BUSINESS MODEL

Management Approach

A Framework for Discussion

Our discussion on management approach outlines how the Bank's economic, social and environmental impacts are managed. Accordingly, we will first identify aspects that are material to the Bank and its stakeholders. We regard an aspect to be material if it substantively affects the Bank's ability to create value over the short, medium and long term. Relevance and importance thus determine materiality , with importance taking cognizance of both the magnitude of the impact as well as its probability of occurrence.

The brief discussion that follows on economic, social (sub-divided into customers, employees and society) and environmental aspects are based on why we consider the aspect to be material, what we do to manage them and how we evaluate our approach and results. They are elaborated further in the next section on Management Discussion and Analysis in the context of deriving and delivering value.

Material Economic Aspects

Economic Performance

Economic performance is important for a business to grow and prosper in the long term. The benefits are not limited to the business, as they also contribute to the well-being of the local community and ultimately the growth and prosperity of the economy at large. Positive economic performance is a win-win approach to a sustainable business. The Bank adopts a four-pronged approach to manage its economic performance, namely, strategic vision, goals, targets and performance monitoring. They are underpinned by the Bank's core competencies and values that were discussed earlier.

Market Presence

A broad geographical presence is important for business segments such as SME financing and retail fund mobilization. The benefits are mutual: local hires improve the diversity within the management team; they provide fresh insights on local needs that may also be replicable elsewhere, while the local community too enhances its human capital. The Bank has consistently expanded its market position through organic growth in the past, and is represented in every province and 22 districts of the country.

Indirect Economic Impacts

In addition to direct value creation and distribution through our own operations, the Bank's investments and market presence impact on the local communities in many ways. They include jobs created or supported in the supply chain, development of skills and knowledge, attracting investment, etc. The Bank's strategic planning and management of its economic performance give rise to direct and indirect economic impacts that contribute to value creation and a sustainable business.

Material Social Aspects

Customers

Product and Service Labelling

In this technologically savvy, data-driven society consumers demand clear information and transparency before making a purchase. Furthermore, with the popularity of social media as well as social interest groups there are several avenues for dissatisfied customers to air their grievances, let alone seek legal action if product information had been misleading. Furthermore, as financial products and services are often perceived to be complicated, the Bank takes great care in providing accurate and relevant information in a manner that could be easily understood by a layman.

Marketing Communications

Inaccurate or misleading communications could lead to financial loss through fines and penalties, as well as loss of reputation, public trust and customers. The Bank has in place marketing communications guidelines to ensure that all applicable laws, codes of conduct as well as business ethics are strictly followed. This includes advertising, promotion and sponsorship of products and services. All marketing communications material are subject to a three-layer checking process.

Customer Privacy

Banks are privy to sensitive and confidential financial information pertaining to customers, who in turn place high importance on the privacy and security of such information. A breach in customer privacy can lead to direct financial consequences such as fines and penalties, as well as loss of reputation and customer loyalty. Hence, the Bank places high importance on customer privacy and maintains secure systems that also include a pledge of confidentiality taken by employees.

Employees

Employment

Employees of the Bank are responsible for the delivery of business promises to all shareholders and stakeholders. Our practices are governed by the Shop and Office Act of Sri Lanka. The Bank goes well beyond meeting minimum legal requirements. This includes aspects on sourcing, training and retaining the best of talent in a work environment that supports our corporate values and business goals.

The Bank does not support forced labour or child labour.

Over 40% of staff are paid performance bonuses and the Senior Management of the Bank is entitled to an Equity Linked Compensation Plan (ELCP). The latter is a retention and shareholder value creation tool as well as a measure for attracting competent professionals.

Occupational Health and Safety

Employees who are healthy in body and mind not only perform better at work but also in their personal lives and in society at large. In this light, the Bank encourages all staff to embrace a healthy work-life balance which is reflected in the fitness facilities and welfare programmes that are made available. In addition, we take note of the well-being of all staff while on duty. In accordance with our Business Continuity Plan, the Bank has a team of over 50 trained first aid officers and 25 trained psychological first aid officers who are available on site.

There were no workers who were involved in occupational activities who have a high incidence or high risk of specific diseases.

Training and Development

As a key to organizational development the Bank continues to invest in its people, particularly through training and development. This takes into consideration the Bank's business needs and long term goals, staff performance evaluations and succession plans. Our investment in this area cuts across the entire employee base, which in turn supports other aspects such as promoting equal opportunity in the workplace, motivating self-improvement and managing one's career ending.

Diversity and Equal Opportunity

The Bank draws on diversity and equal opportunity as strengths to source and retain the best people across a range of talent, skills and education. Diversity is measured along several metrics such as gender, age group and minority groups, and compared across different employee categories to observe trends.

Equal Remuneration for Women and Men

There is no gender bias at the Bank. Rewards and remuneration are based on the principle of equal pay for equal value of work, and are benchmarked against industry norms. Individual performance is reviewed biannually through a transparent process against agreed criteria and targets, within the wider goals of the Bank and its strategic placement in the industry.

Society

Local Communities

The Bank operated 78 branches island wide as at 31 December 2013, spread across rural as well as urban areas. Community buy-in and acceptance is vital for the long term existence of these units, while distrust can damage business operations, brand image and sustainability of the business. The Bank engages with the local community through strategic and philanthropic Corporate Social Responsibility (CSR) initiatives. These initiatives have clear time-bound objectives and results, and are monitored and reviewed periodically.

Compliance

Banks in general have a special role in the economy of any nation as the effects of their problems go far beyond their corporate boundaries, often to those least able to bear the burden of distress. The safety of the banking system is of paramount importance and as such they are subject to a more stringent set of regulations than most other types of businesses.

The Bank's primary sources of compliance requirements stem from the Banking Act No. 30 of 1988 (as amended) and the Directions issued by the Central Bank of Sri Lanka, the financial reporting standards of the Institute of Chartered Accountants of Sri Lanka (ICASL) – including the requirements following the convergence of the Sri Lanka Accounting Standards with the International Financial Reporting Standards (IFRS), the Companies Act No. 7 of 2007 and the Listing Rules of the Colombo Stock Exchange. The Bank is in the process of adopting the Code of Best Practice on Corporate Governance issued jointly by ICASL and the Securities and Exchange Commission of Sri Lanka in 2013.

The governance framework of the Bank casts responsibility on the Board of Directors for the strategic direction, including the overall risk policy and risk management procedures and mechanisms. The Board functions through six Board Committees chaired by Non-Executive Directors. They cover audit, risk management, human resources and remuneration, nominations, strategic issues and corporate governance & legal affairs. The Board and the Chief Executive Officer are further supported by Management Committees focused on assets and liability management, credit, human resources, internal audit, information technology, market & operational risk, outsourcing and procurement.

In order to encourage engagement with the Bank’s customers and stakeholders the Bank has in place a Customer Charter, a formal Complaint Handling Procedure a formal Communication Policy and a Disclosure Policy. The Bank’s internal Compliance Policy and Code of Conduct governing all employees is an integral part of the governance framework of the Bank. The Code inter alia outlines the standards of professional and ethical conduct, and includes aspects such as general conduct and competence, confidentiality, conflict of interest, bribery and discrimination.

Material Environmental Aspects

Materials and Energy

Depletion of natural resources and climate change are critical concerns that directly affect everyone. The challenge for every business is therefore to reduce their material and energy intensity through the adoption of appropriate initiatives. They may include switching to alternative sources, reducing waste, recycling and reusing materials as well as changing the way we do business. The Bank strives to inculcate a culture of responsibility amongst employees where they themselves take responsibility for the effective and efficient use of materials and energy.

Products and Services

The Bank's project lending is an area where there could be adverse indirect impacts if not carefully managed. This could arise from the manner in which the project is implemented as well as from the sale, use and disposal aspects of the products or services generated by
the project.

Such risks are addressed from the very inception, starting with advisory services where required, when the project is formulated. The proposed project is then subject to an appraisal process which includes an evaluation of the economic, environmental and social impacts. Guidance is provided in mitigating negative impacts, and implementing proposed action plans is made a pre-disbursement condition as appropriate. The vigilant stance adopted by the Bank on responsible investment serves to mitigate not only such negative impacts but also any consequential reputational and financial losses for both the client and the Bank.

The Dual Aspects of Value Creation

The above discussion covered the key elements of the Bank's business model, which is essentially a process that transforms the various forms of capital through business activities to create value over time.

The Bank delivers value, both financial and non-financial, to its key stakeholders in the context of the economic, social and environmental aspects within which it operates. These same stakeholders are of value to us, and they are nurtured and developed over a period of time. As stores of value, they constitute our stakeholder capital, and are external to the Bank; the key components being investor capital, customer capital, employee capital and social & environmental capital.

The Bank in turn derives value through the dynamic interaction between the external capital as well as its own internal capital to drive future earnings. The capital internal to the Bank comprises financial capital and institutional capital. The latter includes intellectual property, knowledge, systems, procedures, brand value, corporate culture, business ethics, integrity and the like.

The various forms of capital are in a state of flux with flows taking place among them. The Bank has access to and makes use of these forms of capital in creating value for itself (deriving value) and its stakeholders (delivering value) through its business model. They underscore the dual nature of value creation as depicted in the above diagram.

We will next review the performance of the Bank and the Group in this context.