1. Banking sector in Sri Lanka

 

1.    Introduction

 



Banking sector plays the vital role in economic growth in Sri Lanka over the decades. Banks also play a central role in the transmission of monetary policy, one of the government's most important tools for achieving economic growth without inflation. The central bank controls the money supply at the national level, while banks facilitate the flow of money in the markets within which they operate.

 

The banking sector in Sri Lanka, which comprises Licensed Commercial Banks (LCBs) and Licensed Specialized banks (LSBs), dominates the financial system and accounts for the highest share of the total assets in the financial system. Banks play a critical role within the Sri Lankan financial system, as they are engaged in provision of liquidity to the entire economy, while transforming the risk characteristics of assets.

Banks also engaged in providing payment services, thereby facilitating all entities to carry out their financial transactions. On the other hand, banks can create vulnerabilities of systemic nature, partly due to a mismatch in maturity of assets and liabilities and their interconnectedness. Therefore, the soundness of banks is important, as it contributes towards maintaining confidence in the financial system, and any failure may have the potential to impact on activities of all other financial and non-financial entities, and finally the economy.

In terms of the asset base and the magnitude of services provided, the LCBs are the single most important category of financial institutions within the banking sector. LCBs dominate the financial system with the highest market share of the entire financial system's assets. Therefore, the health of Sri Lankan financial system depends to a large extent on the soundness of the LCBs, primarily on the performance and financial strength of the six largest LCBs, generally referred to as the Systemically Important Banks (SIBs).

The systemic importance of the LSB sector is relatively low in comparison to the LCBs, both in terms of size and their impact on the financial system, as it does not play a major intermediary role in the payment cycle.

Structure of Financial System in Sri Lanka

 

Financial Institution (FI)

Description

Licensed Commercial Banks (LCBs)

LCBs registered under Banking Act No. 30 of 1988 in order to carry out banking business of receiving funds from the public through the acceptance of money deposits, payable upon demand by cheque, draft, order or otherwise, and the use of such funds for advances, investments or any other operation authorized by law, are coming under this.

Licensed Specialized Banks (LSBs)

LSBs registered under Banking Act No. 30 of 1988, are coming under this. These banks are authorized to engage in funding industrial activities, agricultural activities, real estate activities or other economic activities other than accepting and maintaining time and savings deposits.

Licensed Finance Companies (LFCs)

LFCs registered under Finance Business Act No. 42 of 2011 to carry out business of acceptance of deposits and lending of money and/or investment of money are fallen into this category.

Stock Brokers(SBs)

Stock Brokering Companies listed under Securities and Exchange Commission of Sri Lanka Act, No. 36, participating in securities issues on behalf of a client and the provision of financial services related to such issues are included here.

Insurance Companies (ICs)

Insurance Companies registered with the Insurance Regulatory Commission of Sri Lanka are pertaining to this category.

Money or Value Transfer Service (MVTS) Providers

MVTS Providers who involve in transfer of money or value are coming under this category.

Restricted Dealers (RDs) (formerly Authorized Money Changing Companies)

Companies authorized to buy and exchange foreign currency notes, encash Traveler’s Cheques, and/or sale foreign currency notes in terms of the provisions of the Foreign Exchange Act, No. 12 of 2017 are included in this category.

 

 

References

www.cbsl.gov.lk  [Accessed on 08/05/2022 7.28 AM]

fiusrilanka.gov.lk [Accessed on 08/05/2022 8.10 AM]

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