CITIZENS DEVELOPMENT BUSINESS FINANCE PLC

ANNUAL REPORT 2021/22

Operating environment and our response

Market drivers

By paying close attention to the environment in which we operate, we scan the horizon for risks and opportunities, and adapt our strategy accordingly. We also monitor trends in the behaviour of our customers to effectively meet their evolving needs. Especially at a time when our Nation is in crisis, we extend our support to rebuild our country by empowering aspirations, goals, and ambitions of our people.

Given below is a synopsis of the operating context of Sri Lanka

Despite the resilient performance following the immediate aftermath of the COVID-19 pandemic, Sri Lanka’s economic performance and outlook remain threatened due to the severe fiscal and external imbalances. The resultant political and social unrest, and the unfavorable global economic situation, have exacerbated the economic woes of the island.

The economy recovered from the pandemic-induced economic contraction in 2020, with significant contributions from manufacturing, financial services, construction, transport, and real estate activity. However, the Central Bank Governor, warned that this recovery is expected to be short-lived under the current economic crisis, with Sri Lanka having to brace up to witness the worst economic contraction in its history.

Amid the sharp deterioration in reserves, the pressure exerted on the exchange rate was ultimately reflected in an exchange rate adjustment in early March 2022, resulting in the USD/LKR exchange rate depreciating by around 80%. The economic activities of the Nation were further disrupted by the social unrest and political instability caused by regular power cuts, lengthy fuel queues, shortages of essential commodities, and escalating inflation levels. As Sri Lanka’s foreign exchange crisis worsened, the country suspended approximately, USD 25 Bn. in government external debt repayments excluding multilateral debt which is to be restructured as expected by the CBSL.

The significant tightening of monetary policy by the Central Bank led to a sharp increase in the yields of government securities leading to higher marked-to-market losses for financial institutions. The economic downturn and high-interest rate environment are likely to hurt loan growth in 2022, whilst the sharp increase in lending rates is likely to reduce the repayment capacity of borrowers amidst a depressed macroeconomic environment. The financial services sector would be required to make higher impairment provisions, that would impact the bottom-line growth.

Alongside the domestic economic recovery, Sri Lanka’s export sector recorded strong growth, with monthly exports exceeding USD 1 Bn. during the 10 consecutive months from June 2021 to March 2022, mainly driven by industrial exports. Although the recovery in exports and restrictions on non-essential imports, provided some respite to the external trade balance during mid-2021, the overall increase in global commodity prices, weak tourism income, and remittances added pressure on the current account deficit towards the end of the year. Sri Lanka entered into negotiations with key bilateral and multilateral partners for aid and financing facilities in the context of dwindling reserves and loss of access to global capital markets. Thus far, India has extended over USD 4 Bn. in financial support in 2022. Intending to ensure the sustainability of the country’s external debt for restoring macroeconomic stability, the Government and the CBSL have identified the need for implementing urgent measures and economic reforms to address external sector vulnerabilities aimed at resolving persistent and long-standing issues in the economy. Together with bilateral support, the government has commenced negotiations with the International Monetary Fund (IMF) at varying levels across April, May, and June 2022. An IMF delegation arrived in Sri Lanka on the 20 June for further discussions on a possible IMF program which is expected to be at least USD 3 Bn. spread across 3 years. An IMF program is expected to unlock additional bridging finance from other bilateral and multilateral partners. However, to secure and proceed with an IMF programme, Sri Lanka will need to implement several structural reforms including fiscal consolidation, state-owned enterprises reform, and achieve public debt sustainability.

Disruptive digital technologies gaining traction

From customer service chatbots to software robot bankers, disruptive digital technologies like artificial intelligence (AI), robotics, and blockchain are changing the financial services industry. This affects our competitiveness, and our ability to remain relevant to our customers, whilst increasing vulnerability to cyber risks.

Challenges	Opportunities	Impact on CDB	Our response
1. Rapid innovations from FinTechs and telcos with the challenge to integrate and up-scale digital innovations 2. Complexity of managing technology, information and cyber risks 3. Increased competition for specialised skills, such as information technology, data analytics and risk management 4. Customer behaviour influenced by disruption through FinTechs and telcos	5. Several initiatives launched by the Central Bank of Sri Lanka to promote the growth of FinTech solutions in the island to facilitate business expansion 6. Opportunities for process automation and adoption of AI to decrease cost-to-serve and enhance customer convenience 7. Customers increasingly adopting digital products 8. Automation enables to cut down on human error and improve decision making efficiency and processing speed 9. Adoption of an AI-first mindset helps to resist encroachment by expanding technology firms 10. Early adaptation of FinTech solutions enables to achieve an accelerated pace of growth 11. Digital adoption enable businesses to expand beyond geographical boundaries	Expansion of digital platforms helps to broaden customer touch points and channels Achieve cost-efficiencies through digitalisation Stringent monitoring and prevention to protect customers and the Company from the increasing sophistication of cybercrime, fraud risk and financial crime Automation of systems and implementing an agile way of working across all business functions Have a future-ready team of staff members by reskilling team members and making significant investments in developing technology skills and capabilities internally	Faster deployment of new and improved digital products, services and processes to meet customer needs for safe and secure transacting and drive customer experience Meeting customer needs for safe, secure and reliable banking through investing in our cyber security capabilities Providing staff with appropriate technology, tools and equipment to work productively from home during the pandemic and its aftermath Proactively adopt and embrace new technological knowhow and embed AI based solutions to strengthen our decision making and processes The core banking solution has created a differentiation in terms of products offer and service quality Continuous investment in technology platforms, processes and controls including monitoring, enhancements and prioritisation of key issues The entire process of granting credit facilities to customers was automated, reducing the credit process lead time from four days to one

Challenges

Opportunities

Impact on CDB

Our response

1. Rapid innovations from FinTechs and telcos with the challenge to integrate and up-scale digital innovations

2. Complexity of managing technology, information and cyber risks

3. Increased competition for specialised skills, such as information technology, data analytics and risk management

4. Customer behaviour influenced by disruption through FinTechs and telcos

5. Several initiatives launched by the Central Bank of
Sri Lanka to promote the growth of FinTech solutions in the island to facilitate business expansion

6. Opportunities for process automation and adoption of AI to decrease cost-to-serve and enhance customer convenience

7. Customers increasingly adopting digital products

8. Automation enables to cut down on human error and improve decision making efficiency and processing speed

9. Adoption of an AI-first mindset helps to resist encroachment by expanding technology firms

10. Early adaptation of FinTech solutions enables to achieve an accelerated pace of growth

11. Digital adoption enable businesses to expand beyond geographical boundaries

Expansion of digital platforms helps to broaden customer touch points and channels
Achieve cost-efficiencies through digitalisation
Stringent monitoring and prevention to protect customers and the Company from the increasing sophistication of cybercrime, fraud risk and financial crime
Automation of systems and implementing an agile way of working across all business functions
Have a future-ready team of staff members by reskilling team members and making significant investments in developing technology skills and capabilities internally

Faster deployment of new and improved digital products, services and processes to meet customer needs for safe and secure transacting and drive customer experience
Meeting customer needs for safe, secure and reliable banking through investing in our cyber security capabilities
Providing staff with appropriate technology, tools and equipment to work productively from home during the pandemic and its aftermath
Proactively adopt and embrace new technological knowhow and embed AI based solutions to strengthen our decision making and processes
The core banking solution has created a differentiation in terms of products offer and service quality
Continuous investment in technology platforms, processes and controls including monitoring, enhancements and prioritisation of key issues
The entire process of granting credit facilities to customers was automated, reducing the credit process lead time from four days to one

Depleting foreign exchange and heightened external sector challenges

Sri Lanka’s external sector experienced heightened vulnerabilities in 2021 amid persistently high debt service obligations and a weakened balance of payments (BOP) position along with lacklustre performance in the domestic foreign exchange market with continuous pressure on the external value of the currency.

Challenges	Opportunities	Impact on CDB	Our response
12. Slowdown in the economy 13. Currency depreciation against the US Dollar and related cost escalations in the support products and services 14. Import restrictions on motor vehicles 15. Declining worker remittances 16. Reduced rental collection and related increase in credit risk 17. Reduced profitability due to cost escalations and higher expected credit cost 18. Rating downgrades over concerns about sovereign debt sustainability 19. Increased risk due to people using informal channels (Hawala channels) to transfer funds	20. CBSL provided incentives to remit foreign earnings through formal channels 21. Opportunities to expand local products and businesses, especially businesses engaged in import substitution 22. Positive impact on local exporters, as exports become more competitive in the international market	Impact on Company’s profits due to higher loan provisioning requirement Impact on Company’s credit rating Impact on customers due to weakening of their credit worthiness Higher vehicle prices due to import restrictions have reduced the new business generation. High vehicle prices have a positive impact on LTV and collection of existing portfolio. High prices of gold impact positively on existing gold portfolio	Refocus lending products to gold related lending to capture the demand under the current context Redesign process to be more cost efficient Refocus credit evaluation and recovery strategy to capture current challenges Redesign the lending strategy to capture the current credit demand

Challenges

Opportunities

Impact on CDB

Our response

12. Slowdown in the economy

13. Currency depreciation against the US Dollar and related cost escalations in the support products and services

14. Import restrictions on motor vehicles

15. Declining worker remittances

16. Reduced rental collection and related increase in credit risk

17. Reduced profitability due to cost escalations and higher expected credit cost

18. Rating downgrades over concerns about sovereign debt sustainability

19. Increased risk due to people using informal channels (Hawala channels) to transfer funds

20. CBSL provided incentives to remit foreign earnings through formal channels

21. Opportunities to expand local products and businesses, especially businesses engaged in import substitution

22. Positive impact on local exporters, as exports become more competitive in the international market

Impact on Company’s profits due to higher loan provisioning requirement
Impact on Company’s credit rating
Impact on customers due to weakening of their credit worthiness
Higher vehicle prices due to import restrictions have reduced the new business generation.
High vehicle prices have a positive impact on LTV and collection of existing portfolio.
High prices of gold impact positively on existing gold portfolio

Refocus lending products to gold related lending to capture the demand under the current context
Redesign process to be more cost efficient
Refocus credit evaluation and recovery strategy to capture current challenges
Redesign the lending strategy to capture the current credit demand

Tightening Monetary Policy stance by the CBSL

The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) were both increased by 50 basis points in August 2021, by 150 basis points each in total in January and March 2022 and by 700 basis points in April 2022. This affects our net interest margin and profitability.

Challenges

Opportunities

Impact on CDB

Our response

23. Compressing of the net interest margin

24. Impact to profitability due to mark to market adjustment of financial instruments

25. Decline in new lending

26. Increase in cost of funds negatively affecting the profitability

27. Invest excess liquidity in high yielding government securities

28. Increase in customer willingness to place deposits due to high interest rates

Increase in rates increase cost of funding and reduce profitability
Contraction in the loan portfolio due to reduction in new lending
Pressure on net interest margin impact profitability and capitalisation

Refocus lending strategy towards less rate sensitive asset classes
Redeploy excess resources to negotiate solutions with lending customers
Capture new markets to substitute the reduction in vehicle related lending
Focus on low cost funding products such as savings accounts
More stringent approach for cost optimisation.

Increasing governance, social and environmental aspects

Social and climate change risk impacts our Company, our customers and the operating environment. There is an increasing regulatory, political and societal focus on the transition risks associated with climate change with tightened regulatory measures for non-compliance and increased social expectations.

Challenges	Opportunities	Impact on CDB	Our response
29. The increasing pace and evolving complexity of regulatory and statutory requirements across the financial services industry 30. Customers becoming increasingly socially conscious and the increased requirement for solutions that aid the transition to a low-carbon economy 31. Increasing severity of penalties and regulatory sanctions for non-compliance 32. Requirement for improved governance and transparency in business conduct 33. Health and safety 34. Failure to meet ESG commitments and related social expectations could lead to customer and community impacts and reduced shareholder value impacts	35. A strong and stable financial services sector 36. Opportunities to create sustainable financial solutions 37. Opportunities to create social entrepreneurship to solve societal challenges 38. Opportunities to support small and medium businesses who are the backbone of the Sri Lankan economy 39. Commitment to sustainable development goals	Need to embed climate change considerations into business strategies to mitigate risks Proactively seek opportunities to support a transition to a low-carbon economy Need to create new channels and customised products intended to uplift society Need for a coordinated, comprehensive and forward-looking approach to evaluate, respond to, and monitor regulatory change Need to incur increased costs to implement and manage regulatory changes and impacts on financial measures	By embedding sustainability aspects to our cooperate strategy, we provide sustainable finance products and services that drive the transition to a low carbon economy Strengthening our policies, processes, products and services to manage the risks and opportunities associated with climate change Ongoing investment in people, processes and systems across the Company Participating in regulatory and statutory advocacy groups across the industry Engaging with communities and supporting initiatives as part of the Company’s commitment to uplift the society Supporting our customers, employees and the community through the pandemic and the ensuing recovery period

Challenges

Opportunities

Impact on CDB

Our response

29. The increasing pace and evolving complexity of regulatory and statutory requirements across the financial services industry

30. Customers becoming increasingly socially conscious and the increased requirement for solutions that aid the transition to a low-carbon economy

31. Increasing severity of penalties and regulatory sanctions for non-compliance

32. Requirement for improved governance and transparency in business conduct

33. Health and safety

34. Failure to meet ESG commitments and related social expectations could lead to customer and community impacts and reduced shareholder value impacts

35. A strong and stable financial services sector

36. Opportunities to create sustainable financial solutions

37. Opportunities to create social entrepreneurship to solve societal challenges

38. Opportunities to support small and medium businesses who are the backbone of the
Sri Lankan economy

39. Commitment to sustainable development goals

Need to embed climate change considerations into business strategies to mitigate risks
Proactively seek opportunities to support a transition to a low-carbon economy
Need to create new channels and customised products intended to uplift society
Need for a coordinated, comprehensive and forward-looking approach to evaluate, respond to, and monitor regulatory change
Need to incur increased costs to implement and manage regulatory changes and impacts on financial measures

By embedding sustainability aspects to our cooperate strategy, we provide sustainable finance products and services that drive the transition to a low carbon economy
Strengthening our policies, processes, products and services to manage the risks and opportunities associated with climate change
Ongoing investment in people, processes and systems across the Company
Participating in regulatory and statutory advocacy groups across the industry
Engaging with communities and supporting initiatives as part of the Company’s commitment to uplift the society
Supporting our customers, employees and the community through the pandemic and the ensuing recovery period

Materiality

GRI 103-1, 103-2, 103-3, 203-1, 203-2, 203-3

We view value creation in the needs and priorities of our stakeholders in the context of the constantly changing environment within which we operate. Accordingly, the material matters have the most impact on our ability to create value over the short, medium and long-term. These matters influence our stakeholders and our Company to varying degrees. The materiality of each matter is determined based on three aspects - its relevance, the magnitude of its impact, and the probability of occurrence. Even as the above market drivers create trends that present risks, opportunities, or both, the matrices that follow, illustrate the material topics according to their impact on our stakeholders and organisation.

Our management approach

GRI 102-47

We manage the material topics through our strategic planning process. As indicated in the table below, each material topic is linked to one or several strategic imperatives. To achieve the relevant strategic imperatives of each material topic, we have assigned responsibilities to the respective heads of divisions and allocated the necessary resources based on the significance of each material topic. To ensure achievement of the material topics, goals and targets have been embedded in the relevant KPIs with close monitoring and review at regular intervals.

Policies have been formulated to manage the material topics and to guide our people to conduct activities in a responsible, ethical, and transparent manner. These policies are duly adopted by the Board of Directors and are reviewed at predetermined intervals to stay current with the changing environment.

We have instituted formal grievance mechanisms to address and resolve grievances. Furthermore, lending to our customers and dealings with our business partners are screened for social and environmental aspects and all our internal controls, policies and procedures which are laid down to achieve the objectives of material topics are subject to internal and external auditing and verification to ensure adherence. The findings are reported to the Board and/or the Management Committees periodically for information and for corrective action where necessary. The numerous awards and accolades received by our Company over the years demonstrate the effectiveness of the management approach we have adopted.

Material aspects

GRI 102-47

Material topic	GRI disclosure	Stakeholder	Strategic imperative
1. Process automation and adoption of AI
2. Customers increasingly adopting digital products
3. Slowdown in the economy	GRI 201: Economic performance
4. Import restrictions	GRI 201: Economic performance
5. Declining worker remittances	GRI 201: Economic performance
6. Declining global competitiveness of Sri Lanka	GRI 201: Economic performance
7. Increased credit risk defaults and lower recoveries
8. Relief measures introduced by the CBSL and injection of liquidity to the system
9. Rapid innovations from fintechs
10. The complexity of managing technology, information and cyber risks	GRI 418: Customer privacy
11. Increased competition for specialised skills	GRI 404: Training and education
12. Customer behaviour influenced by disruption through fintechs
13. Grow the lending portfolio	GRI 201: Economic performance
14. Expand fee and commission income	GRI 201: Economic performance
15. Health and safety	GRI 403: Occupational health and safety GRI 416: Customer health and safety
16. Create sustainable financial solutions	GRI 307: Environmental compliance GRI 308: Supplier environmental assessment GRI 419: Socio-economic compliance
17. Create social entrepreneurship to solve societal challenges	GRI 413: Local communities
18. A strong and stable financial services sector
19. Commitment to sustainable development goals	GRI 307: Environmental compliance GRI 419: Socio-economic compliance
20. Support small and medium businesses that are the backbone of the Sri Lankan economy	GRI 413: Local communities

Please refer Engaging with our stakeholders and Our strategy for the guide on icon used above.

Our stakeholders

Our principal stakeholder groups are those who potentially have the most significant impact on our value creation process and those who are affected most by our activities. Accordingly, the key stakeholders of CDB are investors, customers, business partners, regulators, employees, the community and the environment. The unprecedented conditions that prevailed during the year, created a need for a deeper engagement with our stakeholders to clearly identify their concerns during these challenging times. By maintaining continuous and open engagement through multiple platforms, we continued to strengthen the engagement with our stakeholders during the year. Furthermore, we are ready to play our part in rebuilding our nation offering unflagging support and empowerment to our stakeholders as a premier financial services institution.

Stakeholder mapping

		Power
		High	Low
Interest	High	Key players A very strong group with high power and interest, capable of proposing new strategies and driving change. Their decisions could have a considerable impact on CDB’s operations. Hence, we nurture strong relationships through ongoing engagement.	Keep informed These groups have a high level of interest in the business, even though their power to exercise is low. They build a strong foundation to support the Company. Our strategy of engagement is to keep them informed and provide feedback and suggestions about our Organisation.
Interest	Low	Keep satisfied They exert a high power through their decisions by influencing the direction of the business environment. Although they do not exhibit a high interest in the company, they ensure Company’s compliance with relevant regulations through close monitoring.	Minimal effort We do not have any stakeholders in this category with low power and low interest in our organisation. We continue to maintain an interest in our stakeholders in every aspect of our business. We respond to their expectations and needs as they in turn, become partners in the progress of the Company.

Engaging with our stakeholders

GRI 102-40, 102-42, 102-43, 102-44

	Their concerns	How we engage	Our response and responsibilities	Method of engagement
	Return on Investment Financial strength and resilience Risk management Sustainability management performance Sustainable profitability Increased share value The integrity of the Board and Management Goodwill of the Company Safeguard asset quality Reinvest earnings	Annual Reports and forums – Annually Annual General Meeting – Annually Interim financial statements - Quarterly Corporate website – Ongoing Announcements to the CSE - As and when needed Media releases - As and when needed	Ensure optimal returns on investment Strengthen risk assessment and mitigation and adhere to the Company’s Code of Conduct Public affairs management and prompt response Reinvest earnings to support the future growth potential Public affairs management Balance profitability in the short-term and sustainable profitable growth in the long-term	Open dialogue channels to clarify and get updated information Discussions and reviews on business performance, targets, forecasts and industry benchmarks Identify performance drivers, industry trends, opportunities and realign with business plans Provide assurance on all regulatory and statutory compliance requirements

	Their concerns	How we engage	Our response and responsibilities	Method of engagement
	Customer experience Convenience and speed of service Accessibility Reliability Real-time information Assurance of privacy Product innovation Technology-driven financial solutions Ethical lending practices Speedy complaint resolution	CDB iNet app - Ongoing Customer relationship unit – Ongoing Dealer network - Ongoing Media advertisements and website – Ongoing Product launches - As and when needed Social media – Ongoing Call Centre - 24x7	Technology-driven financial solutions Ensure high customer confidentiality Avert unsolicited communication and intrusive surveillance Ensure Company brand values and code of conduct Provide positive customer experiences	Customer service and support point of contact Annual customer surveys Island-wide customer touchpoints Face-to-face interactions at CDB branches Regular correspondence with account and facility holders Access to ATMs

	Their concerns	How we engage	Our response and responsibilities	Method of engagement
	Career progression Remuneration and benefits Skills development Work-life balance Human Rights in the workplace Occupational health and safety Favorable working environment	Managers’ meeting/Branch meetings – Weekly Regional review meeting – Monthly Employee engagement – Weekly HR space integrated system - Annually Performance evaluation and reward mechanism - Bi-annually and annually Virtual staff meetings – As and when needed Virtual training programs - Ongoing WhatsApp/Viber groups - Ongoing	Provide a safe and inspiring working environment Support personal and professional growth Provide fair remuneration and talent development Groom future leaders Promote and maintain harmonious relationships Recognise exceptional performers	Regular updates on company performance Encourage career development via lifelong learning programmes and internal/external training Comprehensive integrated HR system Annual social events Open door policy and a safe work environment Performance reviews Grievance handling procedures

	Their concerns	How we engage	Our response and responsibilities	Method of engagement
	Conservation practices Environmental protection Resource efficiency Energy conservation Environmental protection Reducing carbon footprint Contribution to SDGs	Greenhouse gas emission analysis - Annually Emission reduction - Ongoing Paper recycling – Ongoing E-waste recycling – Ongoing Engagement activities - Ongoing Renewable energy – Ongoing Green Ninja Ambassadors - Ongoing Conservation projects – Ongoing	Monitoring and analysis of greenhouse gasses Stakeholder awareness on best practices Adopt environmentally friendly green initiatives – waste management, energy consumption management and emission reduction Adopt green policies, practices and approaches	Conform with applicable environmental laws and regulations Undertake and publicise relevant CSR projects ESMS platform Engagement activities

	Their concerns	How we engage	Our response and responsibilities	Method of engagement
	Safety, health and welfare Education and literacy Societal health and well-being Living standard Social investment Community development Education and literacy Ethical sourcing Employment generation	Employee volunteering activities – Annually Smart classroom donation and Sisu Diri scholarship programme - Annually Outreach programme for autism awareness - Quarterly Press releases – Ongoing Investment on community and conservation - Ongoing Lending for rural economic development - Ongoing Social media - Ongoing SMB Friday to promote entrepreneur - Ongoing	Uplift the quality of life of communities and support community health and well-being, and uplift education Provide solutions for rural youth empowerment Support entrepreneurs Support women’s economic empowerment	Child health and well-being and child education and literacy programme Employee volunteering activities Supporting entrepreneurs through “SMB Friday” Community development through investments Adopt and publicise the green policies and practices followed by CDB

	Their concerns	How we engage	Our response and responsibilities	Method of engagement
	Ethical conduct Profitability Professionalism and on-time service Competitive advantage Accountability Sustainability and functionality of the supply chain Partner wealth maximisation	Supplier screening - As and when needed Individual meetings - As and when needed Joint promotional campaigns - As and when needed Business partner gatherings - Annually	Address issues related to supplier chain Ensure healthy partnerships Encourage sustainable sourcing	Joint promotional campaigns Sustainable sourcing Extended dealer network and marketing channels Promote sustainable consumption and production

	Their concerns	How we engage	Our response and responsibilities	Method of engagement
	Good governance practices Ethically-driven business model A fair and transparent framework and work practices Legal compliance Promote voluntary compliance codes	Regular directives and circulars – Ongoing Compliance forums, and discussions – Quarterly Inspection of new rules and regulations – Daily Press releases - Ongoing Regular Audit	Develop, communicate, and promote good governance and ethical behaviour at all levels Provide timely and accurate information Immediate response to queries made by the authorities Ensure full compliance Comply with rules and regulations	Compliance meetings Regular discussions on regulatory matters Adhere to all mandatory regulatory requirements Comply with all reporting standards and disclosures