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Financial Sector Reforms in Sri Lanka

The regulatory framework in the banking, insurance and financial services industry needs to be further strengthened to foster competition and financial institutions to divert more funds to develop the production sectors and rural development and move away from the traditional bias towards trade financing. A single regulatory arrangement for the non-bank financial sector will be considered to rationalize the operations of multiple regulatory agencies. The financial sector strategy is directed towards achieving financial system stability and promoting access to finance.
Interest spreads continue to remain high, reiterating the necessity of financial sector reforms. Acceleration of these reforms will provide benefits to both savers and borrowers. Pressure on the interest rate will be contained in order to create new economic growth areas and promote small and medium enterprises (SME) led economic activities. Towards this end the Government will not only commit itself to a systematic reduction in the budget deficit, but also to maintain a proper balance in foreign and domestic borrowings in order to avoid undue pressure on interest rates and the exchange rate.
The state banks will be strengthened as strategic state enterprises to improve their financial viability and compete aggressively and effectively in the financial sector and remove market imperfections. The banking and financial institutions are being encouraged to expand their institutional network with technology to less developed areas in the country to make them effective partners in rural development.
In order to ensure financial stability and responsibility and to develop a strong and sound banking system that is resilient to internal and external shocks, the minimum capital requirement for all licensed banks has been enhanced.
For rural firms in Sri Lanka, private commercial banks play a very limited role. In addition, the cost of finance has been considered a major constraint for business start-ups and operations. Even in the urban sector small firms have to pay higher interest rates, limiting their access to finance. In addition, the collateral requirements by banks also impact small firms’ access to finance. It is in this light that the SME banking concept was introduced.
A new SME Bank was set up with an initial capital base of Rs.5,000 million to provide direct credit guarantee schemes, equity and debt capital restructuring aid at concessionary rates of interest for SMEs, and to reduce the dependency on collateral for credit guaranteed to SMEs. The priority sectors for SME lending includes advanced technology, software and business process outsourcing, technological improvements, fisheries, gem and jewellery, agro based industries, the services sector and for SME exports which focus on value addition. Among the incentives for advanced technology is the duty free import of machinery with the SME Bank providing financial support to new or existing companies investing Rs.5 million and 2 million, respectively.

Last Updated on: 17-05-2010

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