Financial sector plays key role in growth momentum

An assessment of the performance and stability of the financial sector of Sri Lanka is presented by the Central Bank in the Financial System Stability Review annually.

In its 2012 issue, it stated that Sri Lanka's financial sector had expanded, strengthened and played a key role in supporting the growth momentum of the economy. Despite challenging global and domestic market conditions, the risk absorbency capacity and the overall soundness of the financial sector improved with higher levels of capital, adequate liquidity buffers, healthy earnings, enhanced supervisory and regulatory frameworks, integrated risk management frameworks. Further, public confidence improved with financial safety net mechanisms and consumer protection measures in place.

Although asset growth moderated responding to the ceiling on credit growth in force during the year, access to finance increased with the extension of branch networks specifically in regional areas.

The multi-pronged policy measures implemented by the Government and the Central Bank during early 2012 facilitated conducive macroeconomic conditions and subdued the volatilities in the financial markets, improving investor confidence.

This was reflected in the continued foreign investments in both equity and government debt securities markets during the year. The banks were successful in securing funding from foreign sources enabling their funding to be diversified and their balance sheets to be strengthened.

With further relaxation of exchange control measures, corporate entities were also allowed to borrow abroad with greater ease. Further, several initiatives including tax incentives were introduced during the year to fast track the development of the capital markets, specifically the corporate debt market.

The regulatory and supervisory frameworks governing the financial sector were strengthened in line with international standards facilitating an effective financial intermediation function. Directions were issued to licensed banks on integrated

risk management and safeguarding of customer interests while guidelines were issued on business conduct and market practices on foreign exchange trading activities. The Central Bank initiated the process of taking measures to introduce capital and liquidity standards to banks under Basel III. A panel of auditors was appointed for licensed finance companies (LFCs) and specialised leasing companies (SLCs) to strengthen the audit process. Further, directions were issued to LFCs in relation to upper limits for interest rates offered for deposits and information systems security while SLCs were issued directions in relation to increase in capital, assessment of fitness and propriety of directors and key management personnel, maximum amount of borrowings and liquidity requirements.

With a view to improving transparency and reliability of financial reporting of the financial institutions, accounting standards in line with international financial reporting standards were adopted in 2012. Solvency margin rules were further strengthened and initial measures are being taken to introduce a risk based capital adequacy framework for the insurance sector. The close monitoring and proactive risk management practices have ensured reliability and smooth operations of the payment and settlement systems in the country.