HISTORY OF BANKING- SRI LANKA

HISTORY OF BANKING IN SRI LANKA..

"To accommodate dynamic economic and financial system developments upon gaining independence in 1948, the post-independence Government of Ceylon established the Central Bank of Ceylon to maintain an active monetary policy regime and a dynamic financial sector to support and promote economic growth."

Prior to the establishment of the Central Bank, the Currency Board System set up under the Paper Currency Ordinance No.32 of 1884. It functioned as the country’s Monetary Authority, though very narrow in its capacity. This system was deemed inadequate for a developing country upon gaining political independence.  

To carry out this task, technical expertise to establish a central bank was sought from the USA in July 1948, with Mr. John Exter, an American economist from the Federal Reserve of USA being appointed. 

The Central Bank of Ceylon was established by the Monetary Law Act No.58 of 1949 and commenced operations on August 28, 1950. It was renamed the Central Bank of Sri Lanka in 1985.

💶The Central Bank was given wide powers to administer and regulate the entire money, banking and credit system of the country and also given the sole right and authority to issue currency.

The objectives of the Central Bank:-

• The maintenance of price stability.
• The maintenance of exchange rate stability.
• The promotion and maintenance of production, employment and real income.
• The encouragement and promotion of the full development of the productive resources.

Core objectives:-

    (1) The maintaining of economic and price stability.
    (2) The maintaining of financial system stability.

Founder governor:-

• Jhon exter 1950-1953 (founder governor)

FINANCIAL SYSTEM AND FINANCIAL INTERMEDIATION

Financial system

Financial system is the system that allows the exchange of funds between lenders, investors, and borrowers. 

A modern financial system may include

• Financial institutions 
• Financial market
• Financial instrument
• Financial services

Functions of a financial system

•      Pooling of funds

•      Capital formation

•      Facilitates payment

•      Short and long term need

•      Risk function

•      Better decisions

•      Finance government need

•      Economic development

What is financial inter-mediation ?

Financial inter-mediation is conducted by third party who take deposits from savers and give it to borrowers.It can be identify as a middleman between two parties in a financial transaction. (Commercial banks, investment banks, mutual funds)

The banking business thrives on the financial intermediation abilities of financial institutions that allow them to lend out money at relatively high rates of interest while receiving money on deposit at relatively low rates of interest.

Excess funds          ➦         Deficit funds 

(who have money)          (who need money)

In banking their main role is financial intermediation from excess money to deficit money. Main product of a bank is loans.

👉For long time- loans

👉For short time- overdrafts

Financial intermediaries offer a number of benefits to the consumers those are safety,liquidity,economies of scale in long run,lower search cost, spreading risk, assets management, investment banking. 

Let's see more about what we have discussed.