- Population – 19.7m (2005)
- Total labour force – 8.1m (2005)
- Average lending interest rate – 12.2% (2005)
- % change in consumer prices – 11.6% (2005)
- GDP at constant 1996 prices – SLR1,082bn (2004)
- Agriculture, forestry and fishing sector as % of total GDP – 17.2% (2005)
Sri Lanka’s financial sector has grown rapidly in recent years, both in terms of the number of institutions and the scope of services offered. The sector was liberalised in 2003, when the government allowed 100% foreign ownership of commercial banks, insurance services and stockbroker services. The government also privatised the insurance sector. Several steps were taken in 2003-04 to enhance the systemic stability of the sector. Capital adequacy ratios were raised, and provisioning requirements made more stringent. The Central Bank of Sri Lanka lifted minimum capital requirements for commercial banks from SLRs500m (US$5m) to SLRs2.5bn (US$25m), and raised those for savings banks and finance companies from SLRs200m to SLRs1.5bn. Banks have been given until the end of 2007 to comply. Credit ratings for all deposit-taking institutions are now mandatory. Other prospective reforms include the adoption of the Basel II capital adequacy standard for all banks with effect from January 2008.
The dominance of the banking sector in the financial industry has grown: it accounted for 70% of assets in 2005. Bank coverage has improved, with an expansion in the branch networks of the main commercial banks. Intense competition among banks has also led to rapid growth in value added services, such as automatic teller machines (ATMs), credit cards, telebanking and Internet banking. It has also encouraged increased financial intermediation.
Besides expanding services, the banking sector is also undergoing structural changes. Mergers, acquisitions and strategic alliances, among both commercial banks and other financial institutions, are becoming more common. The distinction between commercial, development and other specialised banking services has been blurred. Development banks have diversified into insurance and fund management, for example, and have increased their lending capacity by acquiring strategic stakes in commercial banks. Commercial banks, whose main source of business is trade financing, are financing development projects (through loan syndication) and moving increasingly into consumer credit and housing finance.
A persistent weakness of the banking system has been high intermediation costs. These are reflected in the interest rate spreads offered by Sri Lankan banks, which are significantly higher than those in other countries in South Asia. Fundamentally, high costs stem from poor credit-management techniques (high levels of bad loans increase dependence on the fewer sound loans for income) and high operating expenditure. Other problems include the need to mobilise long-term deposits held at fixed rates, high taxes and statutory costs and overdependence on interest-earning activities for income. Although the financial soundness of the banking system has improved, the non-performing loan (NPL) ratios of commercial banks are still relatively high. This is attributable to the lengthy and cumbersome legal procedures involved in debt recovery, which make dispute resolution a protracted and costly experience. Political interference, forcing state banks to issue loans that stand little chance of being repaid, is another cause.
In 2004 the state accounted for 46% of the banking sector through its ownership of the two largest commercial banks, the Bank of Ceylon and the People's Bank. It has a virtual monopoly on the management and use of long-term savings (through two pension funds and the largest savings bank), and consumes over 50% of domestic financial resources, primarily to finance government borrowing. The pre-empting of long-term savings funds by the state has constrained growth in the private debt market. These weaknesses are being addressed. Under a restructuring plan, net profits and deposits at Bank of Ceylon and the People's Bank have risen. The ratio of NPLs in the Bank of Ceylon fell to 6.6% of total loans in 2005, while the NPL ratio in the People's Bank fell to 11% in 2005. The bank has benefited from a recapitalisation programme financed by the Asian Development Bank (ADB).