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EFFECTS OF FINANCIAL SECTOR REFORMS IN SRI LANKA: EVIDENCE FROM THE BANKING SECTOR

Piyadasa Edirisuriya

Monash University, Australia.

ABSTRACT

Sri Lanka went ahead with its financial sector reforms about three decades ago. As the banking sector is the leading sector in most financial systems, the reforms were mainly directed towards the banking sector. Most of these reforms were mainly advocated by the IMF and the World Bank. The policy package was a part of structural adjustment programme and the implementing agency was the government of Sri Lanka. Among these reforms were recommendations to improve private sector participation significantly in the financial sector, removal of restrictions on banking products such as interest rate and loans, exchange rate relaxation, opening up of financial markets for foreign and domestic competition and to encourage efficient functioning of financial market with less government interferences. Though, the programme of reforms is still not completed, substantial benefits appear to be spreading in Sri Lanka as well as many countries in the region. The objective of this study is to examine what types of reforms are being implemented in the country and whether there are any significant benefits to the general public using examples mainly from the banking sector. Our analysis shows that Sri Lankan banks have evolved to a more efficient and competitive market. However, financial market in Sri Lanka needs to go further to improve their efficiencies to bring them up to the standard of international financial markets. Lack of financial literacy among market participants, dominance of state owned banks and lack of clear directives for the government appear to be major issues in the banking sector. Findings of the study also suggest that though there are substantial gains from financial sector reforms however, further reforms are necessary to improve efficiency in the financial sector.

Key words; Financial markets, deregulation, banks, Sri Lanka

JEL classifications: G15 G18 G21