Introduction
In
the modern economy banking institutions can be known as crucial entities which utilizing
money movements, business supporter and an entity who encourages individuals in
saving and investing also maintaining an enriched relationship with financial
stability and economic development. Not only the finance professionals but also
all people must need to have a clear understanding on how banks are functioning.
Structure of Banking Sector in Sri Lanka
In
Sri Lanka the banking sector is consisted of two major institutions which are
regulated by the Central Bank of Sri Lanka. Licensed Commercial Banks (LCB) and
Licensed Specialized Banks (LSB) are the above mentioned two types.
LCB
– Crucial category among the financial institutions in banking sector.
- Maintain demand deposits such as current accounts and saving accounts.
- Loans and overdrafts services.
- Foreign exchanges.
LSB
– Significance is lower when compared to LCBs in terms of the size and the
impact on the financial system.
- Target on development.
- Housing financing and rural banking.
- Specialized lending.
Examples:
National Savings Bank (NSB), Regional Development Bank (RDB), Pradeshiya
Sanwardhana Bank, Sanasa Development Bank PLC etc.
In the present context, there are 30 licensed banks, from them 24 are licensed commercial banks and six are licensed specialized banks.
Performance of Banking Sector
During the year 2022 Sri Lanka had to face a severe economic crisis. It affected to collapse the economy entirely and led to a foreign exchange crisis. After the major crisis that the Sri Lankan economy fought against the banking sector has appeared strongly. To develop the resilience in all sectors strategic monetary policies, improvements of assets quality have affected. There are specific improvements in quality of the asset among some Sri Lanka’s commercial banks.
Importance of Banks
As
mentioned above banks are the backbone of the financial system. As the banks
are the who connect the savers and borrowers they are known as financial
intermediaries. Usually, their primary role can be described as provide
protection to depositors and distribution of loans. Banks generally earn a
profit by the difference in the interest rates paid and received from the
savers and borrowers as the banks receive deposits and provide loans.
In
Financial intermediation the supply units and deficit units are connected.
Banking enables to accept surplus and lend those to who have deficit in funds.
Through these activities banks significantly contribute to enhance financial
stability and economical development by utilizing businesses.
When
it comes to provision of credit it is a very significant service provided by
banking institutions. Because this help to enhance the economic activities as
credit allows businessman to invest in the field that they capable of. As a result,
it leads to long term economic growth of the country.
Banks have a link with monetary policy which is implemented by the Central Bank of Sri Lanka and it affect to banks in different ways. Interest rates in deposit and lending, liquidity management, bank reserves impact, interbank rates influence, open market operations are some of them.
There
are some acts relevant in order to regulate banks in Sri Lanka.
Banking
Act 1988: Introduction and the procedure operations.
Banking
(Amendment) Act, No 24 of 2024: This has announced by CBSL and was effective
from 15 June 2024. According to that it has published to strengthen the legal
and regulatory framework implicated for licensed commercial banks and licensed specialized
banks to improve the strength of banking sector in Sri Lanka. Developments in
current regulations, economic and market developments, best practices and international
standards that should be followed by the local banking institutions are
included in new amendment.
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