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Financial System In Sri Lanka 

Role of the central bank in maintaining financial system

  • Promoting and maintaining public confidence in money
  • Promoting safety and soundness of individual financial institutions.
  • Ensuring public confidence in financial system, in collaboration with other financial regulators, through minimization of risks to the financial system.
  • Acting as lender of last resort.
  • Resolving failing financial institutions in a manner that minimizes possible adverse implications of such an event on the overall financial system/economy.
  •   Regulating and supervising financial market infrastructure. 




  Financial system stability.


financial stability is  one of the main objectives of the central bank.A stable financial system is capable of mobilizing savings and allocating them to productive  investments,managing risks and settling payments, without materially affecting economic growth and welfare of the people.
even during economic shocks and stressful circumstances. This helps to create a favorable environment for efficient financial intermediation to promote investment and economic growth.



          
   Regulation and supervision


Central Bank of Sri Lanka supervises and regulates major financial entities. Through regulation, the Central Bank sets standards or policies that it expects financial institutions to meet. In supervision, the Central Bank assesses the risks that financial institutions pose to financial system stability and, where necessary, takes action to reduce them.

Major regulatory requirements include;
(i)   Minimum ratio of capital to total value of risk based assets.
(ii)  Minimum ratio of liquid assets to liabilities.
(iii) Limit on volume of lending to a single borrower.
(iv) Provision for bad and doubtful debts .
(v)  Submission of annual audited financial statements within a stipulated period.

      Financial market

 The financial market,which is the market for credit and capital,can be divided into the money market and the capital market. The money market is the market for short-term interest -bearing assets with maturities of less than one year,such as Treasury bills,commercial paper,and certificates of deposits.The major task of the money market is to facilitate the liquidity management in the economy.

The Capital Market is the market for trading in assets for maturities of greater than one year, such as Treasury bonds, private debt securities (bonds and debentures) and equities (shares). The main purpose of the Capital Market is to facilitate the raising of long-term funds. The main issuers in the Capital Market are the Government, banks and private companies, while the main investors are pension and provident funds and insurance companies.

Financial Infrastructure

Their are three main categories in the financial infrastructure ,  
  • payment and settlement system 

Central Bank of Sri Lanka (CBSL) has been the driving force in the development of national payment and settlement systems in the country. CBSL has taken several initiatives to make payment systems Safe, Secure, Sound, Efficient and Accessible throughout the country.
  • Credit information 
Availability of information about loans obtained by a person/institution from banks, finance companies and leasing companies etc. is important for an efficient credit market.  When the credit (loan) history of  a borrower is fully available to financial institutions, they are able to make better assessments about a customer’s credit worthiness. 
  • Laws and regulation 

  1. Monetary Law Act (MLA) No.58 of 1949
  2. Payment And Settlement Systems Act No 28 of 2005


Financial Instrument 

  1. Deposits
Deposits are sums of money placed with a financial institution, for credit to a customer's account. There are three types of deposits,
  1. Demand deposit 
  2. saving deposit
  3. fixed deposit
  • Demand deposit 

These are mainly used for transaction purposes and for the safekeeping of funds. Funds can be withdrawn on demand. Demand deposits do not earn interest, but banks provide a number of services to demand deposit- holders like cheque facilities, standing orders, Automated Teller Machine (ATM) cards and debit cards to facilitate withdrawals and payments. 
  • Saving deposit 

Savings deposits earn interest, which may be calculated on a daily, weekly, monthly or annual basis. Funds may be withdrawn from savings accounts at any time. 
  • Fixed or time deposit

These are funds placed at financial institutions for a specified period or term. Fixed / time deposits earn a higher rate of interest than savings deposits. Fixed / time deposits can be for short, medium or long term. Funds can only be withdrawn before the maturity date with prior notice and a penalty may be imposed.

Not only deposit there are many financial instrument in the financial system.loans,treasury bills and bonds,repurchase agreements, commercial paper,corporate bond and debentures,asset backed securities,financial leases etc.

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