The financial system in Sri Lanka comprises the major financial institutions, namely the Central Bank of Sri Lanka, licensed commercial banks (LCBs), licensed specialized banks (LSBs), registered finance companies (RFCs), specialized leasing companies (SLCs), primary dealers (PDs), pension and provident funds, insurance companies, rural banks, merchant banks, unit trusts and thrift and credit co-operative societies, the major financial markets, such as the foreign exchange market, money market, capital market and the informal financial market ; and the financial infrastructure which is the legal framework related to the financial system and the payment and settlement.
The banking sector in Sri Lanka, which comprises LCBs and LSBs, dominates the financial system and accounted for 56.3 per cent of the total assets of the financial system as at end June 2009. Banks play a central role within the financial system, as they have the capacity to provide liquidity to the entire economy. Banks are also responsible for 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. 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.
In terms of the asset base and the magnitude of services provided, the LCBs are the single most important category of financial institution within the banking sector. As at end June 2009, the LCBs dominated the financial system with a market share of 47 per cent of the entire financial system's assets and 84 per cent of the banking sector's assets. Therefore, the health of the financial system depends to a large extent on the soundness of the financial institutions, particularly the LCBs.
As at end June 2009, the banking sector comprised 22 LCBs and 14 LSBs. Even though a large number of licensed banks exist in the country, the stability of the financial system is primarily dependent on the performance and financial strength of the six largest LCBs, consisting of the two state banks and the four largest domestic private commercial banks. These six banks, which are generally, referred to as the Systemically Important Banks (SIBs), represented 76.6 per cent of the LCB sector assets and 64 per cent of the banking sector assets.
The LSB sector represented 9 per cent and 16 per cent of the entire financial system's assets and banking sector's assets, respectively. 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 an intermediary role in the payment cycle.
Last Updated on: 17-05-2010