ranee jayamaha : role of external auditor and implications of the new companies act speech by dr ranee jayamaha, deputy governor of the central bank of sri lanka, at a seminar at the central bank of sri lanka, colombo, 11 june 2007. * * * given the rapidly expanding financial landscape in sri lanka in which finance and leasing companies are making a significant contribution to the financial services industry, it is imperative that the role of each stakeholder is recognized for purposes of clarity, financial reporting and in the interest of wider financial system stability. the business of finance, hire purchase and leasing has grown significantly in the last few years, but at a lower pace than that of the banking sector. in 2006 alone, the growth in leasing portfolio of banks was 80 %, while the finance companies and leasing companies recorded growth rates of 13 % and 6 %, respectively, in their lease portfolios. banks and finance companies have access to low cost funds through deposit mobilization. here too, banks have current accounts at zero costs. leasing companies, on the other hand, rely on bank borrowing or borrowing through debt instruments which is costly to them. recently, the central bank has recommended amendments to the leasing companies act to regularize leasing company borrowings from the public through the issue of debt instruments. the central bank will monitor such borrowings to ensure that highly geared leasing companies do not borrow excessively from the market and terms and conditions will be imposed to mitigate risks to the investors in debt instruments issued by leasing companies. in addition to business growth and fund raising, the viability of the finance and leasing companies should also be monitored and watched, although their asset base accounts for a mere 4. 8 % of total financial sector assets. also, these institutions are engaged in granting credit to the more risky sectors in the economy absorbing higher credit risks which the conventional banking sector is not willing to take on. their contribution to the capital formation in the economy particularly through the provision of leasing and hire purchase facilities is significant. a failure of one or two big companies would have a far reaching impact from a stability point of view, given the ripple effects it could have on the whole financial sector. there are several stakeholders involved in examining the viability of businesses of finance and leasing companies. the chief among them are shareholders, regulators, auditors, investors, depositors and creditors. all these stakeholders have functions and responsibilities assigned to, or assumed by them by law or practice. it is becoming increasingly clear that some of

i last testified before this committee in october, following the release of our autumn monetary policy report. to place our recent experience in some context, let me go back a bit further than that. following the 11 september 2001 terrorist attacks in the united states, the bank of canada quickly and aggressively cut its policy interest rate to shore up confidence and support domestic demand. by the spring of 2002, evidence had already started to build that demand was growing faster than the economy's production capacity. monetary policy actions must always be forward looking. so, even though demand pressures were not yet showing up in prices, we raised our key policy rate three times between april and july 2002, by a total of three - quarters of a percentage point. when we met with you last autumn, inflation in canada was on the rise. but we refrained from raising interest rates because of the prevailing geopolitical and financial uncertainties, high yield spreads and restricted access to funding for riskier corporate borrowers, and the expectation that global economic weakness would restrain total demand for canadian goods. since then, inflation has been above the 2 per cent target. the total year - over - year cpi inflation rate reached a peak of 4. 6 per cent in february, falling back somewhat to 4. 3 per cent in march. key factors behind the jump in inflation are the sharp rise in oil and natural gas prices, increases in insurance premiums, and strong domestic demand. that demand has led to price pressures in certain sectors, such as shelter and some services. in this environment, some indicators of short - term inflation expectations have edged up. these include data from the survey taken by the bank's regional offices and the average private sector consensus forecast. longer - term expectations of inflation, however, remain around 2 per cent. to assess the future trend of inflation, the bank uses a measure of core inflation, which strips out the eight most volatile items in the cpi basket, and the effect of changes in indirect taxes on the remaining cpi components. core inflation now sits around 3 per cent. it should fall to about 2 1 / 2 per cent in the second half of this year, and to about 2 per cent by early 2004. total cpi inflation will continue to be importantly affected by swings in crude oil prices. if oil prices were to settle at about $ 25 per barrel by mid - 2003 — as futures prices suggest — and if the canadian dollar were to stay close to current levels, total cpi inflation would likely fall temporarily below the