened and “why”. However, some
interpretations are drawn based on abductive inferencing/reasoning where the
researcher argues that “something might be the reason” especially for “why”
questions. Therefore, interpretations are generally subjective and they are
presented by analyzing the research data with the support of Marxian critical
themes and other reliability and validation checks. Most of the “how” questions,
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for example “How can influential credit applicants get easy access to top level
credit decision-makers?” were interpreted with straight explanations such as:
“…these lenders and borrowers are friends and/or in the same social
network…”.
This chapter consists of five sections. First, it attempts to analyze the various
decision-making personalities observed in the case study stories. Second, it
argues to strengthen the Marxian critical claim on the importance of the role of
accounting in credit mechanisms and exploitation mechanisms using the
empirical evidence provided by the case studies. The third section answers the
research questions by providing empirical and theoretical evidence and further
develops them into a macro-level theorization of the research findings. Fourthly,
it provides a model for informal decision-making to summarize the factors
discussed in the previous two sections. Finally, it further investigates
theoretically to find the motives behind the decision-makers’ decisions (why)
and what methods they used (how).
8.2 Nature of decision-making

It is revealed that there are four basic types of decisions that have been made by
the credit decision-makers in these case studies according to the situation. It is
observed that some credit decisions are made following formal rules and some
are not. On the other hand, some credit decisions seem logical but some do not
exhibit any business sense but rather appear to be ridiculous. The nature of
decision-making is analyzed below.
8.2.1 The Chairperson: Case studies I and II

The Chairperson is an undisputed leader of 100-plus companies including seven
listed companies in the Colombo Stock Market. He is a socially and
economically powerful individual. He is also influential because of his position
as the President of a Government authority, WEDA. He is closely associated
with the government and political elites. It is argued that businesspersons in the
long run, to maintain their position of power, may accept certain responsibility
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to the whole of society (Davis, 1967). One of the researcher’s colleagues argues
that the Chairperson’s decisions in Cases I and II are rational because they were
intended to rescue 30,000 workers of the Tony Group and save foreign currency
by promoting an import substitution project, Lan-Car Ltd. He interprets this as a
reflection of the Chairperson’s perceived responsibility to the whole society. On
the other hand, it is argued that the social power holder might show his
willingness and ability to help others to feel powerful might not bother about
formalities in decision-making (Peay & Dyer Jr, 1989). However, this
“willingness to help others” is only a mere intention and does not make any
business sense therefore cannot be treated as rational.
Further, when this proposition was posed to a research participant regarding the
Chairperson’s credit decisions in Cases I and II, he argued, “Although the
Chairperson’s credit decision in the case of the Tony Group created a loss to the
Soft Bank after three–four years it was a relief to the workforce of nearly
20,000 of the Tony Group to have adequate time to find alternative
occupations…” and, he said “…but the decision to help Lan-Car was a winner
and Lan-Car is marching forward because of the Chairperson, giving an
expected return to the bank as well.” But his views on Lan-Car Ltd. were
proved incorrect as the CEO of Lan-Car is still struggling to manufacture the
number of cars he promised and had still not reached the break-even point even
in 2005. It was also revealed that even Tony had closed a few factories and the
workforce was reduced to 15,000 by 2005.
The two medium-sized credit applications; Tony Group and Lan-Car Ltd.,
would not have been accommodated if a solid organizational structure (formal)
and professional management culture (rational) were in place in the Soft Bank.
The Bank was run as an autocracy. The Chairperson was all-powerful and no
Board member or officer had the courage to oppose the decisions of the
Chairperson. But the bureaucracy was also challenged by the Chairperson
overruling the decisions of the credit officers of the Soft Bank in the case of the
Tony Group. Therefore, those clients who could approach him could bypass the
normal lending procedures that were rigid and not conducive for the new
175
concepts to grow. Although the theory of autocracy explains “how” the decision
was made it is not helpful in explaining “why” the Chairperson made decisions
which are not rational in a business sense. The concept of bureaucracy does not
support the motives of the decision-maker but it is helpful to explain why the
borrowers tend to resort to informal methods when they seek credit from banks.
Therefore, the question “why” remains still unanswered.
However, another colleague points out the extent of publicity the Chairperson
was aiming at and argued that ego-boosting also would have had significant
influence over Mr. Perera, the Chairperson, to make such irrational decisions.
To the extent that the decisions are informal, radical and irrational they attract
more publicity. The Chairperson, as an esteemed individual, was leading his
group of companies, to which the Soft Bank belongs, towards the largest group
of companies in Sri Lanka. Therefore, it could be argued that the Chairperson
would have been influenced by such attitudes but the motives are not clear and
decisions seem not rational.
8.2.2 Branch manager (BM): Case III

The concepts such as ego, self esteem, social power or even social responsibility
have little relevance in Case III since the decision-makers and credit applicant
involved were not socially powerful individuals or from a social network with
powerful backgrounds. They were in the middle management of the Bank. Mr.
Silva of Superclean believed that his major client (the Soft Bank) was doing a
favour to him and used to reward the bank officers informally as Sri Lankans
normally do. In the South-eastern culture traditional gifts differ from corruption
(Alatas, 1986 cited in Jayawickrama, 2001) and Mr. Silva’s free services at
Christmas and New Year time were treated as gifts.
Branch Manager (BM) Mr. Fernando was instrumental in building up

Superclean. Fernando, the branch manager who nurtured Silva and his business
Superclean, was promoted and transferred to head office. The formal rational
banking practice is studying on enterprising person, taking a calculated risk and
deciding on the nature and amount of credit entrepreneurs who in turn bring
176
business to the bank. In this sense BM Mr. Fernando has managed Silva’s
account as a true banker.
8.2.2.1 Manager–recoveries (M–R): Case III
Mr. Silva pays gratitude to the Manager–Recoveries (M–R) who had re-adopted
a comprehensive customer-rehabilitating approach even going beyond his
authority (informal) and reaping the results of his ingenuity and customer care
(rational). The M–R had a practice of re-structuring and transferring such loans
with new facilities beyond his authority to show very impressive performance
and managed to secure raises and rapid promotions as well. Though the credit
decisions made by the M–R in favour of Silva seem rational according to the
research participants the decisions were made informally without proper
authority. There was no substantial evidence available for major personal
gratifications offered by Mr. Silva to M–R. The most probable reason for the
informal decisions by the M–R could be that the intention of impressing the
management on his performance for rewards. This shows a kind of “petty
corruption” that prevails in the system and whenever the opportunities arise,
bank officers and the customers are very well prepared to resort to informal
methods.
8.2.3 The Credit Officer (CO) and the CM–R: Case III
The Credit Officer (CO), who was in charge of Silva’s account after Fernando’s
transfer, had a personal grudge with Silva and acted irrationally (overcharging
interest and delaying payments, etc.). He pretended that he was applying formal
banking rules and declined credit to Silva while harassing him for
“irregularities”.
Chief Manager–Recoveries (CM–R) was a senior banker and he too seems to be

following banking practices to the letter. He quickly discovered that former
officer had accommodated Silva without proper authority. He was yet to
impress the Management on his skills and performance. CM–R did not believe
Silva’s appeal about his business prospects, maybe due to adverse comments by
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the CO of the branch, and declined further credits. Also Silva did not have
qualified accountants to provide “convincing” financial projections about his
business prospects. CM–R was contemplating to serve a letter of demand
threatening legal action against Silva and his house which was mortgaged to the
Bank. The Management agreed with CM–R’s recommendations and Silva was
helpless.
8.2.4 Credit-decision classification

It is manifested that there is diversity in decision-making in the Soft Bank and
this might be common in Sri Lanka as a cultural phenomenon. These decisions
on credit mechanisms depend basically on the authority entrusted to the
decision-maker, the ability and the willingness in breaking or following rules of
credit policy. These decisions can be classified meaningfully using two
variables namely method used (formal or informal) and manifested sense
(rational and irrational). Therefore, four decision types are identified: Formal–
irrational (the type followed by CO and CM–R); Informal–rational (the type
followed by M–R); Formal–rational (the type followed by B–M) and Informal–
irrational (the type followed by the Chairperson). CO and CM–R strictly
followed rules therefore, formalities were adhered to but did not care about the
consequences are therefore, looked irrational. M–R made decisions which were
beneficial to both the decision-maker and the credit applicant, therefore they
looked rational but he had to follow informal methods since formal rules
prevent making such decisions. B–M managed within the formal system to
support credit applicants as well as develop business therefore, those credit
decisions looked rational. The Chairperson made informal decisions because he
was powerful with legitimate authority to break the rules but he provided
“solace” to the “needy”, to people who were “close” to him and therefore,
looked irrational in the business sense. These decision-makers are summarized
in Table 8-1 below with characteristics and attributes discussed.
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Table 8-1: Matrix of Credit Decision-Making
Manifested sense
Variable
Rational Irrational
Formal B–M CO/CM–R

Method used
Informal M–R The Chairperson
8.2.5 Rule-breakers are treated differently based on their access to power

This type of informal decision-making was possible because of a lack of strict
application of set systems and procedures within the bank. Although banks have
very well written policy and procedure manuals for most of the processes
especially in outlining the delegated authority levels, the Soft Bank culture was
influenced by the informal methods used by the Management and it was known
that rule-breakers were not punished properly due to favoritisms. Mere
documentation of guidelines to follow the set of rules will not serve the actual
purpose of setting up systems. The people involved in the systems should make
sure that delivery of quality output is what is most important to achieve the
corporate goal of the organization.
This was clearly evident in Case III as the research participants were of the view
that M–R would not have been punished if he and/or the client were from a
powerful social class. On the other hand, when the formal credit evaluation
procedures applied, Silva’s credit application was rejected; because there was
no backing from the client to influence the higher authority in the bank, because
he is not a privileged powerful individual, and because his financial projections
were not vetted by accountants. This phenomenon is further discussed below
using Marxian critical lenses.
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8.3 Role of accounting as a Marxian general-intellect

The accounting system is capable of recording the “affairs of the most
unscrupulous money-lender or crooked businessman” (Yamey, 2005, p. 81).
Hooper and Kearins (2008) stress the importance of the role of accounting as a
key technology in facilitating the exploitation mechanism. They point out that
accounting is a means of serving the owners of capital in accumulating wealth.
Both credit decisions in Cases I and II provide evidence to show exploitative
use of deposit funds in the Soft Bank based on accounting projections without
following proper banking procedures. The borrowers used cash flow projections
to prove their business prospects; on the other hand the Chairperson used those
cash budgets to convince the board of directors to ratify his casual decisions.
The role played by accounting in these two cases helped the borrowers to
exploit credit facilities for non-feasible projects while helping the Chairperson
to boost his image. Hence, this research strengthens the Marxian critical claim
that, the accounting function plays a significant role in the concentration of
wealth through the exploitation and credit mechanisms. This process in turn
results in sustaining or even increasing the gap in wealth between those who are
powerful/influential and those who are powerless.
The relationship between accounting and exploitation go beyond the technical

level of facilitating to justify the exploitation mechanism hence the owners of
capital are protected (Chiapello, 2007). The claim: “even when badly kept and
useless as a decision aid, accounting contributes to the legitimacy of practices
originally considered illegitimate” (2007, p. 264) is well endorsed by the
Chairperson’s behaviour in Cases II and III where he got his illegitimate
decision converted into a legitimate one by ratification using cash budgets—a
tool of accounting.
Identifying the problem is a major intellectual responsibility and exposing the

roots of exploitation is a precondition for liberation; Dillard and Tinker (1996)
insist that bringing structural contradictions into consciousness and to develop
them to the highest level of instability is one purpose of critical accounting
180
research. The evidence provided by this research further strengthens this claim.
Further Case III, where the credit applicant was rejected brings such
discriminating deeds and the increasing importance of intellectual systems such
as accounting in exploitation mechanisms into consciousness.
In a macro point of view, when productivity motives become secondary to

political ones such as in Cases I and II, the accounting reports were rarely
discussed or used for accountability and accounting systems were seem to be
maintained only as a regulatory requirement to legitimate events to external
bodies and the populace (Wickramasinghe & Hopper, 2003).
8.3.1 Addressing the research questions
As De Brunhoff (2003) suggests financial activity should be taken out of the

hands of the rich owners of money capital and regulated by the state so that
some deserving powerless individuals like Mr. Silva in Case III can not only
develop their businesses but also save their houses. This case provides evidence
for De Brunhoff’s claim that entrepreneurs and workers should not be
dependent upon the interests of owners of capital and should not be at the mercy
of bureaucratic banking officers.
But De Brunhoff (2003) suggests that “it is necessary to understand more fully
the complex relationship between financial and industrial capital, and the
respective roles of financiers and entrepreneurs in capital accumulation.
Therefore, lack of support from the government in developing business
enterprises appears to have a detrimental impact on the formal banking systems.
That is, in the absence of regulatory policies and a conducive economic–
political environment, the contribution of individual characteristics of credit
decision-makers may be fostered and amplified.
The central research question in this research is “Do credit mechanisms and
income/wealth inequality create a mutually reinforcing cycle in Sri Lankan
society?” The supportive other research questions are:
• Are credit decisions made in favour of influential businesspeople?
181
• Are certain demographic groups at a disadvantage in obtaining credit?
• As a result of favourable credit decisions, could influential groups of

people get richer and more influential?
• Are “ability to obtain credit” and “becoming more influential” mutually

reinforcing?
To build up arguments to the central question it is useful to address the above
four supportive questions first.
8.3.2 Social power and access to credit

Are credit decisions made in favour of influential businesspeople? And Are
certain demographic groups at a disadvantage in obtaining credit? All three
case studies provide evidence to substantiate the claims of certain researchers
discussed in the preliminary literature review presented in chapter one. For
example, the Governor of the Bank of England claims that the access to start-up
or early-stage finance for disadvantaged groups in poor neighbourhoods is a
problem. Silva in Case III is from a “disadvantaged group” in a “poor-
neighbourhood” and access to capital through credit was truly a problem for
him.
Another argument was that “budding entrepreneurs from different demographic

groups do not have similar opportunities in accessing finance; some groups
have less access while other groups have more access to finance capital”. With
the evidence provided in this research, this argument can be restated as “certain
poor entrepreneurs have less access while powerful businesspersons have more
access to credit”.
Another claim is that a growing body of evidence suggests that owners of small
businesses from some demographic groups may have less access to institutional
financing (Bates, 1973; 1991; Cavalluzzo & Cavalluzzo, 1998). This research
has added further proof to this growing body of evidence to strengthen the
argument that there is discrimination in lending based on social status and
economic power. This means poor/powerless groups are discriminated against
182
in provision of credit because they lack certain qualities and factors such as
money, inclusion and networks, etc. which are prerequisites for obtaining credit.
The criticism of banks for their dominating role in providing finance to SMEs
because there are very few lenders who facilitate them (Whincop, 2001) is also
substantiated by the case study stories in this research. Banks, when run under
autocratic leadership, especially when systems are disregarded and management
is weak put SME credit applicants such as Silva in Case III on the receiving
end.
Therefore, the claim of Marx and Engels that the capitalist class, who own the
means of social production, control society and construct values and social
relationships in their own interests is further substantiated by the evidence
provided in this research. Further, in the contemporary context capitalism
promotes separation of the poor from the whole environment (James (2008).
This is the Marxian concept of “alienation”; with regard to workers, but now it
is apparent in almost every field where every-day life is commodified
(Dominelli & Hoogvelt, 1996; Tinker, 1999). Case study III provides
verification for such alienation where agents discriminate or deny the rights of
one group of people to protect and/or strengthen another group in society. It is
argued that “people are poor today because of the failure of the financial
institutions to support them in the past. Like the right to food, clothing, shelter,
education and health, credit should also be recognized as a fundamental human
right” (Yunus, 2007, p. 2). But this right was denied to Silva who was desperate
to save his business and house. Silva had proof of his business acumen and
enterprising skills. The only lapse on his part seems to be “overtrading”
especially without a “cordial relationship” with his bankers. But what Silva did
not have is the social power or membership of a powerful social network to
support him in finance capital when he was in need.
8.3.3 Access to credit and social power are mutually reinforcing

The other two supportive questions are: As a result of favourable credit
decisions, could influential groups of people get richer and more influential?
183
And Are “ability to obtain credit” and “becoming more influential” mutually
reinforcing?
According to case studies I and II, the credit facilities were granted casually on
a personal basis without following the policies and procedures of the bank.
These favourable credit decisions helped the borrowers to remain in the market
doing “trial and error” businesses masquerading as “successful”
businesspersons and enjoying government concessions on business
development programmes such as long-term leased lands, export promotions
and tax advantages, etc. This situation enables the industrial capitalists to
accumulate their wealth even though they and their loans are classified as bad
by banks. The loans are serviced with further borrowings. On the other hand, in
particular, these accounting treatments facilitated the financial capitalist (the
Soft Bank) to declare some unearned profits and artificially push the non-
performing loans down to dress up the financial statements.
Therefore this capitalist credit mechanism is required for financing new

industrial investments, and it also centralizes the money of all social classes.
Owners of small savings are passively involved in the process, while the
ownership of financial assets is highly concentrated in the hands of a few
wealthy people, including some industrial capitalists. This concept of extreme
extraction of value from a group of people in the society, is termed as
exploitation in Marxism.
Marxian critical theorists argue that, in the final stage of capitalism bankers and
industrialists set the ground rules in distributing the benefits with ultimate
power balancing between capital and labour. Their studies investigate how
capitalist forces influence decision-making/lending processes by weakening
state power (economic–political environment) and ignoring the role of peaple’s
abilities, and the skills of bank professionals and at the same time enhancing the
social power of a few “real” decision-makers in the sector. It is evident, in these
case-study stories, that most individual, social-cultural and economic-political
factors are collectively directed towards protecting the social power of an
184
advantaged class of the capitalist society. Social power, privilege and inclusion
in various activities are intertwined with possession of money in capitalist
society, meaning that the economic power afforded by money eventually leads
to social power. Therefore, social power becomes the fundamental driving force
for decision-making based on preferred social norms in the state and private
institutions, particularly in the finance sector.
And, in societies where commodity exchange is widespread, the economic

power afforded by money naturally leads to social power. “Money is the
monopolist of the ability to buy, or in Marxist terminology the ‘universal
equivalent’”, (Lapavistas, 2003, p. 70-71). Cases I and II provide evidence to
strengthen this argument and therefore, it is evident that, as a result of
favourable credit decisions, ‘influential’ groups of people could get richer and
more influential—“ability to obtain credit” and “becoming more influential”
seem mutually reinforcing.
Based on the above analysis, the central research question is addressed below
with a macro-level discussion using Marxian critical theories.
8.3.4 Discussion of the central question

Do credit mechanisms and income/wealth inequalities create a mutually
reinforcing cycle in Sri Lankan society?”
According to Marxian analysis, the distribution of profits between entrepreneurs

and finance providers is awkward, but this accumulation of capital needs both
of them. The credit system transforms idle money into loans that can earn
interest for their owners and redirects it back to accumulation. This loanable
money capital, Marx says, “no longer passive but active, usurious, [and]
proliferating capital” (1978, p. 569 cited in Lapavistas, 2003, p. 70). Case-
studies I and II provide facts to strengthen the Marxian claim that, the credit
system is a serious weapon in the battle of competition and forms a significant
social mechanism for the centralization of capital. Also, Case III provides proof
that a lack of money translates into powerlessness, deprivation and exclusion
185
from several social activities for the majority of the poor under capitalism. In
capitalist society, successful participation in social affairs depends less on a
person’s abilities and skills and more on possession of money.
Inequality is a global phenomenon. Some researchers argue that economic

development that was basically conceived in terms of industrialization and that
liberal democracy did not bring marked change to the problems of the Third
World countries (Schuurman, 1993). The external pressures, including
privatization and import liberalization, eventually create more opportunities for
accumulation of wealth to the group of influential capitalists, making them more
socially powerful. Hence, the issue of income/wealth inequality in a country
cannot be separated from that of the widening gap between rich and poor
countries through globalization of business and through propaganda for
privatization to weaken State power especially in developing countries.
The Marxist interpretation is that inequality is a structural component of

capitalist accumulation in a world economy. The ultimate result of these
influences from international capitalist forces is a continuous widening of the
gap between rich and poor nations further increasing inter-country inequality.
The major tool used for this purpose is the heavily conditional hold of financial
capital controlling the access to it by the poor countries. Despite the huge
differences among development studies scholars, they all agree on one fact: that
economic development in the developing countries will continue to be hindered
by continuous structural roadblocks—including access to credit.
Kuznets’s (1955) assumptions, inferences and even “facts” such as the

economic development of a country would trickle down the benefits to the poor
and would reduce the gap between the rich and poor, have been proven false by
the history. For example, the share of national income enjoyed by the poor has
been continuously reducing in Sri Lanka and was reported as 1.08 percent in
2003 (The Central Bank of Sri Lanka, 2008).
186
There seems to be a barrier between ordinary people’s potential (through

abilities, ideas and skills) and access to money capital in the capitalist society.
In the meantime, people (with or without abilities, ideas and skills) who possess
money could gain the potential and reap the benefits. More seriously, when
access to money capital is coupled with true potential with ideas, abilities and
skills, it could have an undue advantage over moneyless people and on
exponential effect in accumulating wealth.
Based on the evidence discussed above, it could be theoretically argued that

there is a tendency to make credit decisions based on preferential measures
when the credit applicant is socially and economically powerful and the lending
decisions are made by abusing legitimate authority overruling the normal
banking practices for credit evaluation. Exploring from a Marxian critical
theory perspective, Lapavistas (2003) explains the motives behind such
arbitrary lending decisions as follows:
Social power, privilege and inclusion in various activities are intertwined

with possession of money in capitalist society. In capitalist society,
successful participation in social affairs depends less on a person’s
abilities and skills, and more on possession of money (p. 64).
Therefore, all individual, social-cultural and economic-political factors are

collectively directed towards protecting and strengthening the social power of
an affluent class within the capitalist or feudal society. The economic power
afforded by money eventually leads to social power and in turn, social power
becomes the fundamental driving force of arbitrary/informal decision-making in
the banking/finance industry in Sri Lanka. Then, because the powerless are
ignored, the poor class is neglected. Equally, lack of money translates into
powerlessness, deprivation and exclusion from several social activities for the
majority of the poor under capitalism.
The next section elaborates this discussion further by investigating the possible
reasons and motives behind these irrational and informal credit decisions which
are made differing to preferential social norms.
187
8.4 Informal decision-making model

When the informal decisions involved the decision-makers at the highest level
in the bank, it is more likely that the decision-maker was influenced by the
motives of power-boosting through the credit and exploitation mechanisms
backed by accounting technology coupled with the need to achieve esteem
needs. But when the informal decision involves the decision-makers at the
middle level of the hierarchy of the bank, it is more likely that the decision
makers are influenced by genuine banking spirit or motivated by rewards
expectancy. The powerful decision-makers disregard systems and abuse their
authority to accommodate socially powerful credit applicants. The credit
applicants from the disadvantaged group of people are declined through strict
application of banking rules.
For the decision-maker, the ability to break the rules is intensified by the
presence of a weak board of directors, weak organizational structure and
unprofessional procedures. It is also promoted with the cultural and egoistic
motives of accommodating informal requests backed by “legitimate” decision-
making authority.
Lack of support from the government in developing the SME sector seems to be
having a significant impact on the formal banking systems with regard to
financing SMEs, both formally and systematically. These forces collectively
increase the propensity for creating on informal decision-making process
especially when the organizational structure is weak. These factors are
summarized and presented below in a model illustrated in Figure 8-1: Arbitrary
Credit Decision-Making Model.
188
Chapter 8: Theoretical D
GOVERNMENT POLICY ON SME DEVELOPMENT
LACK OF
O E
WEAK BOARD OF LEGITIMATE SPECIFIC
R N
DIRECTORS AUTHORITY FOR GUIDELINES &
G V
PRIORITIES FOR
A I DECISION-MAKING
SMEs.
N R
I O
Z N WEAK
PROPENSITY Credit
INFORMA
ORGANIZATIONAL ABILITY TO BREAK
A M TO MAKE
RULES INFORMAL
Mechanism LENDIN
T E STRUCTURE/
DECISIONS backed by
DECISION
I N SYSTEMS Accounting
O T
POWER-
N
BOOSTING
A ACCOMMODATION
UNPROFESSIONAL EGOISM
L OF INFORMAL
PETTY-
PROCEDURES
REQUESTS CURRUPTION
S O C I O- E C O N O M I C ENVIRONMENT

Figure 8-1: Arbitrary Decision-Making Model: Combined Influence of Individual, Organizational, Political an
Environmental Factors on Informal Decision-Making in Formal Banking System in Sri Lanka
189
Chapter 8: Theoretical Discussion
8.5 How and why are credit decisions made informally and
differently?
Case studies I and II show that informal lending takes place, when the decision
maker: (a) has unchallenged authority and; (b) was influenced by motives such
as ego, self-esteem or favouritism. The case studies data analysis in chapter
seven also revealed that this informal lending will not occur just for reasons of;
a) benefits to the institution (bank) and/or decision-maker; or
b) the personal relationships or gratifications; or
c) technical issues such as the extra liquidity position of the lender; or
d) patriotism/nationalism or social responsibility. But these factors may

have had an impact in influencing the decision-makers.
The case studies show that, when the decisions were made at the highest level,
the informal lending decision might have been made as a result of a
combination of social attributes such as social power, influence, inclusion and
prestige, individual traits such as self-esteem, ego, and individual aspirations.
Marxian analysis argues that these individual traits are super-structural. As
discussed in the literature review chapter, structure plays a vital role in shaping
one’s motives. The structure under review is class-based capitalism and
therefore, capitalists ‘favour’ their fellow capitalists to strengthen their social
network and boost their power, as is evident in this research. Also, the findings
of this research support Goulet’s (2002) notion on the interconnectivity of
vested interest and disproportionate political power of privileged classes and
show how these essential attributes of bank capitalists in Sri Lanka contribute to
enhancement of their social power which, in turn, boosts the capacity of
decision-making within the credit mechanism.
190
8.5.1 Petty Bourgeois

With regard to the justification of lending to an automobile manufacturing
company in Sri Lanka, Allahar’s (2004) theory of “petty bourgeois nationalism”
partly but convincingly explains the possible motives of the finance provider
who is a traditional business individual, because the petty bourgeoisi is more
traditionally in favor of protectionism according to class-bound nationalism.
They are unable to compete internationally, use masks such as nationalism and
patriotism to promote and protect their specific, locally produced goods and
services. This powerful class places their egoistic interests and symbolic gains
before the economic interests at large. These traditional businesspeople, who
could not completely alienate themselves from the feudal paradigm as the
capitalist class did in the industrialized countries, are not sophisticated enough
to compete internationally and their business is restricted to the local market.
They use masks such as nationalism and patriotism to promote and protect their
specific spheres of operation: local industry, local manufacturing, and the
exchange of locally produced goods and services (Allahar, 2004). In the case of
Lan-Car Ltd., this exchange of goods and services is clearly evident where the
Soft Bank Chairperson provided ‘market support’ by promising to buy
automobiles from them in addition to provision of financial capital. What the
Chairperson was primarily targeting was the publicity which is an essential
requirement to boosting his popularity and therefore to enhance his social power
base.
Further, as Munck (1986, cited in Allahar, 2004) stressed, nationalism matters

because people die for it but the motive is not clear. Therefore, analyzing and
interpreting the behaviour of such petty-bourgeois are useful endeavours and
important in discovering the motives of such irrational decision-makers.
8.5.2 Four birds in one shot

The Chairperson made credit decisions to disburse loans and blew his own
trumpet to the board of directors of the bank about his ‘business development’
drive while showing off to the general public about his ‘patriotism’ to the
191
country. The Chairperson was aiming at four birds with one shot, i.e., fulfilling
egoistic motive, strengthening his position as the Chairperson of the Soft Bank,
becoming more powerful as the President of a state authority and boosting
popularity among the general public. The more devious and “smart” these
performances of these types of individuals are the more they achieve their
personal goals at the cost of public funds, customer deposits and minority
shareholders. This argument is built on the claim of Hooper and Karin (2008)
on the wealth confiscation through the Marxian concept of an Exploitation
Mechanism.
8.5.3 Exploitation of minority shareholders

On the other hand, even small shareholders are affected by such decisions
which hamper the institution’s profitability, returns and therefore distribution of
dividends. Moreover, publicity given for such risky lending decisions creates a
negative image for the lending institution among the business and investment
community and sends adverse signals to research units of stockbrokers and
other companies with large investment portfolios. The invariable result is
circulation of unfavourable research reports on the target institution by those
researchers and, the natural consequences are increased selling pressure and
depleted demand to the shares of such institutions and ultimately the inadvertent
crashing of the share price. This scenario has little, or no effect at all, on the
managing owners since they do not expect genuine business returns such as
dividends or capital gains but numerous other returns such as fringe benefits,
other perks and fulfilling their other motives such as “feeling powerful”. The
ultimate sufferers are the small shareholders of such companies and sometimes
its employees. But in the worst case scenario, this type of loss of confidence can
infiltrate into the general public and could result in a “run” on deposits and
finally could be exposed to a collapse as was evident in the case of Soft Bank in
2008.
Due to resulting low share prices, these institutions are not exposed even for
take-overs, hostile or otherwise, because the present owners have the controlling
192
power with more than 50 percent shareholdings. This accumulation of share

ownership has been carried out by making use of the loopholes in the regulatory
policies and procedures regarding ownership restrictions. It is interesting to note
that, the share price fell by 50 percent from LKR28 to LKR14 during the ‘run’
in December 2008 and, when the CBSL had to intervene and changed the
management by appointing a new Chairperson and a board of directors, the
market quickly responded by bouncing back the share price to LKR24 and since
then it has improved gradually, and touched LKR35 closing the gap with the
industry PE ratio in January 2009.
It is quite interesting to conjecture why bank capitalists would take such

exorbitant risks in lending money especially when the prevailing risk-free
government securities carry rates of interest higher than the average rate of
interest offered on deposits. Banks are in a very comfortable position to make
their margins which are moderately thin but steady and secured. Such irrational
behaviour by owners of financial capital has very little justification.
8.5.4 Importance of State intervention

Lack of state support could result in detrimental impacts on financing
enterprises, forcing certain decision-makers to make uninformed, informal and
sometimes illogical decisions in their own interests. But if the credit mechanism
is completely regulated and monitored by the state as Marxian theory advocates,
there would be momentous changes in the whole structure of the capitalist
accumulation of wealth. Therefore, De Brunhoff (2004) suggests that “it is
necessary to understand more fully the complex relationship between financial
and industrial capital, and the respective roles of financiers and entrepreneurs in
capital accumulation.
It has been revealed by surveys of small businesses (for example, in Sri Lanka
and Tanzania, see section 2.5.2) that State support is vital in developing
business enterprises. The suggestion to strip the powers of rich owners of
money capital because the entrepreneurs should not be dependent upon the
interest of such decision-makers is further supported by this research. Had there
193
been a proper SME development programme in Sri Lanka, the three credit
applicants considered in this research would have been in a better position.
Tony and Yusoof would have been advised appropriately and been guided
straight to viable projects. Yusoof realized the Lan-car was not up to standard
lately, collaborated with Korean manufacturers and abandoned the original
project. Silva may have been offered financial back-up and business strategy
assistance. The Marxian perspective is that state intervention is part and parcel
of capitalist development though the promotion of capitalism did not mention
that explicitly. These cases confirm Isbister’s (2001) argument that “It is a
serious misunderstanding of capitalism to think that it consists of a private
sector alone or that it stands in opposition to government” (p. 38). It is evident
that capitalists while opposed to certain government policies, widely depend on
governments but without proper guidance from the government these petty
bourgeois “nationalists” just go on gut feeling influenced by personal motives
such as those seen in case-studies I and II. Moore’s (1997) criticism of
Smithian/neo-liberal arguments about governments as obstacles to capitalism in
the contemporary Third World are analogues is proved valid. It is worth noting
that Saad-Filho’s (2003) claim that
“…developed markets arise only through state intervention. The state

establishes the institutional and regulatory framework for market
transactions, including property rights and law enforcement. It regulates
the provision of infrastructure, ensures that a healthy, trained and pliant
workforce is available, and controls social conflict. The state establishes
and regulates professional qualifications and the accounting
conventions… (2003, p. 9).
8.5.5 Credit mechanism is a terrible social mechanism

The credit system transforms idle money into active money capital and, in
society at large, the economic power afforded by money naturally leads to
social power.
The discovery in case-study III is that, when the informal decision-making was
involved at the middle and lower management levels, decisions might have been
194
made as a result of rewards expectancy on performance and/or reciprocation

expectancy from the parties involved. On the other hand it was observed that
Mr. Silva is powerless—he lacks the social network to reach the top
management of the bank. Also note that Superclean is a small enterprise and
therefore it was ignored.
One discovery in cases I and II is that the capitalists from the finance and
industrial sectors act together in exploitation and as a result they get richer and
more powerful. The implications vary from lost opportunities to waste of
resources. The important elements of this reasoning are identified as the credit
mechanism and the role of accounting as a technology for smooth functioning
of the exploitation mechanism. Certain capitalists often use masks such as
“nationalism/patriotism”, or “social responsibility” to maintain the capitalistic
socio-cultural structure which, in Marxian analysis, is detrimental to economic
development as well as to the equal distribution of income/wealth of a country,
among its people. Also the impact of such systems goes beyond the boundaries
of countries through “globalization” and contributes towards widening inter-
country differences as well in terms of economic development.
8.5.6 Structure over ideology and institutions over individuals

Arbitrary/informal decision-making is encouraged when standard systems and
procedures are not effectively implemented in an organization. Especially,
financial institutions are supposed to have, and they generally do have, well
written policy and procedure manuals in accordance with the regulatory
requirements. Although industry standards of the Sri Lankan banking sector are
comparable and on par with international standards by rating agencies, the
banking culture, as discussed in detail in the chapters five, six and seven, is
highly contaminated with traditional arbitrary methods.
Therefore, it is not only the need for individual power that generates arbitrary
decision-making but also the systemic stimulants induced by the institution and
the social network as a whole, because, as the Marxian critique suggests, power
is held by capital and exercised on its behalf.
195
Chapter 9 : Conclusions
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CHAPTER NINE
9 CONCLUSIONS
9.1 Introduction
This research on the credit mechanism in Sri Lanka is pioneering. The previous
research elsewhere provides evidence for the existence of the discriminatory
nature of financing, and the subsequent neglect of disadvantaged groups in
society. This research takes that premise further by an empirical investigation
and attempts to link it theoretically to the country’s income/wealth inequality.
The central research question, “Do the credit mechanisms and income/wealth
inequalities create a mutually reinforcing cycle in Sri Lankan society?” is
answered by combining the arguments developed from all three case studies.
This research provides empirical and theoretical evidence to argue that there is a
possibility of a relationship between the credit mechanism and income/wealth
inequality in Sri Lankan society and, this relationship seems mutually
reinforcing. Further, the research findings strengthen the Marxian critique that
accounting plays a significant role as a technology in the credit and exploitation
mechanisms. The findings of this research are useful in optimizing
understanding of the credit mechanism and some behavioural aspects of credit
decision-makers in the Sri Lankan banking industry.
The conclusions are helpful in formulating policies for more productive

financial capital mobility systems in Sri Lanka and other similar countries. This
research reveals that the implementation of proper policies and systems with
regard to credit mechanisms warrants state intervention. The Soft Bank crisis
showed that crony capitalism, which facilitates the exploitation mechanism at
its extreme and enables the credit mechanism to work mainly for the rich, is not
sustainable. Such credit mechanisms waste resources and ignore the need for
nurturing potential projects, which in turn create roadblocks for employment
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generation and economic development, and help to keep the poor frustrated,
finally resulting in maintaining income/wealth inequality.
9.2 Summary of the three cases

Case study I: Tony Group: a garment manufacturing business, was the highest
single foreign exchange earner in Sri Lanka but was struggling with a lack of
orders and liquidity problems and the consequences were dire with huge
probable redundancies. Tony had a close relationship with the Chairperson of
the Soft Bank as both are powerful businesspersons. He was privileged to get a
quick meeting with the Chairperson. After a short, friendly negotiation, with the
help of accountants, Tony secured a US$4 million credit line over the table,
without formal credit evaluation. The Chairperson justified his decision on
sympathetic (social responsibility/patriotism) grounds and cash flow projections
provided by the accountants.
Case study II: Yousef: a car manufacturer in Sri Lanka, was struggling with
regulatory authorities and financing problems. The owner, Yousef, of Lan-Car
Ltd. was powerful enough to contact the Chairperson of the Soft Bank directly,
and was privileged to get an instant credit line without formal credit evaluation.
However, the company’s automobiles had been refused registration because of
roadworthiness and safety issues. The Chairperson’s justification was under the
mask of patriotism, to save foreign exchange, etc., and was supported by
positive cash flow projections made by accountants. These informal credit
decisions were unjustified as demonstrated.
Case study III: Silva was a powerless janitorial-service enterpriser struggling

with a loss of business and financing problems. Silva prospered fast at the
beginning and he assigned his success to the Branch Manager (BM; credit
decisions were formal and rational). Then, Silva had to deal with the Credit
Officer of the branch but was not comfortable because of some personal
grudges (CO; credit decisions were formal and rigid). But Silva recovered with
the help of Manager–Recoveries (M–R; credit decisions were informal and
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rational) who went beyond his authority to grant credit to Silva. Finally, Silva
ended up with the Chief Manager– Recoveries (CM–R; credit decision was
formal and rigid) who applied the rules strictly and Silva lost his house and was
imprisoned. M–R was fired.
Based on the above case analyses, the outcome of the discussion of the other
four research questions is that there are credit decisions made in favour of
influential businesspeople and therefore, certain demographic groups are at a
disadvantage in obtaining credit. As a result of such favorable credit decisions,
certain influential groups of people become richer and more influential,
therefore, it is inferred that, the “ability to obtain credit” and “becoming more
influential” are mutually reinforcing.
9.2.1 Post-research events

Post-research events enhance the credibility of the data collected in this research
and are useful in verifications and validations of claims and arguments and
therefore, increase the dependability of the outcome of this research.
The instant credit extended to the garment manufacturer in Case I and the car
manufacturer in Case II directly by the Chairperson proved futile. Both the
credit facilities were classified as non-performing loans (NPL) later. By 2006,
the Soft Bank’s NPL levels, at 12 percent of total loans, was the highest among
the banks. The Soft Bank rating outlook was downgraded to negative by rating
agencies based on weak solvency, slow NPL resolution, insufficient internal
capital formation and challenges faced in raising fresh equity capital. The level
of profitability of return on assets of 0.7 percent, coupled with its high dividend
payout ratio of 42 percent of profits after tax, together with bad debts prevented
internal capital formation to improve solvency.
The middle-level recovery manager, M–R was fired for unauthorized decisions
which included granting credit facilities to Silva. However, the research
participants were of the view that M–R would not have been punished if
he/clients were powerful/rich/influential. M–R is still respected among his peers
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for his knowledge and skills. Silva’s credit application was declined based on
formal credit evaluation. Silva is not influential, he is not a powerful individual,
and therefore the bank proceeded with legal action including selling his house to
recover his debts. Also, Silva was jailed for non-payment of employee
provident fund contributions.
Soft Bank faced a ‘run’ in late December 2008 due to a loss of public
confidence in the Chairperson. The Central Bank of Sri Lanka (CBSL)
intervened and rescued the Bank. The Board of Directors of the Soft Bank,
including the Chairperson, was removed by the CBSL. The management was
handed over to another stable bank in Sri Lanka. A threefold increase in
provisions for NPLs, which were largely extended to the group companies by
the new management, substantiates the claim that credit had been provided to
connected parties on preferential norms without proper evaluation.
9.3 Research conclusions and contribution to knowledge

Five individual credit decision-makers and their four decision types were
investigated in relation to the credit mechanism, the unit of analysis of this
research. The case studies focused on the behaviour of decision-makers, the
organization structure, the management style of the Soft Bank and the credit
culture in Sri Lanka at large. The discussion centred around the links between
accounting technology, social mechanisms and income/wealth inequality as a
global phenomenon. Therefore, this research is a study on both the micro level
(individual or institutional level) and a macro level (income/wealth inequality,
accounting and the credit culture in Sri Lanka). Two theoretical models are
proposed for Informal Credit Decision-Making (Figure 8.1) and on increasing
income/wealth inequality. These models were developed by combining
empirical evidence and theoretical interpretation of the research questions and
answers. The core findings of this research are presented below as empirical
findings: Marxian theoretical confirmations, methodological derivatives and
combined conclusion.
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9.3.1 Empirical findings

Credit applicants Tony and Yousef, who were sufficiently powerful and/or
privileged to reach the ultimate decision-making authority, were at an advantage
and were successful in obtaining necessary finance for their projects.
Conversely, the credit applicant, Silva, lacking social power or any other
influence, could not obtain the necessary finance and, therefore, failed.
The social power involved was such an influential factor it could even reverse
regulators’ decisions, so that Yousef’s unroadworthy automobiles were declared
to be road-worthy. But this power or influence was not available to the poor
enterpriser to turn around his small and viable cleaning business during hard
times.
All three credit applicants had failed formal credit evaluation. In fact Tony had
been reported to the Credit Investigation Bureau for default by four other banks
and Yousef’s fibreglass automobile had been rejected by authorities on
regulatory grounds, lack of road-worthiness and safety. But Tony and Yousef
were successful in obtaining credit while Silva was discriminated against.
All three case studies provide empirical evidence to the claim that the
application of credit rules had become a negative device in this particular
banking environment. These credit rules are meant to be superseded by the
decision-makers to provide credit to all businesses: small, medium or large. But
encouraging poor clients can have a negative effect on decision-makers’
prospects as is evident in the Silva case where the M–R was fired for “abusing
authority” by superseding rules and providing credit to Silva, a deserving credit
applicant.
Both Tony and Yousef had qualified accountants working for them. They had
the capacity to provide professional project reports, feasibility studies with
convincing cash-flow projections and profit forecasts to justify their credit
requirements. But Silva was a small businessman who lacked the power of
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accounting technology to convince the credit decision-makers and to pass the

credit rules’ requirements and therefore was not successful in obtaining credit.
In the decision-making process, it is evident that accounting tools such as profit

planning and cash-flow projections play significant roles in justifying credit
decisions. The credit applicants supported by qualified accountants have an
advantage in obtaining favorable credit decisions. The small credit applicant
who cannot afford qualified accountants and without “professionally prepared
cash flows” etc., failed to convince credit decision-makers.
This research revealed that the credit culture in Sri Lanka is contaminated with
informal methods. The informal nature in this decision-making is known but not
in its entirety to all the role players in the mechanism. Yet it plays an important
role in financing businesses, especially to the advantaged groups of society.
Informal methods were apparent on all fronts in the process, from both credit
applicants as well as credit providers, at all levels from small to large clients
and from the junior credit officers to the top-level decision-makers. These
informal methods are more effective when it involves powerful individuals
rather than ordinary persons.
It was also evident empirically that the state policies and systems on
entrepreneurial development and business financing are weak or not in place at
all. The inconvenient process and the difficulties experienced by Yousef is an
example showing that there was no proper system in place to evaluate the
viability of such projects, especially when they are in the national interest,
involved economic policy issues and required large resources. Also it was
revealed that businesspersons lack confidence in existing systems and
regulatory frameworks. On the one hand Yousef did not agree with the
regulators on the non-viability of his automobile project while the Chairperson
viewed the regulators as obstacles.
Much diversity was observed in credit decision-making in Sri Lanka during this
study. The credit decisions are largely dependent on the extent of authority
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entrusted to the decision-maker and his/her ability and willingness to break or

follow the rules of the credit policies and credit administrative procedures.
There is empirical evidence to claim that the Chairperson was steered to
informal credit decisions largely by his desire to strengthen his network, show
his powers and to project himself as a saviour of “helpless entrepreneurs” and
he used masks such as patriotism to justify his decisions.
It was empirically revealed that import protectionism is promoted with ulterior

motives. This might be due to a lack of proper policy, systems and institutions
to identify and nurture potential entrepreneurial projects. The petty-bourgeoisie
is more traditionally in favour of import protectionism. The traditional
businesspeople, who are not sophisticated enough to compete internationally
and whose business is restricted to the local market, use masks such as
patriotism to promote and protect their specific spheres of operation: local
industry, local manufacturing, and the exchange of locally produced goods and
services. This exchange of goods and services is clearly evident where the bank
Chairperson provided market support by placing an order in advance to buy
automobiles from the borrower in addition to granting him financial capital. It
was also revealed that state sponsorship in assessing, evaluating and developing
projects is not encouraging or not in place at all. This situation has led to
making credit decisions which are naïve and by taking an uncalculated risk, or
on a trial and error basis. Therefore, resources are wasted, potential
projects/entrepreneurs are neglected and economic development is hampered.
9.3.2 Marxian theoretical confirmations

The importance of the role of accounting as a key technology in facilitating the
credit mechanism and exploitation mechanism is manifested in this research
too. Both Cases I and II provide evidence to show the exploitative use of
deposit funds in the Soft Bank without following proper evaluating procedures
but on professional accounting projections. The borrowers used cash-flow
projections to ‘prove’ their business prospects. On the other hand the
Chairperson used accountants and accounting reports to convince the board of
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directors and to justify his decisions. Hence, it is evident that accounting

functions play a significant role in the exploitation and concentration of wealth
through the credit mechanism. Therefore, accounting is a strong persuasive
technology which serves the wealthy and sustains inequality.
Nationalism in the guise of import substitution serves to preserve class

differences between the owners of capital and the working class. According to
Marxian analysis, the distribution of profits between entrepreneurs and finance
providers is awkward, but this accumulation of capital needs both of them. The
credit provided under the mask of nationalism activates the credit mechanism,
transforms idle money into loans that can earn interest for their owners, and
redirects it back to accumulation, thereby increasing the class difference.
Individual traits are super-structural. Structure plays a vital role in shaping one’s
motives. According to Marx, the structure is class-based and the Chairperson, a
powerful capitalist, tactfully hooked other socially powerful individuals into his
social network which in turn boosted his own socio-economic power base.
Socially powerful decision-makers in this research seemed to place their
egoistic interests and symbolic gains before the country’s economic interests,
under the façade of popular theories such as nationalism, patriotism and social
responsibility.
The major shareholders did not inject a single cent as new capital but they
smartly used others’ money to acquire and retain the controlling power of the
Bank using certain loopholes in the system and by forming employee share
ownership programmes (ESOPs). The directors of the ESOPs are their most
loyal employees and include relatives and family friends. In this way the
Chairperson established his powers to extend credit to connected parties outside
the credit rules and feels more powerful because he looks after not only himself
but his cronies as well. This is a clear exploitation of public deposit funds for
the benefit of the “owners” of finance capital. The negative publicity was such
that the Soft Bank faced a ‘run’ and lost 10 percent of its deposits. The
regulators had to intervene by removing the board of directors including the
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Chairperson and assign the management of the bank with another stable, state-
owned bank.
On the other hand, small shareholders are exploited through bad credit decisions
which hamper the bank’s profitability. This resulted in circulation of
unfavourable research reports on the bank, the fall of its share price and the
ultimate consequence of reducing the shareholders’ wealth. This scenario has
little, or no effect at all on the controlling major shareholders since they do not
expect genuine business returns such as dividends or capital gains, but
numerous other advantages such as fringe benefits, other perks and/or fulfilling
their motives such as “feeling powerful”. The ultimate sufferers are the minority
shareholders, its employees, customers and in the worst case scenario, the
public.
Marxian critique suggests that power is held by capital and exercised on its
behalf. Equally, lack of money translates into powerlessness, deprivation and
exclusion from social activities for the majority of the poor under capitalism. As
argued in this thesis, successful participation in social affairs depends less on a
person’s abilities and skills and more on possession of money and power.
Money, whether through credit or other sources, is the possessor’s essential
powers. According to Marx, one’s individuality is secondary to possession of
money. Any wicked, dishonest, unscrupulous and stupid individual is respected
because money is respected. Money is the highest good, and consequently by
association, its owner is also good. There seems to be a barrier between
ordinary people’s potential (through abilities, ideas and skills) and access to
money capital in capitalist society. In the meantime, people (with or without
abilities, ideas and skills) who possess money gain potential advantages and
multiply them. Moreover, when access to capital is coupled with true potential
or ideas, abilities and skills, it may have an undue advantage over moneyless
people and an exponential effect in accumulating wealth.
It is argued that the culture of using informal methods in Sri Lanka is an

outcome of lengthy colonization where business was possible only with
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government support such as issuing various licences to trade and manufacture.

The implementation of successful transactions requires bureaucratic approval
but a large number of the bureaucrats are corrupted by people with connections.
The introduction of strict price controls of products would have also influenced
people to exploit informal means to carry out their business in a more
competitive manner. This situation is a vicious cycle where economic power is
instrumental in encouraging informal methods and the ‘job’ is done by using or
abusing power, which in turn boosts the social power of the power holder and,
further encourages using informal methods in the society.
There are four types of credit decisions observed during the interpretation of
research data. This classification of decisions was done based on decision-
makers’ approach towards application of credit rules and rationality of the
decisions. There are some credit decisions which were made according to credit
rules and seem rational. Conversely there are some decisions which were made
superseding rules but still seem rational. Also there are some credit decisions
which are made by strict application of credit rules but look irrational while
some other decisions which are made informally, without following rules and
look irrational.
9.3.3 Methodological derivatives

Many researchers feel a need to position themselves as a particular type of
researcher and identify themselves with a defined way of knowing. Each
research situation and research question is unique, and assumptions can be as
varied as the situations. The researcher has taken a strategic position in
designing the research methodology of this research.
The past experiences of a few senior bank officers were reconstructed for
building understanding and to expose the existing credit systems in Sri Lanka.
Then they were substantially backed by evidence obtained through secondary
sources. Some real-world experiences were iteratively filtered through analyses,
interpretation and theorization and then articulated as knowledge in this thesis.
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This case study research also supports the claim that case studies are not really a
methodology, but rather, are an approach to research. The case study research
data was collected through different sub-methods such as questionnaires,
interviews, exchange of e-mails and internet chats, etc. The research data were
analyzed using narrative methods and posing how and why questions repeatedly.
The theoretical guidance provided by Marxian critical theory played a
significant role in presenting, analyzing, interpreting and theorizing the outcome
of this research. In designing this case study research, the integration of
carefully articulated research assumptions/questions/propositions based on the
preliminary investigation backed by the researcher’s exposure to the relevant
field of study were useful to maintain the focus of the study.
9.3.4 Combined conclusion: Credit Mechanisms create roadblocks for

economic development and play a role in sustaining wealth
inequality
This thesis argues that all individual, social-cultural and economic-political
factors are collectively directed towards protecting and strengthening the social
power of an affluent class within capitalist society. The economic power
afforded by money eventually leads to social power and in turn, social power
becomes a significant driving force of arbitrary/informal decision-making in the
banking/finance industry in Sri Lanka. Then, because the powerless are ignored,
the poorer classes are neglected. Equally, a lack of money translates into
powerlessness, deprivation and exclusion from social activities for the majority
of the poor under capitalism. Therefore, opportunities are lost to the
society/country as a whole, and the poor remain poor.
On the other hand, because the powerful classes acquires more power through
such informal decisions, it can be concluded that inequality in the society and
preferential/informal bank lendings are mutually reinforcing. And therefore, the
socially powerful rich classes get richer and richer while the powerless poor
classes remain stagnant.
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Preferential credit decisions are made to accommodate fellow socially powerful

credit-applicants, while the arbitrary strict application of rules is apparent to
reject some other credit applications. The application of rules has become a
negative device and they are meant to be superseded if prospective business
projects are to be financed through bank loans. But such encouragement of
small, poor clients can have a negative effect on a manager’s prospects. The
mutually reinforcing cycle is that certain credit decisions, which are made
through abusing authority, supply money to the influential individuals in the
society and, such economic power enhances the social powerbase of those
individuals, which in turn reinforces the propensity to make preferential credit
decisions. On the other hand when credit is declined by applying the rules
strictly because the credit applicants are not influential or do not have informal
access to credit decision-makers, the powerless poor class is ignored and
opportunities are lost to disadvantaged social groups. This mechanism makes
rich people richer while poor people remain poor if not poorer.
The Soft Bank crisis showed that the extreme use of the exploitation mechanism
and credit mechanism for capital accumulation is not sustainable. Also, these
power-driven discriminatory decision-making systems not only restrict the
availability of financial capital for feasible projects, but also blatantly deny
credit applications of potential enterprises. Further, wasting resources for
unfeasible projects, while ignoring the need for nurturing potential viable
projects, are a double blow to the efforts towards employment generation and
economic development and therefore, detrimental to the economic well-being of
the general population. This situation frustrates the poor. These findings provide
insight for policy formulators in developing policies for more productive
financial capital mobility systems in Sri Lanka. The conclusions of this research
emphasize the need for radical changes in the financial mobility system through
state intervention for SME development. It is suggested that proper state
intervention in regulating SME financing could remove such credit-related
obstacles to economic development, and work towards a fair distribution of
economic benefits to the people in Sri Lanka and beyond.
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218
Appendices
Appendix 1: Questionnaire (1)

1. Please identify and provide details; credit amount, project description and
application process (you are free to use fictitious names) for a credit applicant you
are well aware of the credit application process followed.
2. Was it successful?
3. Did credit applicant attempt to approach higher authority to influence the loan
officers who were doing formal credit process? How, what methods, did the credit
applicant use to approach the decision-makers?
4. How and to what extent that the credit applicant has been accomodated by the
decision-makers and what methods were followed?
5. Please describe the the project proposal in detail in relation to the general economic
environment in Sri Lanka?
6. Please describe the loans negotiation processes in a form of dialog if you can recall
them?
7. How and what methods were used to present those projects to the decision-makers?
8. What methods did the borrower use to convince the decision-makers? Please
indicate as you believe, why did the bank decision-makers accommodate it? (If
you feel comfortable to answer?)
9. What were the immediate results of the credit decision?
10. Please describe the present situation of the enterprise? Does it service the loan/s?
219
Appendices
220
Appendices
Appendix 2: Participation Information Sheet
1. Date Information Sheet Produced:
03rd July 2006
2. Project Title
Role of bank lending in sustaining income/wealth inequality in Sri Lanka.
3. Invitation
You are cordially invited to participate in this research because the findings
would be helpful for economic development of Sri Lanka and to minimize
unequal distribution of income/wealth among people. Participation is
entirely voluntary.
4. What is the purpose of this research?
This research is for the researcher’s doctoral studies and a thesis will be
produced on the findings of the research.
5. How are people chosen to be asked to be part of this

research?
You will be asked to be part of this research by emails and/or over the
telephone. You have been chosen because you have worked for local banks
in Sri Lanka for more than 20 years.
6. What happens in this research?
221
Appendices
You will be interviewed by secured emails during which you will be invited
to describe a series of events that you observed and your perception of the
effect of these on lending decisions of banks in Sri Lanka where you work
or worked.
7. What are the discomforts and risks?
There may be some ethical risk or discomfort to you even though

informal/arbitrary methods including bank lending decisions are very
common in Sri Lanka and the public is aware of these cases. However, very
careful control measures are suggested to alleviate these risks as described
below.
8. How will these discomforts and risks be alleviated?
There will not be any clue to identify you as your identity will be kept
strictly confidential. You are not expected to reveal anything which will
embarrass you or make yourselves uncomfortable. Only two participants
would be interviewed out of large number of bank employees and only three
cases will be selected for the purpose of this research. As there are a number
of people involved in managing each credit per client from the point of
accepting the applications, processing, negotiating, recommending,
approving to monitoring, the probabilities of tracing them is very remote.
You will be advised to use email accounts outside the banks, so that you
cannot be identified by the bank by tracing employees’ email accounts. I will
advise you to use my Hotmail or Gmail accounts as my email box is
accessible to the IT staff of AUT university.
The e mails will be destroyed immediately permanently after making

printouts which will be stored in locked cabinets in the supervising
professor’s office for six years and then will be destroyed permanently.
If you experience any imotional or other discomfort, you will be able to use
the AUT online counselling service, if you consider it necessary.
222
Appendices
9. What are the benefits?
The research findings would be helpful for the economic development of Sri
Lanka and to minimize unequal distribution of income/wealth among
people. The knowledge could be applicable beyond Sri Lanka for other
developing countries with similar backgrounds. The thesis might earn the
researcher a PhD.
10. What compensation is available for injury or negligence?
N/A
11. How will my privacy be protected?
Your identity will be known only to the researcher and to the supervising
professor. Your identity will be kept strictly confidential.
12. What are the costs of participating in this research?
Only some of your time. This could be up to 4 - 8 hours.
13. What opportunity do I have to consider this invitation?
You are invited to respond, if you wish to take part, within one month.
14. How do I agree to participate in this research?
You will be able to agree to participate by providing the signed Consent

Form that is e mailed to you with this information sheet.
15. Will I receive feedback on the results of this research?
Yes, you will be sent the draft documentation of your interviews for
verification and the articles written on the research findings will be sent to
you.
16. What do I do if I have concerns about this research?
223
Appendices
Any concerns regarding the nature of this project should be notified in the
first instance to the Project Supervisor, Prof. Keith Hooper,
[email protected] telephone +64 9 921 9999 extension 5758.
Concerns regarding the conduct of the research should be notified to the

Executive Secretary, AUTEC, Madeline Banda, [email protected],
921 9999 ext 8044.
17. Who do I contact for further information about this

research?
18. Researcher Contact Details:
C A Saliya, [email protected]
19. Project Supervisor Contact Details:
Prof. Keith Hooper, [email protected], Telephone +64 9 921 9999

extension 5758
Approved by the Auckland University of Technology Ethics Committee on

29 May 2006 AUTEC Reference number 06/40
224
Appendices
Appendix 3: Questionnaire (2); Analytical

questions
a) The approach and methods used by the borrower

Why did the credit applicant approach the chairperson direct?
• Was it because he is powerful?

• Was it because he is rich?
• Was it because he had the access or had the network?
• Has the applicant tried the formal methods before?
What was the outcome of such approaches?
In the case of denying the credit, did the credit applicant attempt to approach the
decision-makers informally? Was it successful? If not, why?
b) The approach and the methods used by the lender

Why did the bank accommodate the credit applicant informally?
• The project is financially feasible?

• Because of the technical reasons such as excess liquidity?
• Because the decision-maker was deceptively guided by the capable
credit applicants?
• Was it for personal gratification?
• Was it on sympathetic/patriotic/nationalistic grounds and/or based on
social responsibility?
• Was it because of personal relationship?
• Was the decision influenced by the ego of the decision-maker?
• Did the organization structure force the decision-maker to make such
decisions?
• Has the SME financing schemes of the government any impact on this
decision?
225
Appendices
c) The influencing factors

Please comment on the following factors in contributing or acting as roadblocks
towards the decision-making process of this decision:
• Organization structure
• Poor management skills of the relevant bank officers
• Nationalistic or patriotic attitudes
• Egoistic motives
• Government policies on entrepreneurship development
• Government policies in SME financing
d) The decision-making process

Please critically analyze the decision-making process and comment on the
following questions:
• Was it quick?
• Was it after following proper banking policies and procedures?
• Was it based on cash flows and proper credit evaluations?
• Were decision-makers rewarded as a result of those decisions?
e) Concluding remarks
Please feel free to express your views on this credit application with regards to
the social network and economic and social power of individuals involved.
Also you can express your views on the impact of such credit decisions to
economic development and addressing poverty problems in Sri Lanka.
226
Appendices
Appendix 4: Linking exercise of evidence; from

data to story- The background and Case I
Evidence Type Evidence Content (Pl. refer sections indicated within
brackets)
News Bomb blast in Colombo (7.2):
Papers/direct There was a terrorist attack in Colombo, the Capital of Sri
observation Lanka, in January 1996. The damage was heavy with a
death toll of more than 30 people, casualties of more than
300 people. It caused severe damage to the buildings
around, including the office of Mr. Perera who was the
Chairperson of Soft Bank, the banking arm of a large
Group of companies. He was hospitalized with serious
injuries to the left eye and eventually he lost the eye. Mr.
Perera (the Chairperson), in his late fifties, was a devoted
Catholic, and the most venerable priests came and prayed
for him in the hospital. He was told that “…Your duty for
this world is not over; therefore the God has saved you to
serve the people more”.
Newspapers Doctorate to the Chairperson (7.2):

The University of Sri Lanka recently awarded the
Chairperson with a Doctorate, for his contribution
towards the business development of the country. He was
a well recognized business tycoon having more than one
hundred companies under the name of Soft Group, and
ten of them had been listed in the Colombo stock
exchange. A leading business magazine named him as the
Personality of the 10,000 thousand employees, US$80
million of net assets and US$2 billion of total assets.
Annual Management style and change (7.2.1)

reports/Press- General Manager/Chief Executive Officer (CEO) of the
releases/ Soft Bank had a clash with the Board and he left the Bank
Direct together with almost all the members of the senior
observations management team of the Soft Bank in June 1996 and
reconstructed formed a new bank. Further, more than 100 officers left
the Soft Bank and joined the new bank in September
1996. The dissidents, in canvassing an already known
customer base, also launched adverse propaganda against
the Soft Bank. The Bank was facing severe problems,
losing staff and customers at the same time and without a
227
Appendices
strong management team, in need of a strong leadership.

As a result the Chairperson had to be involved heavily in
day-to-day operations of the bank and therefore he
suggested to the Board that he would have weekly
meetings with the senior management of the bank to
monitor the progress closely. He also strengthened his
power in the board by inviting a few loyal confidants
(two lawyers, an accountant and an IT specialist) onto the
board of directors of the Soft Bank.
Normally the full board meeting was held on the last

Friday of the month where all the board members
participated and crucial decisions were made. It was
evident that Board/Chairperson approved only the
proposals (credit, re-structuring of large facilities, new
recruitments, promotions and capital expenditure, etc)
recommended by the then management. When there were
customer/staff complaints or requests for credit facilities
from the Chairperson/Directors, they were re-directed to
the management, and the CEO had to report on those at
the next Board meeting. This process was followed to
avoid conflicts by giving due respect to the formal
hierarchical-authority.
The new CEO was a senior banker, in his late fifties and
demonstrated a democratic and consultative type of a
management style. He had no experience of holding the
hot seat before and showed laissez-faire type leadership
qualities. The Finance Manager, a qualified accountant,
was promoted to the position of CFO by the new
management. In addition to the full Board meeting, the
Soft Bank started three more weekly review meetings, on
the other three Fridays of the month, for the Marketing,
Recoveries and Information Technology functions of the
bank. The relevant senior officials were summoned to
these meetings whenever necessary, while the CEO and
Chief Financial Officer (CFO) were invited for all three
meetings. It was the practice of the Chairperson to
allocate some time to handle the complaints made by
customers, potential customers and even by the general
public. He was very customer oriented and often allowed
the customers to confront the bank officers openly,
sometimes causing embarrassment to such officers.
Regulatory
directives issued
Basel Agreement, Capital Adequacy, Single Borrower
by the CBSL
Limit, Liquidity Ratio, Ownership restrictions (7.2.1):
Rating
228
Appendices
reports/Internal
circulars/ Direct Strict compliance of the Single Borrower Limit prevented
observations the Soft Bank from lending to sister companies in the Soft
reconstructed Group. The Chairperson was not very happy about this
through the concept since most of the group companies paid
Questionnaire significant amount of interest to other banks on their
Two, Question borrowings and the process was not reciprocal because
(c) none of the other banks operated as a part of a group as
the Soft Bank operated. He used to say in a lighter vein
that, “the Rugger Ball technique is the best strategy for
these regulators. We must do the best for the Bank and let
the regulators chase behind us”.
Rating reports/
Interviews with
colleagues/ “The Chairperson plays disproportionately large role”
direct (7.2.1):
observations The Soft Bank had obtained a special approval from the
Central Bank Sri Lanka for direct holding of 18% of its
equity by the Soft Group. The Banking Act allows only
10% of shareholding by a person or persons who are
acting in concert. But the Soft Bank had more than 50%
of its ownership with the Chairperson, his wife and few
companies of the Group, through indirect holdings and
employee share ownership schemes, which are allowed
by the Banking Act. One rating agency had reported
“[T]he Bank’s Chairperson, a promoter shareholder, plays
a disproportionately large role in running the Bank and
particularly in setting policy. The Group’s track record in
managing the Bank has not been good so far”.
This loophole is that the special permission granted to
purchase shares of a bank by its employees by creating
trusts in the name of employees called a “Employee
Share Ownership Plan” but the ownership is limited to
five percent. Under normal circumstances banks cannot
lend money to purchase their own shares but the
exception is ESOP. Therefore, the Soft bank created six
ESOP trusts and lent money at a concessionary rate of
interest to purchase its own shares, and each trust
acquired 4.99% of ownership summing up to 29.9% of
ownership in total. The present owners did not inject a
single cent as new capital but it was a ‘smart’ way of
using others’ money to acquire the controlling power of
an institution. The directors of these ESOPs are their most
loyal employees such as relatives and family friends and,
in this way, the Chairperson feels more powerful because
he looks after not only himself but his cronies as well.
229
Appendices
Annual Financials of the Soft Group and the bank (7.2.1)

reports/Press- The customer deposit base was three times of that of SET
releases Bank, which was also incorporated in 1989. It was the
second largest private bank in terms of customer deposits
and assets and became the largest private bank in terms of
the branches and number of employees by the end of the
year 1996.
However, the profitability figures were poor, reporting its

Return on Average Assets (ROAA) as less than 1% and
Cost to Income ratio as more than 70%, which was the
highest among private banks listed on the Colombo Stock
Exchange. The amount of non-performing loans (NPL)
had risen to more than 20% of total loans. The Central
Bank of Sri Lanka severely warned the management
several times and had set time frames to address the issue
immediately. The Chairperson was worried about this
situation and raised doubts on the efficacy of the systems
as well as the personnel of the Bank. The market price of
the Soft Bank stock was also not performing in par with
the industry average Price Earning (PE) ratio. Research
reports on the Soft Bank, published by most of the
stockbrokers were adverse with a recommendation to
‘sell’ or ‘hold’, and because of poor financials when
compared to the financials published by the peer banks.
In 1995 the Soft Bank had reported US$3.5 million of

after-tax profits. The shares had been trading with an
average PE ratio of seven times, where the industry had
performed at twelve times. The Cost to Income ratio
worsened from 70% in 1995, to 80% in 1996. The NPL
level was also on the high side with 18% in 1995 and
20% in 1996, compared to the industry average of 14%,
while the CAT bank reported the best NPL ratio of 7%.
The ROAA of the Soft Bank was 1% in 1995 came down
to 0.6% compared to the 2% of the CAT bank and the
international average was reported as 2%.
The Capital Adequacy Ratio was reported as 8% just

within the regulatory requirement of 8%. The Soft Bank
was experiencing a very hard time with the external
auditors and the Bank Supervision Dept. of the Central
Bank of Sri Lanka with regards to the provisions to be
made for bad loans. The provisions for bad debts, as a
percentage of after-tax profits, was 50% for the Soft Bank
whereas the industry average was only 10% in 1996. But
230
Appendices
the deposit growth of the Soft Bank was reported as the

highest in the industry with 35% growth, from US$520
million to US$703 million during the year 1996,
compared to the industry growth of 15%. The Soft Bank
achieved a remarkable loan growth of more than 54%
(industry loan growth was 20%) in 1995 and 25%
(Industry 20%) in 1996 contributing to the total assets
base growth of 22% compared to industry average of
15%.
Inter-rater “Mr. Perera became all powerful” (7.2.1)

reliability checks Under these circumstances Mr. Perera became the all-
powerful Chairperson of the Soft Bank.
Research reports Soft Bank shares were recommended to ‘sell’ or ‘hold’

of Stock Brokers (7.2.1)
The selling pressure on the Soft Bank share was
aggravated by the adverse rumours spread by the
dissident group, who worked for the new bank, pushing
the share price further down.
Treasury reports The Soft Bank was making a negative contribution (7.2.1)
– Internal
The Soft Bank had about US$100 million invested in GS
over and above the required amount for the statutory
liquidity requirement. The Soft Bank was highly liquid
with an extraordinary growth in customer deposit base
and had reported 34% of Statutory Liquidity Ratio as
against the regulatory requirement of 20%. This situation
was reported to the Management by the CFO and pointed
out if the bank mobilizes funds at the present rate of
interest and invest in GS, without lending, the bank will
make a negative gross spread (contribution) of 3% on
incremental deposit funds.
Reconstructed
direct New strategies for interest rates and lending, warning the
observations Bank officials and comments of the officers, etc. (7.2.1)
Internal circulars
Direct Chairperson was critical on the lending policy of the Soft
observations Bank and the regulatory requirements such as Capital
Adequacy and Single Borrower Limit, and approved the
following two strategies to be implemented immediately.
• To cut the interest rate offered by the Soft Bank
for deposits by 3%.
231
Appendices
• To introduce attractive loan products for

aggressive lending, offering a lower rate of
interest.
The CEO and the top officials of the management were

very nervous about reducing the rate of interest for
customer deposits, citing that the Soft Bank would not be
competitive among the rival banks which were still
offering the same rates. The CEO warned that there
would be a ‘run on the Bank’. Chairperson queried the
tolerable limit of such a ‘run’ and instructed the CFO to
monitor the deposit movements daily and report if the
liquidity position of the Bank was in jeopardy.
Research reports On the other hand, the senior credit officials were
severely warned and, given a massive task of achieving
already increased lending targets. Marketing team was
asked to make a presentation on some innovative lending
products after working with the advertising agency of the
Bank. The budget and the cost-benefit analysis had to be
vetted by the CFO and a quick-time plan for the launch
had to be tabled at the next review meeting.
The Soft Bank lost deposits due to the lowest interest

rates offered in the market but the trend was not that
alarming to the liquidity position. Marketing team was
very critical about the situation and warned, “Once you
lose a customer, it is very difficult to win them back”.
One of the popular arguments was “We worked very hard
to win this customer base. The cost of regaining them,
would be much more than the saving that–we get from
the reduced interest rate”.
However, it was surprising to note that all other banks

followed suit and reduced their interest rates for deposits,
in six to eight weeks’ time. The growth rate of deposits of
the Soft Bank too returned to normal. The average
interest rate offered by the banks for one year fixed
deposits as at 30th June 1996, was 12%. The Soft Bank
reduced that to 9% in August. In the middle of August the
average rate came down to 11%, then to 10.5% by the
end of the month and finally to 9% by the third week of
September 1996.
232
Appendices
Central Bank Gilt edged instruments offer higher returns than bank
Annual Reports/ deposits (7.2.1)
Bulletins
With the change of the Government in 1994 the CBSL
cut the REPO rate (Re-Purchase Offer rate; similar to the
cash rate in New Zealand) and Reverse REPO rate
frequently. This situation affected most of the banks with
low Advance to Deposit ratio, and which had invested
their funds in government securities. The REPO rate,
which was at 18% at the beginning of the year 1995, was
slashed frequently in 1995 and 1996 to remain at the 10%
level at the end of the year 1996. The spread between the
REPO rate and the Reverse REPO Rate also reduced
from 3% to 2%.
Sri Lanka had a very peculiar type of interest rate

scenario where the Government Securities (GS) carried
higher rates of interest than the rate offered by banks to
the public for their deposits. Therefore most of the banks
followed a very conservative lending policy, comfortably
parking their excess funds in risk-free Treasury Bills
and/or Treasury Bonds, and made an easy spread.
This is because the GS (Treasury Bills/Bonds) were not

easily accessible to the general public specially for small
timers where there was a minimum amount required for
investment. Also the investment and the liquidation
procedures were complicated so that ordinary depositors
conveniently opt for the closest, friendliest branch of a
bank and invest their money in deposit products with a
lower return.
Newspapers/ Import-Export statistics (7.3.1)

CBSL reports The total export income of Sri Lanka was US$12,050
million in 1996, and Textiles & Garments Sector
accounted for US$6,484 million which was more than
53% of the total export income of the country and the
Tony Group accounted for approximately US$200
million in the year 1996.
Reconstruction of The meeting with Tony (7.3.1)

observations One Friday, while the Chairperson was conducting one of
through the the review meetings of the Soft Bank, Mr. Tony, the
Questionnaire (1) owner of Tony Group, contacted the Chairperson for an
Questionnaire (2 immediate appointment to discuss an urgent matter. The
233
Appendices
Questionnaire (1) Chairperson immediately made arrangements for a quick

meeting showing all the respect to another business
tycoon of the country.
Tony was adjudged the Entrepreneur of the Year in 1995.

His group had accounted for a major share of textiles and
garments exports, which was the largest foreign exchange
earner of the island. The Tony Group expanded very fast,
especially during the previous regime of Republican
Government, with huge loan facilities from the
government owned banks, for the setting up of factories
in the rural areas. Tony Group had a very good reputation
for manufacturing garments for world-renowned brands
like Marks & Spencer, GAP, Van Hussein, and few
others. Those buyers also had invested in high-tech
equipment and quality experts in the Tony Group
factories.
The credit proposal of Tony (7.3.2)

Questionnaire (2)
He tabled the details of his factories with their capacity
and locations. He blamed the newly appointed Labour
government for not allocating on adequate quota for him
to work on full capacity and therefore, he complained that
his group was running with a negative cash flow due to
under-utilization of assets. He was in the midst of a
crucial issue, he said that he had no funds to pay the
salary bill of the current month. The best employees were
leaving the group and he said he had no option other than
agreeing to the foreclosure suggested by the banks.
He also pointed out that the new owners would not be

able to maintain the same rapport with the international
buyers and the whole episode would end up in tragedy,
pushing 30,000 workers to the streets. He was pleading to
the Chairperson to bail him out, assuring that this credit
line would rejuvenate the whole group and the future cash
flows would be very healthy with the orders in their
hands. He also requested for a facility of Letter of Credit
(LC) to import the necessary fabrics and accessories.
On the request of the Chairperson he explained his cash

flow situation and borrowing positions. The total
borrowings of the Tony Group were more than US$20
million. It comprised US$5 million from the Bank of
Lanka, US$5 million from SET Bank, US$2 million from
234
Appendices
HAT Bank and a syndicated loan of US$8 million from

all three banks. He had borrowed from all private banks
and Bank of Lanka, the State owned largest bank in Sri
Lanka, which had structured a syndicated loan as well.
Due to non-servicing of interest, almost all the banks had
classified Tony Group as a defaulter and had reported to
the Credit Information Bureau (CRIB), which is the
central monitoring authority for defaulters.
When evaluating the creditworthiness of a client, the first

thing a credit officer has to do is to call for a CRIB report
of the client. Tony had applied for a facility from the Soft
Bank a week ago and the team leader of the Corporate
Credit Division had declined it on the basis of the CRIB
report.
Tony was very convincing and very politely explained

how the senior officers of the Soft Bank rejected his
proposal and praised the Chairperson for his visionary
leadership and patriotic attitudes in advance.
Questionnaire (2) The negotiation (7.3.3)

The Chairperson was very upset about the situation and
blamed the politicians, regulators and bankers for not
identifying the needs of the country. He said, “...this is
the whole problem with our bankers. They are guided by
some stupid rules called banking practices and ruin
people like you [Tony]. They will never think beyond that
cage of banking practices. Even our State policies do not
provide proper support to people like you. Now, you have
generated 30,000 employments. If they lost their jobs and
you lose your business, the cost will be much more to the
economy in the long run, I don’t know, when these
people will learn these things?...”. And the Chairperson
said “...tell me Tony how much do you want? And what
is the collateral you can offer?” Tony said, “Sir, all my
assets have been taken by the banks, I can give my
personal guarantee and the secondary mortgage of the
assets which have already been mortgaged to the other
banks, and Chairman sir, believe me and I will not let you
down”. “Your house?” the Chairperson queried. “That’s
in my wife’s name and I am sorry sir, I can’t draw her
into this, she will eat me”, Tony answered.
Then the Chairperson asked, “Can you give your wife’s
235
Appendices
personal guarantee?” But Tony politely disagreed saying,

“I am very sorry sir, but do not worry I will never let you
down and I will pay every cent due to your bank on time,
and I am not going to deal with any of those other banks
in the future, my one and only bank is your bank for the
rest of my life.”
The Chairperson smiled and said, “Ok, tell me your

requirement, have you got a good accountant? Do you
have the cash flow projections?” “Yes sir, this is how we
are going to manage, I need US$2.5 million advance to
pay my salary bill and other statutory dues. And I need a
LC facility of US$ 1.5 million to finance input materials
for uninterrupted production.”
“Is that all you need? Tell me right now, you will not be
facilitated under the normal banking practices by our
credit officers in the Bank.” Tony was jubilant and said,
“That’s what I wanted Your Honor. I do not need a cent
more than what is necessary.” and he invited the
Chairperson to chair his board; “Why don’t you come and
chair our Board meetings as well?” The Chairperson
thanked him for the invitation and said, “I don’t want to
interfere with your business, you are the best person to
manage your business, but you can give us a good
publicity.” “Of course, sir,” Tony readily agreed.
The following day the business page of a leading

newspaper carried an article saying, “Soft Bank rescues
Tony Group”. The news spread fast and Tony was
announcing openly that Mr. Perera helped him. He issued
a special circular to the Tony Group employees saying
that they all must do banking with the Soft Bank
explaining that the Soft Bank was a true kind bank, while
criticizing all other banks for advocating him to sell the
factories.
The Chairperson was very happy about the publicity

given and the copies of the paper cutting of the news item
circulated among the Board members at the next Board
meeting. He assured the board that he will bring more and
more business and expressed his regrets that he could
have done that before; means involving more in day-to-
day activities of the bank.
236
Appendices
Questionnaire (2) The decision (7.3.4)

The Chairperson approved all the facilities amounting to
US$4 million. He was very critical of the bank officers
who rejected Tony’s proposal purely on the CRIB report
and said, “I think we need a good finance person, not a
banker, to manage Tony’s facilities,” and appointed CFO
as the credit officer in charge for the Tony Group. The
CFO was instructed to monitor the cash flow position
thoroughly and whenever there was a situation which
warranted over-the-limit borrowing, he had to report to
the Chairperson.
Tony was jubilant on the quick decision made by the

Chairperson and offered him a seat on the main Board of
the Tony group with a brand new Mercedes, which was in
the harbour, imported under the permit granted for
exporters. The Chairperson politely refused the offer and
appointed his CFO as an observer in the Board of the
Tony group.
The outcome (7.3.5 and 7.3.6)

Sunil, one of long-time close confidants of Tony, was
fired. He was one of Tony’s joint-Managing Directors,
and was in charge of the finance function. It was a known
fact among the accountants that it was very difficult to
work with Tony. No financial controller had worked very
long periods at the Tony Group and it was not rare to
notice vacancy advertisements for the post of Financial
Controller for the Tony Group. Senior executives started
leaving Tony Group, or were asked to leave. Sunil
criticized Tony’s financial discipline and always
complained about liquidity problems. He complained that
Tony did not transfer sales proceeds in full to Sri Lanka.
Mr. Tony was very particular about the closed exchange
control policy of Sri Lanka, and always had a buffer
overseas. He used various tactics to keep a part of his
wealth overseas and was successful in convincing the
Chairperson of the Soft Bank to open a factory in an
African country as well. Tony remitted money for this
purpose as a capital investment outside Sri Lanka, under a
special permission from CBSL.
The Tony Group’s fate is not a unique one. With the

cessation of the quota system, the other countries like
China and Malaysia could supply the same garments at a
lower cost, therefore the buyers naturally shift their
237
Appendices
business out of Sri Lanka for better margins. This threat

was brought to the knowledge of garment businessmen,
and few dynamic businessmen created their own brands
and successfully transformed the threat into an
opportunity. But the Tony Group was over-dependent on
international brands and lost some of the contracts to
Malaysia.
After few months, the Tony Group account was taken

away from the CFO and handed over to the Corporate
Banking division. The new credit officer submitted a
formal proposal for the Tony Group and the management
approved the package recommended and extended a
further facility to smoothen the cash flow.
After four years of operation, the Soft Bank had to

provide for bad debts since the Tony Group couldn’t
service the loan. The interest loss was around US$0.3
million which was in interest in suspense account, and the
capital write-off was nearly US$1 million by the end of
2003. The Tony Group gradually lost their business and
started to close down factories under the pressure
imposed by the banks. The staff cadre had come down to
10,000 and running only 20 factories by the end of 2003.
The monthly sales of US$2 million in 1998 had came
down to US$1.5 million in 2003 and was virtually
making a negative contribution.
238

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Role of Bank Lending in Sustaining Income/Wealth Inequality in Sri Lanka

Candauda Arachchige Saliya

Auckland University of Technology

In fulfillment of the requirements for the degree of

Doctor of Philosophy (PhD)

Primary Supervisor: Prof. Keith Hooper

LIST OF TABLES ....................................................................................................................... X

CONFERENCE PAPERS ........................................................................................................... XII

ACKNOWLEDGEMENTS ........................................................................................................ XIII

ABSTRACT ............................................................................................................................ XIV

CHAPTER ONE ......................................................................................................................... 1

1.1 RESEARCH MOTIVATION ........................................................................................................ 1

CHAPTER TWO ...................................................................................................................... 17

2 LITERATURE REVIEW .................................................................................................... 17

2.1 INTRODUCTION ................................................................................................................. 17

2.3 GLOBAL INEQUALITY AND SRI LANKA ..................................................................................... 22

2.7.1 Neo-liberal capitalism ......................................................................................... 37

CHAPTER THREE .................................................................................................................... 53

3 RESEARCH METHODOLOGY .......................................................................................... 53

3.1 INTRODUCTION ................................................................................................................. 53

3.4 DESIGNING THE RESEARCH METHODOLOGY ............................................................................. 61

CHAPTER FOUR ..................................................................................................................... 75

4 RESEARCH METHODS ................................................................................................... 75

4.1 INTRODUCTION ................................................................................................................. 75

4.8.1 Inductive generalization and abductive inferencing/reasoning ........................ 106

CHAPTER FIVE ..................................................................................................................... 111

5 BACKGROUND: SRI LANKA ......................................................................................... 111

5.1 INTRODUCTION ............................................................................................................... 111

CHAPTER SIX ....................................................................................................................... 127

6 CASE STUDIES; STORIES .............................................................................................. 127

6.1 INTRODUCTION ............................................................................................................... 127

6.4.3 The negotiation ................................................................................................. 144

CHAPTER SEVEN .................................................................................................................. 153

7 CASE STUDIES - ANALYSIS .......................................................................................... 153

7.1 BACKGROUND ................................................................................................................ 153

CHAPTER EIGHT ................................................................................................................... 173

8 THEORETICAL DISCUSSION ......................................................................................... 173

8.1 INTRODUCTION ............................................................................................................... 173

CHAPTER NINE .................................................................................................................... 197

9 CONCLUSIONS ............................................................................................................ 197

9.1 INTRODUCTION ............................................................................................................... 197

LIST OF REFERENCES ........................................................................................................... 209

APPENDIX 1: QUESTIONNAIRE (1) ....................................................................................... 219

APPENDIX 2: PARTICIPATION INFORMATION SHEET ........................................................... 221

APPENDIX 3: QUESTIONNAIRE (2); ANALYTICAL QUESTIONS .............................................. 225

APPENDIX 4: LINKING EXERCISE OF EVIDENCE; FROM DATA TO STORY- THE BACKGROUND

Figure 2-1: Proportional impact of the increasing gap .......................................................... 18

Saliya Candauda Arachchige

Saliya, C. A. (2006a). Bank capitalism in Sri Lanka favours protectionism

Saliya, C. A. (2006b). Role of bank lending in sustaining wealth/income

Saliya, C. A. (2008a). Enterprise financing decisions and global poverty. Paper

Saliya, C. A. (2008b). Enterprise financing, employment generation and

Saliya, C. A. (2008c). Role of financing in sustaining global poverty. Paper

Saliya, C. A. (2009b). Entrepreneurial finance; The ‘FIRI’ theory of credit

Despite busy work schedules, the research participants and

The support I received from Dr Andy Godfrey and Ms Eathar of the

The purpose of this PhD thesis is to make a contribution to existing knowledge

The literature review revealed that: a) Global inequality is aggravated by the