Effects of Financial Sector Reforms in Sri Lanka: Evidence from the Banking Sector

Asia Pacific Journal of Finance and Banking Research, Vol. 1, No. 1, 2007

20 Pages Posted: 18 Jan 2010

See all articles by Piyadasa Edirisuriya

Piyadasa Edirisuriya

Monash University; Financial Research Network (FIRN)

Date Written: June 4, 2007

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.

Keywords: Financial markets, deregulation, banks, Sri Lanka

JEL Classification: G15, G18, G21

Suggested Citation

Edirisuriya, Piyadasa, Effects of Financial Sector Reforms in Sri Lanka: Evidence from the Banking Sector (June 4, 2007). Asia Pacific Journal of Finance and Banking Research, Vol. 1, No. 1, 2007, Available at SSRN: https://ssrn.com/abstract=1536035

Piyadasa Edirisuriya (Contact Author)

Monash University ( email )

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Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
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Australia

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