National Microfinance Study of Sri Lanka: Survey of Practices and ...

Introduction and Approach
The majority of the commercial banking sector proved unable or unwilling to
supply the level of information required for the district level survey. Accordingly
they were omitted from the central actor and activity surveys that represent Part A
and Part D of this report.
The Commercial Banks have become involved in microfinance either through
their own ‘in house’ microfinance interventions or as vehicles of the state for
wholesaling loans for on-lending as microfinance credit to participating partners
in state and donor community funded microfinance interventions since the 1980s.
The specialist microfinance divisions of the Hatton National Bank, the Peoples
Bank and the Seylan Bank are case studied. These are complemented with a study
on the pawning structures and systems of the Peoples Bank. A combination of
semi-structured interviews, questionnaires and formal and in-house
documentation were used to undertake this survey.
The Commercial Banking Sector
Sri Lanka began deregulating its financial sector in 1977. The total number of
commercial banks operating in the country at the end of 2000 stood at twenty-six.
The sector is comprised of two state banks, eight domestic private banks and
sixteen foreign banks. The sector has gown and diversified in the last three
decades but remains dominated by two state-owned commercial banks, namely,
the Bank of Ceylon and the Peoples Bank. Together, these two banks account for
some fifty-five percent of national banking assets.
Since 1992 the government has implemented significant regulatory, supervisory,
and institutional reforms in the financial sector. These include improved
disclosure requirements and loan recovery mechanisms and in 2000 the limits on
foreign ownership of commercial banks and insurance companies was raised to
sixty percent and ninety percent respectively —with a view to further improving
their capital base and encouraging modernisation.
Today, services continue to improve and the environment is becoming
increasingly competitive. Numbers of bank branches have expanded and been
accompanied by increased density of customers served per branch. The
availability of modern services such as automated teller machines, credit cards,
and telephone banking services continues to increase rapidly. This has encouraged
financial intermediation and increased financial deepening in the economy, i.e.
reaching lower income clients. There have also been improvements to rural
banking and credit facilities and the expansion of private forward-sales contract
facilities for agricultural products.
As part of sector reform, action has been taken to restructure the Ministry of
Finance and to modernise the central bank (CBSL) and the two state banks were
restructured, including the introduction of some external contracted senior
managers who are concerned mainly with the management of the restructuring
process.
The state banks have had to be assisted twice in the past to meet their emerging
deficits arising largely by directed lending. It appears that further strengthening of
the two state banks is necessary to reduce intermediation costs and improve
financial sector stability by increasing their capital base.